int 2 exam

fair market value method

use when you have no significant influence or control (own or < or equal to 20%) and the mp is reliable

held to maturity (htm)

do not adjust fair market value ; adjust the cost of bond investments each period if fmv is reliable. The change in fair market value is reported on the income statement under “other” revenues and expenses (Unrealized holding gain/loss account) 

Record dividends received as dividend income

available for sale (afs)

Adjust the investment to fair market value at the end of the period if fair market value is reliable

The change in fair market value is reported on the balance sheet as part of owner’s equity in the “unrealized holding gain/loss” owner’s equity account

Record dividends received as dividend income

trading securities

Adjust the investment to fair market value at the end of each period if fair market value is reliable (bid ask quote)

The change in fair market value is reported on the income statement under “other” revenues and expenses (Unrealized holding gain/loss account) 

Record dividends received as dividend income

equity method

Use when you own an equity investment in a company and have significant influence

Significant influence is presumed to exist with ownership of > or = 20%, when the investor has
      Access to financial information
      Seat(s) on the board of directors
      Actual influence on major company policies and procedures

Suppose an HTM bond's fair value increases by $40,000 during the year.

What does the company do with that $40,000 increase?

don’t recognize the unrealized gain; For HTM, the investment stays at amortized cost. Changes in fair value don't create an unrealized gain/loss entry.

how does AFS recognize a change in fair value?

Unrealized G/L in OCI (Equity)

how does trading securities recognize a change in fair value?

Unrealized G/L in Net Income

j/e Investee earns income → Investment ↑

Dr. Equity Investments
Cr. Investment Income

j/e Investee pays dividends → Investment ↓

Dr. Cash
Cr. Equity Investments

ending investment formula=

Beginning + income - dividends

investment income=

Net income × Ownership %

Dividends received=

Dividends × Ownership %

record dividends declared j/e:

dr. dividends receivable

cr. equity investments

amortized cost > fair value

unrealized loss

when is revenue recognized

revenue is recognized when the performance obligation is satisfied

5 steps of revenue recognition

1.Identify the contract with customers

2.Identify the separate performance obligations in the contract

3.Determine the transaction price

4.Allocate the transaction price to the separate performance obligations

5.Recognize revenue when each performance obligation is satisfied

j/e entry for contract signed

no j/e