Exam 4

Purchase of debt security

Dr. Investment in debt

Cr. Cash

Receipt of interest for debt security purchased at par

Dr. Cash

Cr. Interest Revenue

Receipt of interest for debt security purchased at a discount

Dr. Cash

Dr. Investment

Cr. Interest revenue

Receipt of interest for debt security purchased at a premium

Dr. Cash

Cr. Investment

Cr. Interest Revenue

Adjust debt security to fair value with a gain HTM

no entry

adjust debt security to fair value with a gain (TS, AFS)

Dr. Fair Value Adjustment

Cr. Unrealized Gain or Loss- Income

Adjust debt security to fair value with a loss HTM

No entry

Adjust debt security to fair value with a loss (TS, AFS)

Dr. Unrealized Gain or Loss-Income

Cr. Fair Value Adjustment

Interest revenue

market rate at bond purchase x amortized cost at the beginning of period

How are trading securities recorded on the balance sheet

at fair value

How are unrealized gains or losses on trading securities reported on the income statement?

as part of net income in the period they occur

interest receivable

face value x stated interest

interest revenue

beginning bond amortized cost x market interest

Purchase of equity security

Dr. Investment in Stock

Cr Cash

Declaration of Dividends (FV-NI)

Dr. Cash

Cr. Dividend Revenue

Declaration of dividends (Equity Method)

Dr. Cash

Cr. Investment in Stock

Recognize proportionate share of net income (FV-NI)

No entry

Recognize proportionate share of net income (Equity Method)

Dr. Investment in Stock

Cr. Investment Income

Adjust equity security to fair value with a gain (FV-NI)

Dr. Fair Value Adjustment

Cr. Unrealized Gain or Loss-Income

Adjust equity security to fair value with a gain (Equity Method)

No entry

Adjust equity security to fair value with a loss (FV-NI)

Dr. Unrealized Gain or Loss-Income

Cr. Fair Value Adjustment

Adjust equity security to fair value with a loss (Equity Method)

No entry

Step 1 of the Recoverability test

Net cash flows< Carrying value

Step2 of the Recoverability test

Measure impairment as any excess of carrying value over fair value

Research and Development until Technological Feasibility

R&D expense

Technological feasibility

is reached with either a detailed program design or a working model

R&D activity after technological feasibility

intangible asset

composite annual depreciation rate =

annual group straight- line depreciation / total group acquisition cost

Composite annual depreciation =

composite annual depreciation rate x total group acquisition cost

composite group useful life =

group depreciable cost / annual group straight-line depreciation

Asset Recoverability Test

Expected net cash flows less than book value?

Impairment Test

Recognize any loss for the excess of book value over fair value

depletion rate per unit of output =

depletion base / estimated activity base in units

annual depletion =

depletion rate x actual activity base in units

successful-efforts method

only exploration cost of successful wells are capitalized

full-cost method

All exploration costs are capitalized if the estimated value of reserves discovered from the successful wells is >= the amount to be capitalized

Equity method

Owns 20-50% of stock

FV-NI

Less than 20%

Impairment of HTM Investments

Dr. Loss on Impairment

Cr. Allowance for Credit Losses

Impairment of AFS Debt Investment when it is not inclined to sell

• Dr. Loss on Impairment and credit Allowance for Credit Losses for the portion of the unrealized loss due to credit risk, limited to the amount that the fair value is less than amortized cost.

• Eliminate a corresponding OCI loss (previously recorded through FV-OCI*) through a debut to the Fair Value Adjustment account and a credit to Unrealized Gain or Loss-OCI