ACCY 304 TEST 2 Taylor's versions

The value from a financial asset comes from a

Contractual claim to cash flows

Type of Securities

Debt and equity

Debt Security management intent

No plans to sell prior to maturity (HTM debt investments) and plans to sell prior to maturity(trading debts and AFS debt investments)

Debt security valuation approach

Amortized cost (carrying value) and fair value

Equity security management intent

Plan to sell ( based on % of ownership) and exercise control

Equity security valuation approach

Fair value and the equity method

HTM Securities

Company has the positive intent and ability to hold to maturity. (calculate interest rev). No recognition of URHGL and income is recognized when interest is earned

Valuation for HTM securities is done at

Amortized cost. (ex: acquisition cost adj for the amort of discount or premium)

If the selling price of an investment is greater than the carrying value:

A gain on sale of bonds occurs

If selling price of an investment is less than the carrying value:

A loss on sale of bonds occurs

Recording the sale of bonds includes:

Cash received for the selling price of the bond, cash received and interest and revenue recognized, and removal of the debt investments acc.

Accounting for AFS securities:

Reported on the balance sheet at fair value, FV is noted at end of year and differences btwn amort. and fv are recognized as an URHGorL,

Unrealized Holding Gains and Losses are reported in

Other comprehensive income (OCI) NOT net income.

Other comprehensive income is reported in

The statement of comprehensive income, and is added or subtracted from accumulated comp inc, (which is reported as a separate component to SHE)

Difference between accounting for HTM and AFS securities:

AFS securities require an evaluation of the fair value of AFS securities at the end of the year.

AFS securities are reported on

The balance sheet at fair value.

Trading securities

Are held by companies with an intent to hold and sell within three months time. *refers to frequent buying and trading of these types of securities

Trading securities are reported at

Fair value on the balance sheet.

Any unrealized holding gains or losses attributable to trading securities are reported as

A part of net income

Holdings of less than 20%

Investor has passive interest (FV method used)

Holdings between 20% and 50%

Investor has significant influence (equity method used)

Advantages of Equity Investments

Provide higher rates of return as compared to debt securities, can be sold very quickly, are more liquid compared to d/s, offer the opportunity to diversify one's portfolio.

Disadvantage of having a large portfolio of stock is that

For holdings of less than 20%, the fair value method of accounting must be used. (gains and losses based on changes in the fv of the stock must be reported in net income.)

FV Method of equity investments:

Equity securities are recorded at COST, the FVA acc either reduces or increases the net balance of "Equity Investments".

Dividend Revenue is recognized on the income statement:

Whenever an investee declares a dividend.

If no dividend is declared:

There would be no dividend revenue to recognize.

If an equity investment in which a corp holds less than 20% is sold

We compare the OG cost of the investment with the selling price of the stock. (realized gain or loss on sale goes on the inc statement.)

For realized gains and losses:

We must compare the og cost to the selling price to determine the amount of gain or loss to recognize. (fv is not considered when journalizing sale)

Debt securities that are bought and held primarily for sale in the near term are reported at

fair value

Unrealized holding gains or losses are recognized as other comprehensive income for:

Available for sale securities

Trading securities are generally held for less than:

3 months

Debt securities may be classified as:

Held to maturity, trading, or available for sale.

A correct valuation is

held-to-maturity securities at amortized cost.

Investments are reported at market value on the balance sheet under the equity method

False

Under the equity method, the investment account is decreased by all of the following except the investor's proportionate share of:

declines in the fair value of the investment

Transfers of securities between categories of investments should be accounted for at cost.

False; at fair value

Fair value floor is determined by

amortized costs of AFS debt security - FV of AFS debt security

Temporary differences create the following:

1. Deferred Tax Liability
2. Deferred Tax Asset (Benefit)

Deferred Tax Liability

Refers to tax revenue that will be recognized in a future year OR to a tax deduction that cannot be taken in a future year.
a.) current year taxable inc < current year financial inc when DTL is originated

Deferred Tax Asset (Benefit)

Refers to tax revenue that will NOT be recognized in a future year OR a tax deduction that can be taken in a future year.
a.) Current year taxable inc> current year financial inc when the DTA is originated

Temporary Difference

Difference between the tax basis of an asset or liability and its reported carrying value or book value in the GAAP based financial statements.

Taxable Amount

Increases taxable income in future years

Deductible amount

Decreases taxable income in future years

Deferred Tax Liability (Deferred Tax Expense)

Arises bc taxable income is less than financial inc in the current year.

If probable to lose a legal battle or litigation:

You must accrue a liability and pay it out in the year of the loss.

Under the fair value method, an investors income is affected by:

unrealized holding gains and losses and dividends received

under the equity method, an investors inc is affected by:

proportionate share of investees net income