ACC109 Module 3: Investments

A complete set of 100 vocabulary flashcards covering key definitions, classifications, journal entries, and mathematical formulas for ACC109 Module 3 on Investments.

Three reasons for investing

Earn income on extra cash; generate investment income; achieve strategic goals.

Strategic investments

Investments in competitors, suppliers, or customers for business purposes.

Short-term investments

Current assets readily convertible to cash and intended for conversion within one year or the operating cycle, whichever is longer.

Typical short-term maturity

Usually 3 to 12 months.

Cash equivalents

Generally mature within 3 months; not classified as short-term investments.

Long-term investments

Not readily convertible to cash or not intended for short-term conversion.

Other long-term investments

Special-purpose funds, land, and assets not used in operations.

Debt securities

Represent a creditor relationship.

Equity securities

Represent an ownership relationship.

Three investment accounting factors

Type of security, holding intention, and ownership percentage.

Trading securities

Actively bought and sold for profit; reported at fair value.

Trading classification

Always current assets.

Held-to-maturity (HTM)

Debt investments the company intends and is able to hold to maturity.

HTM valuation

Amortized cost; no fair value adjustment.

HTM balance sheet classification

Current if due within one year or operating cycle, whichever is longer; otherwise long-term.

Available-for-sale (AFS)

Securities not classified as trading or HTM, held for future sale rather than active trading.

AFS valuation

Fair value, with unrealized gains or losses reported in equity.

AFS classification

May be current or long-term.

Insignificant influence

Generally under 20% ownership; fair value method.

Significant influence

Generally 20% to 50% ownership; equity method.

Controlling influence

Generally over 50% ownership; consolidation.

HTM equity securities

None; HTM applies only to debt.

Debt security purchase entry

Debit Debt Investments; credit Cash at cost.

Interest recognition

Recognize interest when earned.

Cash interest entry

Debit Cash; credit Interest Revenue.

Accrued interest entry

Debit Interest Receivable; credit Interest Revenue.

Interest formula

$$\text{Principal} \times \text{Annual interest rate} \times \text{Time fraction}$$

Interest for part of a year

$\text{Principal} \times \text{Rate} \times \frac{\text{Months}}{12}$, or $\frac{\text{Days}}{360}$ when applicable.

Semiannual interest

$$\text{Principal} \times \text{Annual rate} \times \frac{6}{12}$$

Debt investment reporting

Interest revenue on income statement; debt investment on balance sheet.

Cost differs from maturity value

For long-term debt, amortize the difference over remaining life.

HTM purchase entry

Debit Debt Investments - HTM; credit Cash.

HTM maturity entry

Debit Cash; credit HTM Investment for principal and Interest Revenue for earned interest.

Unrealized gain or loss

Change in fair value before sale.

Unrealized gain/loss formula

$\text{Fair value} - \text{Cost}$ (or applicable adjusted carrying amount).

Fair value exceeds cost

Unrealized gain.

Fair value below cost

Unrealized loss.

Trading unrealized gain entry

Debit Fair Value Adjustment - Trading; credit Unrealized Gain - Income.

Trading unrealized loss entry

Debit Unrealized Loss - Income; credit Fair Value Adjustment - Trading.

Trading unrealized reporting

Other Revenues and Gains or Other Expenses and Losses on income statement.

Unrealized Gain/Loss - Income

Temporary account closed to Income Summary.

Fair Value Adjustment - Trading

Permanent asset valuation account.

Trading balance sheet formula

$$\text{Investment cost} + \text{or} - \text{Fair Value Adjustment} = \text{Fair value}$$

Trading sale gain/loss

$$\text{Net sale proceeds} - \text{Cost of individual securities sold}$$

Trading sale entry

Debit Cash; credit investment at cost; record difference as gain or loss.

Fair value adjustment on sale

Do not prorate or adjust the portfolio adjustment for an individual sale.

Trading portfolio valuation

Compare total portfolio fair value with total portfolio cost.

Three adjustment steps

Find existing account balance; find required ending balance; enter the difference.

Required adjustment balance

$$\text{Portfolio fair value} - \text{Portfolio cost}$$

Adjustment entry amount

$$\text{Required ending adjustment balance} - \text{Existing adjustment balance}$$

Why adjustment differs from gain/loss

Prior-period fair value adjustment may already have a balance.

AFS unrealized gain entry

Debit Fair Value Adjustment - AFS; credit Unrealized Gain - Equity.

AFS unrealized loss entry

Debit Unrealized Loss - Equity; credit Fair Value Adjustment - AFS.

AFS unrealized reporting

Equity on balance sheet and comprehensive income, not net income.

AFS balance sheet formula

$$\text{Investment cost} + \text{or} - \text{Fair Value Adjustment} = \text{Fair value}$$

AFS adjustment with credit balance

Contra asset that reduces investment cost to fair value.

AFS sale gain/loss

$$\text{Net sale proceeds} - \text{Cost of securities sold}$$

AFS sale entry

Debit Cash; credit investment at cost; recognize realized gain or loss.

Trading versus AFS unrealized results

Trading affects net income; AFS affects equity and comprehensive income.

Trading versus AFS sales

Both compare net sale proceeds with cost of individual securities sold.

AFS versus HTM

AFS at fair value; HTM at amortized cost.

AFS portfolio adjustment over multiple years

Adjust from existing Fair Value Adjustment balance to the newly required balance.

AFS securities management

Not actively managed like trading securities.

Equity purchase cost

$$\text{Shares} \times \text{Purchase price per share} + \text{Brokerage fees and commissions}$$

Equity purchase entry

Debit Equity Investments; credit Cash for total cost.

Dividend revenue formula

$$\text{Shares owned} \times \text{Dividend per share}$$

Dividend receipt, fair value method

Debit Cash; credit Dividend Revenue.

Dividend revenue reporting

Other Revenues and Gains on income statement.

Cost per share

$$\frac{\text{Total acquisition cost}}{\text{Total shares purchased}}$$

Cost of shares sold

$$\text{Cost per share} \times \text{Shares sold}$$

Partial sale allocated cost

$$\text{Original total cost} \times \left(\frac{\text{Shares sold}}{\text{Original shares}}\right)$$

Net sale proceeds

$$\text{Shares sold} \times \text{Sale price per share} - \text{Selling commissions}$$

Realized stock gain/loss

$$\text{Net proceeds} - \text{Applicable cost or book value of shares sold}$$

Gain versus loss

Gain if net proceeds exceed applicable carrying amount; loss if less.

Noninfluential equity investments

Insignificant influence; entire portfolio reported at fair value.

Noninfluential unrealized reporting

Other Revenues and Gains or Other Expenses and Losses on income statement.

Noninfluential equity dividend

Recognize dividend revenue when received, as shown in presentation.

Equity method

Recognizes investor share of investee earnings or losses in investment balance.

Investor versus investee

Investor owns shares; investee is the company invested in.

Share of investee income

$$\text{Investee net income} \times \text{Ownership percentage}$$

Investee income entry

Debit Long-Term Investment; credit Earnings from Long-Term Investment.

Investee loss entry

Debit Loss from Investment; credit Long-Term Investment.

Share of dividends

$$\text{Investee total dividends} \times \text{Ownership percentage}$$

Equity method dividend entry

Debit Cash; credit Long-Term Investment.

Why equity method dividends are not revenue

Share of investee income was already recognized; dividends reduce the investment asset.

Equity method ending balance

$$\text{Beginning investment} + \text{Share of income} - \text{Share of losses} - \text{Share of dividends}$$

Equity method sale gain/loss

$$\text{Sale proceeds} - \text{Investment book value at date of sale}$$

Parent company

Investor with controlling influence, generally over 50% voting stock.

Subsidiary

Investee controlled by parent.

Consolidated financial statements

Present parent and subsidiary together.

Comprehensive income

All equity changes except owner investments and dividends.

Comprehensive income items

AFS unrealized gains/losses, foreign currency adjustments, and certain pension adjustments.

Comprehensive income presentation

Separate statement after income statement or lower section of combined statement.

Return on total assets (ROA)

Measures performance from assets; $\text{profit margin} \times \text{total asset turnover}$.

Profit margin

$$\frac{\text{Net income}}{\text{Net sales}}$$

Profit margin meaning

Net income generated per dollar of net sales.

Total asset turnover

$$\frac{\text{Net sales}}{\text{Average total assets}}$$

Total asset turnover meaning

Ability to generate sales using total assets.

Average total assets

$$\frac{\text{Beginning total assets} + \text{Ending total assets}}{2}$$

ROA component equation

$$\left(\frac{\text{Net income}}{\text{Net sales}}\right) \times \left(\frac{\text{Net sales}}{\text{Average total assets}}\right)$$