1 investments in debts and equity securities. 2 determine why companies invest in other companies. ...

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Investments Investments in Debts in Debts

and Equity and Equity SecuritiesSecurities

2

Determine why companies invest in other companies.

Understand the varying classifications associated with securities.

Account for the purchase of debt and equity securities.

Account for the recognition of revenue from investments.

Learning Objectives

3

Account for the change in value of securities.

Account for the sale of securities. Record the transfer of securities

between categories. Explain the proper classification and

disclosure of investments in securities.

Learning Objectives

4

Compare the accounting for securities under U.S. GAAP with the international standard in IAS 39.

Learning Objectives

EXPANDED MATERIAL Account for changes to and from the

equity method of accounting for securities.Account for the impairment of a loan receivable.

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5Time Line of Business Issues Involved with Investment Securities

DETERMINE purpose of investment

?


CLASSIFY investments

a, b, c


Cloud Corporation

$100 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.

Cloud Corporation


Good Buy Corporation


PURCHASE securities


Cloud Corporation


Cloud Corporation




EARN AND RECOGNIZE

a return


Cloud Corporation


Cloud Corporation




MONITOR changes in value

+-

+-

+


Cloud Corporation


Cloud Corporation



$10 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. SELL

securities


Time Line of Business Issues Involved with Investment Securities

TRANSFER securities between

categories

a b c


Time Line of Business Issues Involved with Investment Securities

DISCLOSE status of portfolio at the

end of the period

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A maturity value, representing the amount to be repaid to the debt holder at maturity.

An interest rate that specifies the periodic interest payments.

A maturity date, indicating when the debt obligation will be redeemed.

Classification of Securities

Debt securities typically have the following characteristics:

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These shares of stock typically carry with them the right to collect dividends and vote on corporate matters.


Equity securities represent ownership in a company.

Equity securities have the potential for significant increases in price.

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Debt/EquitySecurities

TradingTradingSecurities purchased for salein the near future.

Held-to-Maturity

Held-to-Maturity

Securities purchased with theintent to hold until maturity.

Available-for-sale

Available-for-sale

Securities not classified astrading or held-to-maturity.


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Available-for-sale

TradingHeld-to-maturity

DebtDebt

Equity Method

EquityEquity

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Purchases of Debt Securities

On May 1, Douglas, Inc. purchases $100,000 in U.S. Treasury notes at 104¼, including

brokerage fees. Interest is 9% payable semiannually on January 1 and July 1. The

debt securities are classified by the purchaser as trading securities.

On May 1, Douglas, Inc. purchases $100,000 in U.S. Treasury notes at 104¼, including

brokerage fees. Interest is 9% payable semiannually on January 1 and July 1. The

debt securities are classified by the purchaser as trading securities.

Accrued interest on May 1 is $3,000, calculated as follows:

$100,000 x .09 x 4/12 = $3,000

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May 1 Investment in Trading Securities 104,250Interest Receivable 3,000

Cash 107,250

Purchase date:

Asset Approach

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May 1 Investment in Trading Securities 104,250Interest Revenue 3,000

Cash 107,250

Purchase date:

Revenue Approach

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July 1 Cash 4,500Interest Receivable 3,000Interest Revenue 1,500

Receipt of semiannual payment:

Asset Approach

July 1 Cash 4,500Interest Revenue 4,500

Revenue Approach

21Interest Revenue for Debt Securities (Held-To-Maturity)

On January 1, 2001, Silmaril Technologies purchases 5-year, 10% bonds with a face value of $100,000

for $108,115. The bonds pay interest on January 1 and July 1.

The market rate (yield) is 8%.

On January 1, 2001, Silmaril Technologies purchases 5-year, 10% bonds with a face value of $100,000

for $108,115. The bonds pay interest on January 1 and July 1.

The market rate (yield) is 8%.

Jan. 1 Investment in Held-to- Maturity Securities 108,115

Cash 108,115

Click arrow to return to Slide 37

22Interest Revenue for Debt Securities (Held-To-Maturity)

When the first interest payment is received from Silmaril, the following

entry would be made:

When the first interest payment is received from Silmaril, the following

entry would be made:

July 1 Cash 5,000Interest Revenue 4,325Investment in Held-to- Maturity Securities 675$108,115 x .08 x 6/12$108,115 x .08 x 6/12

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Equity Securities


These shares of stock typically carry with them the right to

collect dividends and to vote on corporate matters.


These shares of stock typically carry with them the right to

collect dividends and to vote on corporate matters.

24Determining the Appropriate Securities Accounting Method

0% 20% 50% 100%

No significantinfluence

Significantinfluence

Control

Ownership Percentage

Account for as trading or

available-for-saleEquity method

Equity method and consolidation

procedures

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Purchase of Equity Securities

Purchased 100 shares of Dave’s Deli Purchased 100 shares of Dave’s Deli common shares at $2 per share.common shares at $2 per share.

Purchased 100 shares of Dave’s Deli Purchased 100 shares of Dave’s Deli common shares at $2 per share.common shares at $2 per share.

Available-for-Sale

Investment in Available-for- Sale Securities 200

Cash 200

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(Representing a 20%ownership)

(Representing a 20%ownership)

Purchased 1,000 shares of Dave’s Deli Purchased 1,000 shares of Dave’s Deli common shares at $2 per share.common shares at $2 per share.

Purchased 1,000 shares of Dave’s Deli Purchased 1,000 shares of Dave’s Deli common shares at $2 per share.common shares at $2 per share.

Equity Method

Investment in Dave’s Deli Common Stock 2,000

Cash 2,000


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Available-for-Sale

Cash 80Dividend Revenue 80

Received $0.80 per share dividend.Received $0.80 per share dividend.Received $0.80 per share dividend.Received $0.80 per share dividend.

Equity Method

Cash 800Investment in Dave’s Deli Common Stock 800


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Dave’s Deli announces earnings for theDave’s Deli announces earnings for theyear of $10,000.year of $10,000.

Dave’s Deli announces earnings for theDave’s Deli announces earnings for theyear of $10,000.year of $10,000.

Available-for-Sale

No EntryEquity Method

Investment in Dave’s Deli Common Stock 2,000

Income from Investments 2,000


29Reporting TemporaryChanges in Value

Classificationof Security

Disclosedat

Report FMV

TradingFair marketvalue

Incomestatement

Held-to-maturity

Amortizedcost

Notrecognized

Available-for-sale

Fair marketvalue

Stockholder’sequity

Change On

30Example: TemporaryChanges in Value

Rocky’s Financial Corp. has the following securities in its portfolio:

• Trading securities:– Purchase price $ 8,000– Value end of year $ 7,000

• Available-for-sale securities:– Purchase price $ 5,000– Value end of year $ 6,100

• Held-to-maturity securities:– Purchase price $20,000– Value end of year $23,000

31Example: TemporaryChanges in Value

Assuming all securities were purchased on the same day, prepare Rocky’s journal entries for:– Purchase.

– Year-end adjustments.

32Example: TemporaryChanges in Value (Solution)

Date of Purchase:Investment in Trading Securities 8,000Investment in Available-for-Sale Securities 5,000Investment in Held-to-Maturity

Securities 20,000 Cash

33,000

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End of Year:

Unrealized Loss on Trading Securities 1,000

Market Adjustment--Trading Securities 1,000

Market Adjustment--Available-for-Sale. 1,100

Unrealized Increase/Decrease in

Value Available-for-Sale Securities 1,100

Example: TemporaryChanges in Value (Solution)

No entry is required for the held-to-maturity securities.

No entry is required for the held-to-maturity securities.

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FASB No. 115 puts an end to “cherry-picking.”

This is the practice of selectively selling

securities whose prices have increased, while

keeping those that have experienced losses or have maintained their

historical cost.

35Financial Statement Disclosure of Securities

Partial Balance Sheet for Rocky’sAssets

Invest. in trading securities $8,000

Market adjustment (1,000) $ 7,000

Invest. in available-for-sale sec. 5,000

Market adjustment 1,100 6,100

Invest. in held-to-maturity sec. 20,000

Stockholders’ Equity

Add unrealized increase in

available-for-sale securities $ 1,100

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Partial Income Statement for Rocky’s

Other Expenses and Losses

Unrealized loss on trading

securities

$1,000

Financial Statement Disclosure of Securities

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Sale of Securities

On April 1, 2003, the investment in Silmaril’s debt securities is sold for $103,000, which

includes accrued interest of $2,500. Interest revenue of $2,105 ($105,248 x .08 x 3/12) would be recorded. On January 1, the debt

securities had a carrying value of $105,248. The required amortization for the three-

months’ premium between January 1 and April 1 is $395. To review the purchase transaction,

click on the green dot.

On April 1, 2003, the investment in Silmaril’s debt securities is sold for $103,000, which

includes accrued interest of $2,500. Interest revenue of $2,105 ($105,248 x .08 x 3/12) would be recorded. On January 1, the debt

securities had a carrying value of $105,248. The required amortization for the three-

months’ premium between January 1 and April 1 is $395. To review the purchase transaction,

click on the green dot.

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Sale of Securities

Entry to record accrued revenue and to amortize premium:Apr. 1 Interest Receivable 2,500

Investment in Held-to Maturity Securities 395Interest Revenue 2,105

Entry to record sale:Apr. 1 Cash 103,000

Realized Loss on Sale of Securities 4,353

Interest Receivable 2,500Investment in Held-to Maturity Securities 104,853

39Transferring SecuritiesBetween Categories

TransferredTreatment of

Change in ValueFrom “Trading” 1. Recognize any previously

unrecognized changes.2. Do not reverse previously

recognized changes.

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Example: From “Trading”

Assume:Cost of trading security $1,000

Fair market value, end of Year 1 1,600

Fair market value at transferin Year 2 1,800

Proper adjusting entries were

made at end of Year 1

Record a transfer to “Available-for-Sale” category.


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Example: From “Trading”

Investment in Available-for-Sale Securities 1,800

Market Adjustment--Trading Securities 600

Unrealized Gain on Transferof Securities 200 Investment in Trading Securities 1,000







recognized changes.To “Trading” Recognize any previously

unrecognized changes.

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Example: To “Trading”

Assume:–Cost of Available-for-Sale Sec. $10,000

–Fair market value, end of Year 1 8,700

–Fair market value at Transfer in Year 2 8,300

–Proper adjusting entries were

made at End of Year 1

Record a transfer to “Trading” classification.

Record a transfer to “Trading” classification.

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Example: To “Trading”

Investment in Trading Securities 8,300Market Adjustment--Available-for- Sale Securities 1,300Unrealized Loss on Transfer of Securities 700

Unrealized Increase/Decrease in Value of Available-for-Sale Securities 1,300 Investment in Available-for-Sale Securities 10,000






unrecognized changes.From “Held-to-Maturity” to“Available-for-Sale”

Recognize any unrealizedchanges in value.

46Example: From “Held-to-Maturity” to “Available for Sale”

Assume:Cost of Held-to-Maturity Security $40,000FMV End of Year 1 40,700FMV at Transfer in Year 2 40,400Proper adjusting entries were

made at End of Year 1

Record a transfer from “Held-to-Maturity” to “Available-for-

Sale” classification.

Record a transfer from “Held-to-Maturity” to “Available-for-

Sale” classification.

47Example: From “Held-to-Maturity” to “Available for Sale”

Investment in Available-for-Sale Securities 40,400

Unrealized Increase/Decrease in Value of Available-for- Sale Securities 400 Investment in Held-to-Maturity Securities 40,000






unrecognized changes.From “Held-to-Maturity” to“Available-for-Sale”

Recognize any unrealizedchanges in value.

From “Available-for-Sale” to“Held-to-Maturity”

Amortize any recognizedunrealized change using theeffective-interest method.

49Example: From “Available-for-Sale” to “Held-to-Maturity”

Assume:Cost of Available-for-Sale

securities $6,000Fair market value, end of Year 1 7,500Fair market value at Transfer in,

Year 2 6,900Proper adjusting entries were made

at end of Year 1

Record a transfer from “Available-for-Sale” to “Held-to-Maturity”

Record a transfer from “Available-for-Sale” to “Held-to-Maturity”

50Example: From “Available-for-Sale” to “Held-to-Maturity”

Investment in Held-to-MaturitySecurities 6,900

Unrealized Increase/Decrease in Value of Available-for-Sale

Securities 600Investment in Available-for-

Sale Securities 6,000Market Adjustment--Available-

for-Sale Securities 1,500

51Additional Disclosures Required by FASB 115

• Trading securities– The change in net unrealized holding gain or

loss that is included in the income statement.• Available-for-sale securities

– Aggregate fair value, gross unrealized holding gains and gross unrealized holding losses, and amortized cost basis by major security type.

– The proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales and the basis on which cost was determined in computing realized gains and losses.


• Available-for-sale securities (continued):– The change in net unrealized holding gain or loss

on available-for-sale securities that has been included in stockholders’ equity during the period.

• Held-to-maturity securities:– Aggregate fair value, gross unrealized holding gains and gross

unrealized holding losses, and amortized cost basis by major security type.

– The company should disclose information about contractual maturities.


• Transfers of securities between categories:– Gross gains and losses included in earnings from transfers of

securities from available-for-sale into the trading category.– For securities transferred from held-to-maturity, the company should

disclose the amortized cost amount transferred, the related realized or unrealized gain or loss, and the reason for transferring the securities.

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The EndThe End

1 investments in debts and equity securities. 2 determine why companies invest in other companies. ...

Documents

value of securities

equity securities slide

purchase securities

transfer of securities

sale of securities

time line of business

c slide

return slide