Intermediate Accounting, Kieso, Chapter 17

Investment in Debt Securities

Companies account for investments based on:

1) The type of security

---- debt

---- equity

2) intent with respect to the investment

Debt Investment Classifications

- Held to maturity

- Available for sale

- Trading securities

amortized cost

the acquisition cost adjusted for the amortization of discount or premium

Held-to-maturity securities

Classify a debt security as such if it has both:

- the positive intent

- the ability to hold securities to maturity

Valuation: amortized cost

Unrealized holding gains or losses: not recognized

Other Income Effects: Interest when earned; gains and losses from sale.

Amortize premium or discount using the effective-interest method.

Available-for-sale securities

Companies report these securities at:

Valuation: fair value

Unrealized holding gains or losses: Recognized as other comprehensive income and as separate component of stockholders' equity (goes on balance sheet)

Other Income Effects: Interest when earned, gains and losses from sale.

Trading Securities

Companies report these securities at:

Valuation: fair value

Unrealized holding gains or losses: Recognized in net income

Other Income Effects: Interest when earned, gains and losses from sale.

JE. of Held to maturity

Investment:

Debt investment XX (at cost)

----- Cash XXX

Receipt of interest payment:

Cash XX (bond $*bond %)

Debt investment XX (Interest Rev-Cash received)

---- Interest Revenue XXX (cost*yield%)

Interest and amortized (End of year):

Interest Receivable XX (Cash amount above)

Debt Investment XX (int rev-cash received)

---- Interest Revenue XXX (plug)

Financial statements - Held to maturity

On Balance sheet

Current assets:

---- Interest Receivable

Long term investments

---- Debt investments (held to maturity)

Income Statement

Other revenues and gains:

---- Interest Revenue

JE of Available for sale

Purchase of bonds (at a premium):

Debt investment XX (at cost)

----- Cash XXX

Interest Revenue:

Cash XX (bond$*%)

---- Debt Investment XXX (Int rev-cash received)

---- Interest Revenue XXX (Cost *yield%)

Interest Revenue (at end of year):

Interest Receivable XX (cash amount above)

---- Debt Investment XXX (Bond prem amort)

---- Interest Revenue XXX (Interest Revenue)

Sale of Available-for-Sale Securities

If company sells bonds before maturity date:

- It must make entries to remove from the Debt Investments account the amortized cost of bonds sold.

- Any realized gain or loss on sale is reported in the "Other" section of the income statement.

JE of sale of Available for Sale security

Sold for $90,000

Amortized cost is $94,214

Cash XX (sold)

Loss on sale XX (difference above)

---- Debt Investment XXX (Amortized cost)

Financial statements - Available for sale

Balance sheet

Current assets:

--- Interest Receivable

Investments:

--- Debt investments (available for sale)

Stockholders' equity

--- Accumulated other comprehensive loss

Income Statement

Other revenues and gains:

--- Interest Revenue

Other expenses and losses:

--- Loss on sale of investments

JE for trading securities

Purchase of the investment:

Debt investments (at cost)

--- Cash

Interest received:

Cash

--- Interest Revenue

Fair value adjustment:

Unrealized holding gain or loss (BV-FV)

--- FV adjustment - Debt investment

Investments in Equity Securities

represent ownership of capital stock

Cost includes:

- price of the security, plus

- broker's commissions and fees related to purchase

% ownership (control) generally determine the accounting treatment for the investment subsequent to acquisition

Ownership Percentages in Equity Investments

0%-20%: No Influence, FMV

20%-50%: Significant influence, Equity Method

50%-100%: Control, Cost method, or equity method, investment eliminated in consolidation

Holding less than 20%

Valuation: fair value

Unrealized holding gains or losses: Recognized in net income

Other Income effect: Dividends declared; gains and losses from sale

Holdings between 20% and 50%

valuation: equity

Unrealized holding gains or losses: not recognized

Other Income effects: Proportionate share of investee's net income

Holdings of more than 50%

Valuation: Consolidation

Unrealized holding gains or losses: Not recognized

Other Income effects: Not applicable

Add up financial statement of company

JE of purchase of Holdings less than 20%

Records investment purchase:

Equity investment XX (at cost)

--- Cash

Cash dividend:

Cash XX

--- Div Revenue XXX

End of year, record net unrealized gains and losses:

Unrealized holding loss (if negative) XX

--- FV adjustment - Equity Investment XXX

JE of sale of Holdings less than 20%

Gain/Loss on sale:

net proceeds

+- Cost

= Gain/Loss on sale

Cash XX (Net proceeds)

--- Equity investment (at cost)

--- Gain on sale

Comparison of Equity Method to Fair Value

Record the investment at cost and subsequently adjust the amount each period for

the investor's proportionate share of the earnings (losses) and

Dividends received by the investor.

* If investor's share of investee's losses exceeds the CV of the investment, the investor ordinarily should discontinue applying the equity method and not recognize additional losses*

controlling interest

When one corporation acquires a voting interest of more than 50% in another corporation.

- Investor corp is referred to as the parent.

- Investee corp is referred to as the subsidiary

- Parent generally prepares consolidated financial statements