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Investment Investment in Debt and in Debt and
Equity Equity SecuritiesSecuritiesAn electronic presentationAn electronic presentation
by Douglas Cloudby Douglas Cloud Pepperdine UniversityPepperdine University
An electronic presentationAn electronic presentation by Douglas Cloudby Douglas Cloud
Pepperdine UniversityPepperdine University
chapterchapter 14
2
1. Determine why companies invest in other companies.
2. Understand the varying classifications associated with securities.
3. Account for the purchase of debt and equity securities.
4. Account for the recognition of revenue from investments.
Learning Objectives
ContinuedContinuedContinuedContinued
3
5. Account for the change in value of securities.
6. Account for the sale of investment securities.
7. Record the transfer of securities between categories.
8. Properly report purchases, sales, and changes in value of investment securities in the statement of cash flows.
Learning Objectives
ContinuedContinuedContinuedContinued
4
9. Explain the proper classification and disclosure of investments in securities.
10. Compare the accounting for securities under U.S. GAAP with the international standard in IAS 39.
Learning Objectives
EXPANDED MATERIAL11. Account for the impairment of a loan
receivable.
5Investment in Debt and Equity Securities—2001
Total Investment Percentage ofTotal Investment Percentage ofCompany (in billions) Total AssetsCompany (in billions) Total Assets
Berkshire Hathaway $69.0 42.4%Microsoft 17.7 34.7Coca-Cola 5.4 24.2Citigroup 160.8 15.3AT&T 24.5 14.8Verizon 10.2 6.0
6Time Line of Business Issues Involved with Investment Securities
DETERMINE purpose of investment
?
7Time Line of Business Issues Involved with Investment Securities
CLASSIFY investments
a, b, c
8Time Line of Business Issues Involved with Investment Securities
Cloud Corporation
$100 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
Cloud Corporation
$100 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
Good Buy Corporation
$10 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
PURCHASE securities
9Time Line of Business Issues Involved with Investment Securities
Cloud Corporation
$100 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
Cloud Corporation
$100 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
Good Buy Corporation
$10 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
EARN AND RECOGNIZE
a return
10Time Line of Business Issues Involved with Investment Securities
MONITOR changes in value
Cloud Corporation
$100 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
Cloud Corporation
$100 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
Good Buy Corporation
$10 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
+-
+-
+
11Time Line of Business Issues Involved with Investment Securities
Cloud Corporation
$100 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
Cloud Corporation
$100 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx.
Good Buy Corporation
$10 par valuexxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. SELL
securities
12Time Line of Business Issues Involved with Investment Securities
Time Line of Business Issues Involved with Investment Securities
TRANSFER securities between
categories
a b c
13Time Line of Business Issues Involved with Investment Securities
Time Line of Business Issues Involved with Investment Securities
DISCLOSE status of portfolio at the
end of the period
14Why Companies Invest in Other Companies
Safety Cushion
Cyclical Cash Needs
Investment for a Return
ContinuedContinuedContinuedContinued
15Why Companies Invest in Other Companies
Purchase for Control
Investment for Influence
16
1. A maturity value, representing the amount to be repaid to the debt holder at maturity.
2. An interest rate that specifies the periodic interest payments.
3. A maturity date, indicating when the debt obligation will be redeemed.
Classification of Investment in Securities
Debt securities typically have the following characteristics:
17
These shares of stock typically carry with them the right to collect dividends and vote on corporate matters.
Equity securities represent ownership in a company.
Equity securities have the potential for significant increases in price.
Classification of Investment in Securities
18
Debt/EquitySecurities
TradingTradingSecurities purchased for salein the near future.
Held-to-Maturity
Held-to-Maturity
Securities purchased with theintent to hold until maturity.
Available-for-sale
Available-for-sale
Securities not classified astrading or held-to-maturity.
Classification of Investment in Securities
19
Available-for-sale
TradingHeld-to-maturity
DebtDebt
Equity Method
EquityEquity
Classification of Investment in Securities
Cost Method
20
Equity securities represent ownership in a company.
These shares of stock typically carry with them the right to
collect dividends and to vote on corporate matters.
Equity securities represent ownership in a company.
These shares of stock typically carry with them the right to
collect dividends and to vote on corporate matters.
Equity Method Securities
21
Equity Method Securities
These are securities purchased with the intent to control or significantly influence the operations of the investee.
These are securities purchased with the intent to control or significantly influence the operations of the investee.
22
Equity Method Securities
At least 20 percent of the outstanding voting stock must
be owned to have this significant influence or control.
At least 20 percent of the outstanding voting stock must
be owned to have this significant influence or control.
Even then, there may be evidence to support the fact
that even a 20 percent investment does not have
significant influence.
Even then, there may be evidence to support the fact
that even a 20 percent investment does not have
significant influence.
23Different Accounting Different Accounting TreatmentsTreatments
Classification of Securities
Types of Securities
Disclosure on the
Balance Sheet
Treatment of Temporary Changes in
Value
Held to maturity Debt Amortized cost Not recognizedAvailable for sale Debt/equity Fair market value Reported in
stockholders’ equity
Trading Debt/equity Fair market value Reported on the income statement
Equity method Equity Historical cost Not recognized adjusted for changes in the assets of the investee
24
Purchases of Debt Securities
On May 1, Douglas Company purchases $100,000 in U.S. Treasury notes at 104¼, including brokerage fees. Interest is 9%
payable semiannually on January 1 and July 1. The debt securities are classified by the
purchaser as trading securities.
On May 1, Douglas Company purchases $100,000 in U.S. Treasury notes at 104¼, including brokerage fees. Interest is 9%
payable semiannually on January 1 and July 1. The debt securities are classified by the
purchaser as trading securities.
Accrued interest on May 1 is $3,000, calculated as follows:
$100,000 x .09 x 4/12 = $3,000
25
Purchases of Debt Securities
May 1 Investment in Trading Securities 104,250Interest Receivable 3,000
Cash 107,250
Purchase date:
Asset Approach
ContinuedContinuedContinuedContinued
26
Purchases of Debt Securities
May 1 Investment in Trading Securities 104,250Interest Revenue 3,000
Cash 107,250
Purchase date:
Revenue Approach
ContinuedContinuedContinuedContinued
27
Purchases of Debt Securities
Receipt of semiannual payment:
July 1 Cash 4,500Interest Receivable 3,000Interest Revenue 1,500
Asset Approach
July 1 Cash 4,500Interest Revenue 4,500
Revenue Approach
28
Purchase of Equity Securities
Purchased 10,000 shares of Dave’s Deli Purchased 10,000 shares of Dave’s Deli common shares at $2 per share.common shares at $2 per share.
Purchased 10,000 shares of Dave’s Deli Purchased 10,000 shares of Dave’s Deli common shares at $2 per share.common shares at $2 per share.
Treated as available-for-sale because management has no intention of holding
these securities for a a long period of time and will sell them as soon as it is
economically advantageous
29
Available-for-SaleAvailable-for-Sale
Investment in Available-for- Sale Securities—AB Company 2,000
Cash 2,000
Purchase of Equity Securities
Citty Co. purchased 1,000 shares of AB Citty Co. purchased 1,000 shares of AB Company common shares at $2 per share.Company common shares at $2 per share.Citty Co. purchased 1,000 shares of AB Citty Co. purchased 1,000 shares of AB
Company common shares at $2 per share.Company common shares at $2 per share.
30
Citty Co. purchased 100,000 shares of AB Citty Co. purchased 100,000 shares of AB Company common shares at $2 per share.Company common shares at $2 per share.
Citty Co. purchased 100,000 shares of AB Citty Co. purchased 100,000 shares of AB Company common shares at $2 per share.Company common shares at $2 per share.
Purchase of Equity Securities
Assume that the 100,000 shares purchased represents 20 percent of the
outstanding voting stock of AB Company. This investment gives the investor significant influence over AB
Company.
31
Purchased 100,000 shares of Dave’s Deli Purchased 100,000 shares of Dave’s Deli common shares at $2 per share.common shares at $2 per share.
Purchased 100,000 shares of Dave’s Deli Purchased 100,000 shares of Dave’s Deli common shares at $2 per share.common shares at $2 per share.
Trading SecuritiesTrading Securities
Investment in Trading Securities— AB Company Common Stock 2,000
Cash 2,000
Purchase of Equity Securities
32
PV of Debt Securities
On January 1, 2004, Silmaril Technologies purchased 5-year, 10% bonds with a face value of $100,000 and interest payable
semiannually on January 1 and July 1. The market rate on bonds of similar quality and
maturity is 8%.
On January 1, 2004, Silmaril Technologies purchased 5-year, 10% bonds with a face value of $100,000 and interest payable
semiannually on January 1 and July 1. The market rate on bonds of similar quality and
maturity is 8%.
33
PV of Debt Securities
Present value of principal:
FV = $100,000; N = 10; I = 4%
$ 67,556Present value of interest payments:
PMT = $5,000; N = 10; I = 4%
40,554Total present value of the bonds
$108,110Investment in Trading Securities 108,100
Cash108,100
34Interest Revenue for Debt Securities (Trading)
When the first interest payment is received from Silmaril, the following
entry would be made:
When the first interest payment is received from Silmaril, the following
entry would be made:
July 1 Cash 5,000Interest Revenue 5,000
35Interest Revenue for Debt Securities (Held-to-Maturity)
When the first interest payment is received from Silmaril, the following
entry would be made:
When the first interest payment is received from Silmaril, the following
entry would be made:
July 1 Cash 5,000Interest Revenue 4,324Investment in Held-to- Maturity Securities 676
$108,110 x .04
36Interest Revenue for Debt Securities (Held-to-Maturity)
When the second interest payment is received, the interest revenue is determined by the yield
times the bond carrying value.
When the second interest payment is received, the interest revenue is determined by the yield
times the bond carrying value.
Jan 1 Cash 5,000Interest Revenue 4,297Investment in Held-to- Maturity Securities 703
$107,434 x .04
37Determining the Appropriate Determining the Appropriate Accounting MethodAccounting Method
0% 20% 50% 100%
No significantinfluence
Significantinfluence
Control
Ownership Percentage
Account for as trading or
available-for-saleEquity method
Equity method and consolidation
procedures
38Determining the Appropriate Determining the Appropriate Accounting MethodAccounting Method
In the absence of persuasive evidence to the contrary,
equity securities are classified as trading or available for sale when ownership is less than
20 percent.
In the absence of persuasive evidence to the contrary,
equity securities are classified as trading or available for sale when ownership is less than
20 percent.
SummarySummary
39Determining the Appropriate Determining the Appropriate Accounting MethodAccounting Method
The equity method is used when ownership is such that the investor has the ability to
significantly influence or control the investee’s operations.
The equity method is used when ownership is such that the investor has the ability to
significantly influence or control the investee’s operations.
SummarySummary
40Determining the Appropriate Determining the Appropriate Accounting MethodAccounting Method
Ownership Interest
Control or Degree of Influence
Accounting Method
Applicable Standard
More than 50% Control Equity method APB Opinion #18and consolidation FASB Exposureprocedures Draft
20% to 50% Significant Equity method APB Opinion #18influence
Less than 20% No Account for as FASB Statementsignificant trading or No. 115influence available for sale
41
AB Company announces dividends of AB Company announces dividends of $0.25 per share. Assume that Citty Co. $0.25 per share. Assume that Citty Co.
owns 1,000 sharesowns 1,000 shares
AB Company announces dividends of AB Company announces dividends of $0.25 per share. Assume that Citty Co. $0.25 per share. Assume that Citty Co.
owns 1,000 sharesowns 1,000 shares
Cash 250Dividend Revenue 250
Revenue for Equity Securities Classified as Trading and AFS
42Revenue for Equity Securities Classified as Trading and AFS
AB Company announces dividends of AB Company announces dividends of $0.25 per share. Assume that Citty Co. $0.25 per share. Assume that Citty Co.
owns 100,000 which represents 50 owns 100,000 which represents 50 percent of the outstanding voting stock.percent of the outstanding voting stock.
AB Company announces dividends of AB Company announces dividends of $0.25 per share. Assume that Citty Co. $0.25 per share. Assume that Citty Co.
owns 100,000 which represents 50 owns 100,000 which represents 50 percent of the outstanding voting stock.percent of the outstanding voting stock.
Cash 25,000Investment in AB Company Stock 25,000
43Revenue for Equity Securities Classified as Trading and AFS
AB Company reports an income of AB Company reports an income of $250,000 for the year. Again, assume $250,000 for the year. Again, assume that Citty Co. owns 50 percent of the that Citty Co. owns 50 percent of the
outstanding voting stock.outstanding voting stock.
AB Company reports an income of AB Company reports an income of $250,000 for the year. Again, assume $250,000 for the year. Again, assume that Citty Co. owns 50 percent of the that Citty Co. owns 50 percent of the
outstanding voting stock.outstanding voting stock.
Investment in AB Company Stock 125,000
Income from Investment in AB Company Stock 125,000
44Equity Method: Purchase For More than Book Value
The net assets of Stewart Inc. was $500,000 at the time Phillips Manufacturing Co.
purchased 40% of the common shares for $250,000 on January 1, 2005. The market
value of the net assets of Stewart Inc. would be $625,000, which is $125,000 more than
the book value. Only $50,000 of this is attributed to depreciable assets.
The net assets of Stewart Inc. was $500,000 at the time Phillips Manufacturing Co.
purchased 40% of the common shares for $250,000 on January 1, 2005. The market
value of the net assets of Stewart Inc. would be $625,000, which is $125,000 more than
the book value. Only $50,000 of this is attributed to depreciable assets.
$250,000 $250,000 ÷ .40÷ .40$250,000 $250,000 ÷ .40÷ .40
45Equity Method: Purchase For More than Book Value
The average remaining life of the depreciable assets is 10 years and the
special operating license is to be amortized over 20 years.
The average remaining life of the depreciable assets is 10 years and the
special operating license is to be amortized over 20 years.
Additional depreciation ($50,000 x 0.40)/10 $2,000License amortization ($75,000 x 0.40)/20 1,500
$3,500
46Equity Method: Purchase For More than Book Value
Stewart Inc. declared and paid dividends of $70,000 to common stockholders during 2005, and it
reported net income of $150,000 for the year ended December 31, 2005.
Stewart Inc. declared and paid dividends of $70,000 to common stockholders during 2005, and it
reported net income of $150,000 for the year ended December 31, 2005.
47Equity Method: Purchase For More than Book Value
Investment in Stewart Inc. Common Stock
Acquisition cost 250,000Share of earnings 60,000
Dividends 28,000Additional depreciation 2,000Additional amortization 1,500
310,000 31,500Balance 278,500
48Accounting for TemporaryChanges in Value of Securities
Classificationof Security
Disclosedat
Report FMV
TradingFair marketvalue
Incomestatement
Held-to-maturity
Amortizedcost
Notrecognized
Available-for-sale
Fair marketvalue
Stockholder’sequity
Change On
49
Eastwood Inc. purchased the following securities on March 23, 2005.
• Trading securities:– Purchase price (Security #1) $ 8,000– Value end of year (#1) $ 7,000– Purchase price (#2) $ 3,000– Value end of year (#2) $ 3,500
• Available-for-sale securities:– Purchase price (#3) $ 5,000– Value end of year (#3) $ 6,100
Accounting for TemporaryChanges in Value of Securities
ContinuedContinuedContinuedContinued
50
• Available-for-sale securities:– Purchase price (#4) $12,000– Value end of year (#4) $11,500
• Held-to-maturity securities:– Purchase price (#5) $20,000– Value end of year (#5) $19,000
Accounting for TemporaryChanges in Value of Securities
ContinuedContinuedContinuedContinued
51Accounting for TemporaryChanges in Value of Securities
Investment in Trading Securities 11,000Investment in Available-for-Sale Securities 17,000Investment in Held-to-Maturity Securities 20,000
Cash 48,000
Initial Purchase EntryInitial Purchase Entry
ContinuedContinuedContinuedContinued
52
December 31, 2005:
Unrealized Loss on Trading Securities 500 Market Adjustment—Trading Securities 500
By the end of the year, the value of By the end of the year, the value of the the trading securitiestrading securities decreased from decreased from
$11,000 to $10,500.$11,000 to $10,500.
By the end of the year, the value of By the end of the year, the value of the the trading securitiestrading securities decreased from decreased from
$11,000 to $10,500.$11,000 to $10,500.
Accounting for TemporaryChanges in Value of Securities
ContinuedContinuedContinuedContinued
53
December 31, 2005:
Market Adjustment—Available-for-Sale Securities 600
Unrealized Increase/Decrease in Value of Available-for-Sale Securities
600
By the end of the year, the value of By the end of the year, the value of the the available-for-saleavailable-for-sale securitiessecurities
increased from $17,000 to $17,600.increased from $17,000 to $17,600.
By the end of the year, the value of By the end of the year, the value of the the available-for-saleavailable-for-sale securitiessecurities
increased from $17,000 to $17,600.increased from $17,000 to $17,600.
Accounting for TemporaryChanges in Value of Securities
54
FASB No. 115 puts an end to “cherry-picking.”
This is the practice of selectively selling
securities whose prices have increased, while
keeping those that have experienced losses or have maintained their
historical cost.
Accounting for TemporaryChanges in Value of Securities
55
Partial Balance Sheet for Eastwood Inc.Assets
Invest. in trading securities $11,000 Market adjustment—trading sec. (500) $10,500Invest. in available-for-sale sec. $17,000 Market adjustment 600 17,600Invest. in held-to-maturity sec. 20,000$48,100
Stockholders’ EquityAdd unrealized increase in available-for-sale securities $ 600
Accounting for TemporaryChanges in Value of Securities
56
Partial Income Statement for Eastwood Inc.
Other expenses and losses:Unrealized loss on trading
securities $500
Accounting for TemporaryChanges in Value of Securities
57
Sale of Securities
On April 1, 2005, the investment in Silmaril’s debt securities is sold for
$103,000, which includes accrued interest of $2,500. Interest revenue of $2,105
($105,248 x .08 x 3/12) would be recorded. On January 1, the debt securities had a
carrying value of $105,248. The required amortization for the three-months’ premium
between January 1 and April 1 is $395.
On April 1, 2005, the investment in Silmaril’s debt securities is sold for
$103,000, which includes accrued interest of $2,500. Interest revenue of $2,105
($105,248 x .08 x 3/12) would be recorded. On January 1, the debt securities had a
carrying value of $105,248. The required amortization for the three-months’ premium
between January 1 and April 1 is $395.
58
Sale of SecuritiesEntry to record accrued revenue and to amortize premium:Apr. 1 Interest Receivable 2,500
Investment in Held-to Maturity Securities 395Interest Revenue 2,105
Entry to record sale:Apr. 1 Cash 103,000
Realized Loss on Sale of Securities 4,353
Interest Receivable 2,500Investment in Held-to Maturity Securities 104,853
59Transferring SecuritiesBetween Categories
TransferredTreatment of
Change in ValueFrom trading Any unrealized change in value not
previously recognized will be recognized in net income in the current period.
To trading Any unrealized change in value not previously recognized will be recognized in net income in the current period.
From held to maturity to available for sale
Recognize any unrealized change in value in a stockholders’ equity account.
ContinuedContinuedContinuedContinued
60Transferring SecuritiesBetween Categories
TransferredTreatment of
Change in ValueFrom available for sale to held to maturity
Any unrealized change in value recorded in a stockholders’ equity account is to be amortized over the security’s remaining life using the effective-interest method.
Statement of Financial Standards No. 115, par. 15d
61
Assume:Cost of trading security $3,000Fair market value, end of 2006 3,600Fair market value at transfer
date 3,800
Transferring SecuritiesBetween Categories
ContinuedContinuedContinuedContinued
62Transferring SecuritiesBetween Categories
Investment in Available-for-Sale Securities 3,800
Market Adjustment--Trading Securities
600 Unrealized Gain on Transfer
of Securities 200
Investment in Trading Securities3,000
63Transferring SecuritiesBetween Categories
Assume:Cost of available-for-sale security
$12,000Fair market value, end of 2006
10,700Transfer from the available-for-sale category to the trading
security category.
Transfer from the available-for-sale category to the trading
security category.
ContinuedContinuedContinuedContinued
64
Investment in Trading Securities 10,300Market Adjustment--Trading Securities 1,300Unrealized Loss on Transfer
of Securities 1,700Unrealized Increase/Decrease in Value of Available-for- Sale Securities 1,300
Investment in Available-for- Sale Securities 12,000
Transferring SecuritiesBetween Categories
65
Assume:Cost of held-to-maturity security
20,000Fair market value, Dec. 31, 2006
20,700Record a transfer from held-to-maturity to
the available-for-sale category.
Record a transfer from held-to-maturity to the available-for-sale category.
Transferring SecuritiesBetween Categories
ContinuedContinuedContinuedContinued
66
Investment in Available-for- Sale Securities 20,400
Unrealized Increase/ Decrease in Value of Available-for-Sale
Securities400Investment in Held-to-
Maturity Securities 20,000
Transferring SecuritiesBetween Categories
67
Assume:Cost of available-for-sale
securities$5,000
Fair market value, end of 20066,500
Fair market value at transfer date5,900Record a transfer from available-
for-sale to held-to-maturity.
Record a transfer from available-for-sale to held-to-maturity.
Transferring SecuritiesBetween Categories
ContinuedContinuedContinuedContinued
68
Investment in Held-to-MaturitySecurities 5,900
Unrealized Increase/Decrease in Value of Available-for-Sale
Securities 600Investment in Available-for-
Sale Securities 5,000Market Adjustment—
Available-for-Sale Securities 1,500
Transferring SecuritiesBetween Categories
69Cash Flows from Gains and Losses on Available-for-Sale
Caesh Company began with a $1,000 investment on January 1, 2005.
Cash sales $1,700Cash expenses (1,400)Purchases of investment securities (600)Sale of investment securities (costing $200) 170
ContinuedContinuedContinuedContinued
70Cash Flows from Gains and Losses on Available-for-Sale
The market value of the remaining securities was $500 on December 31, 2005.
ContinuedContinuedContinuedContinued
Sales $1,700Expenses (1,400
)Operating income $ 300Realized loss on sale of securities (30
) Net income $ 270
71Cash Flows from Gains and Losses on Available-for-Sale
Caesh Company will report a $100 unrealized increase in the value of it
available-for-sale portfolio.
This $100 unrealized increase is reported as an increase in
Accumulated Other Comprehensive Income.
This $100 unrealized increase is reported as an increase in
Accumulated Other Comprehensive Income.
ContinuedContinuedContinuedContinued
72Cash Flows from Gains and Losses on Available-for-Sale
The statement of cash flows for Caesh Company for 2005 appear as follows:
Operating activities:Net income $ 270Plus realized loss on sale of securities 30 $ 300
Investing activities:Purchase of investment securities $(600)Sale of investment securities 170 (430)
Financing activities:Initial investment by owner 1,000
Net increase in cash $ 870
73
Classification and Disclosure
• Trading securities– The change in net unrealized holding gain or
loss that is included in the income statement.• Available-for-sale securities
– Aggregate fair value, gross unrealized holding gains and gross unrealized holding losses, and amortized cost basis by major security type.
– The proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales and the basis on which cost was determined in computing realized gains and losses.
ContinuedContinuedContinuedContinued
74
• Available-for-sale securities (continued):– The change in net unrealized holding gain or loss
on available-for-sale securities that has been included in stockholders’ equity during the period.
• Held-to-maturity securities:– Aggregate fair value, gross unrealized holding gains and gross
unrealized holding losses, and amortized cost basis by major security type.
– The company should disclose information about contractual maturities.
Classification and Disclosure
ContinuedContinuedContinuedContinued
75
• Transfers of securities between categories:– Gross gains and losses included in earnings from transfers of
securities from available-for-sale into the trading category.– For securities transferred from held-to-maturity, the company should
disclose the amortized cost amount transferred, the related realized or unrealized gain or loss, and the reason for transferring the securities.
Classification and Disclosure
76
The EndThe End
chapter 14
77