investments sid glandon, dba, cpa assistant professor of accounting the university of texas at el...
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Investments
Sid Glandon, DBA, CPA
Assistant Professor of Accounting
The University of Texas at El Paso
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Debt Securities Classified as held-to-maturity
Positive intent and ability to hold to maturity Classified as trading
Help for sale in near term to generate income Classified as available-for-sale
Not classified as held-to-maturity or trading securities
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Debt Securities Classified as Held-to-Maturity Valuation
Amortized cost Unrealized holding gains or losses
Not recognized Other income
Interest earned Realized gains and losses from sale
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Debt SecuritiesClassified as Trading Valuation
Fair value Unrealized holding gains or losses
Recognized in net income Other income
Interest earned Realized gains and losses from sale
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Debt SecuritiesClassified as Available-for-Sale Valuation
Fair value
Unrealized holding gains or losses Recognized as other comprehensive income Recognized as separate component of stockholders’
equity
Other income Interest earned Realized gains and losses from sale
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Investment in Debt Securities
Cost to investing entity $924,183Par value 1,000,000Discount 75,817Stated interest rate 8%Effective interest rate 10%Fair value of security; End of year 1 1,000,000 End of year 2 975,000
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Classified as Trading: Journal Entry
Account Debit CreditInvestment, trading debt security $924,183 Cash $924,183To record the purchase of a debt security classified as trading
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Classified as Trading
FMV $1,000,000Original cost 924,183Unrealized holding gain $75,817
Account Debit CreditSecurities Fair Value Adjustment, Trading $75,817 Unrealized holding gain, Income $75,817
Computation of Gain (Loss) at the End of Year 1
To recognized unrealized holding gain on debt security
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Classified as Trading
FMV $975,000Original cost 924,183Unrealized holding gain 50,817Previously recognized holding gain 75,817Unrealized holding loss ($25,000)
Account Debit CreditUnrealized holding loss, Income $25,000 Securities Fair Value Adjustment, Trading $25,000
Computation of Gain (Loss) at the End of Year 2
To recognized unrealized holding loss on debt security
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Classified as Available-for-sale
YearInterest Revenue
Interest received
Amortization of Discount
Carrying Value
Fair Value, End of Year
$924,183 1 $92,418 $80,000 $12,418 936,601 $1,000,0002 93,660 80,000 13,660 950,261 975,000
Amortization Schedule
Account Debit CreditInvestment, available-for-sale debt security $924,183 Cash $924,183To record the purchase of a debt security classified as available for sale
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Classified as Available-for-Sale
FMV $1,000,000Carrying value 936,601Unrealized holding gain $63,399
Account Debit Credit
Securities Fair Value Adjustment, Available-for-Sale $63,399 Unrealized holding gain, Equity $63,399
Computation of Gain (Loss) at the End of Year 1
To recognized unrealized holding gain on debt security
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Classified as Available-for-SaleFMV $975,000Original cost 950,261Unrealized holding gain 24,739Previously recognized holding gain 63,399Unrealized holding loss ($38,660)
Account Debit CreditUnrealized holding loss, Equity $38,660
Securities Fair Value Adjustment, Available-for-Sale $38,660To recognized unrealized holding loss on debt security
Computation of Gain (Loss) at the End of Year 2
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Classified as Held-to-Maturity No entry for fair value adjustment Fair value changes are not recognized at
the balance sheet date Securities are reported at amortized cost
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Equity Securities Ownership interests Include rights to buy or sell ownership Extent of ownership determines accounting
treatment for equity securities
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Degrees of Control
0% 20% 50% 100%
Little or None Significant Control
Ownership Percentage
Level of Influence
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Available-for-Sale Less than 20% ownership interest Recorded at cost Valued and reported at fair value Dividends are recognized as income Unrealized holding gains and losses
Part of comprehensive income A component of stockholders’ equity
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Trading Less than 20% ownership interest Recorded at cost Valued and reported at fair value Dividends are recognized as income Unrealized holding gains and losses
Recognized in net income
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Equity Method Between 20% and 50% ownership interest Substantive economic relationship Investor’s carrying value
Increased by proportionate share of earnings Decreased by
Dividends, and Proportionate share of losses
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Consolidation More than 50% voting interest Investor is parent Investee is subsidiary Investor prepares consolidated financial
statements Investor accounts for investment on its
books using the equity method
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Investments In Equity Securities
Ownership in Capital Stock
< 20% voting 20-50% voting >50% voting
Trading Available for Sale
No Consolidation
Consolidation
Fair Value
Fair Value
EquityMethod
EquityMethod
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Accounting by Category
Category ValuationUnrealized Holding Gains and Losses Other Income
< 20% ownership
Trading Fair value Net incomeDividends; gain or loss on sale
Available-for-Sale Fair valueComprehensive income, separate component of
shareholders' equity
Dividends; gain or loss on sale
20% - 50% ownership Equity method Not recognizedProportionate
share of income or loss
> 50% ownership Consolidate Not recognized No applicable
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Transfers of Classifications
FROM TOUNREALIZED GAIN OR LOSS ON
TRANSFERTrading Available-for-sale None, already recognized in incomeTrading Held-to-maturity None, already recognized in incomeAvailable-for-sale Trading Include in current incomeAvailable-for-sale Held-to-maturity FV becomes amortized cost basisHeld-to-maturity Trading Include in current incomeHeld-to-maturity Available-for-sale Include in equity, other comprehensive income