Investments

Chapter 14 FASB statement no. 115: GAAP for investments in debt and equity securities that have readily determinable fair values. Classify debt and equity “marketable” securities into 3 categories. 1. Trading Securities: Purchased for the purpose of selling them in the near future. (Held for a few months. Reported at their fair value on the balance sheet. Unrealized gain/loses are included in net income. 2. Available-for-Sale Securities: a) Debt Securities not classified as held to maturity b) debt to equity securities not classified as trading securities. Reposted at their fair values on the balance sheet. 3. Held-to-Maturity Debt Securities: Debt securities for which the company has the “positive intent and ability to hold those securities to maturity.” Can be sold near maturity date or if the companies credit worthiness has deteriorated. Reported at their amortized cost on the balance sheet. The equity method is used for investments in equity securities when the investor has significant influence over the investee. Significant influence occurs between 20% and 50%. Recording of Available-for-Sale A Company common stock B Company common stock C Company common stock D company 10% bonds 100 shares at $50 per share 300 shares at $80 per share 200 shares at $120 per share Face vale of $15,000, acquired at par plus accrued interest. Interest is paid on May 31 and November 30 each year. Recording initial cost: Investment in Available-for-sale Securities Interest Revenue (15,000x.10x5/12) Cash Recording interest revenue: Cash Interest Revenue (15,000x.10x6/12) Recognition of Unrealized Holding Gains and Loses 100 shares of A company common shares stock 300 share of B company common shares stock 200 shares of C Company preferred stock $15,000 face value of D company 10% bonds TOTALS 68,000 625 750 COST 5000 24,000 24,000 15,000 68,000 Allowance for change in value of investment Unrealized increase/decrease in value of Available-for-Sale Securities 68,625 750 12/31/00 FAIR V. 6000 23,500 26,000 15,500 71,000 CHANGE 1000 (500) 2000 500 3,000 3,000 3,000 If following year 12/31/01, the FAIR VALUE change to 66,000 the following entry would be made: Unrealized increase/decrease in value of Available-for-Sale Securities Allowance for change in value of investment 5,000 5000 Investments Held-to-Maturity Debt Securities: Recording initial cost: 9% bond face value 100,000 on Aug. 1, 2000 at 99. Interest paid May 31 & Nov. 30. Investment Held-to-Maturity Debt Securities (100,000x.99) Interest revenue (100,000x.09x2/12) Cash 99,000 1,500 100,500 Recording for premiums and discounts: 100,000 13%yield effective interest rate 12%, paying 102,458 Investment in Held-to-Maturity Debt securities Cash 102,458 102,458 Recording of Interest: Cash 6,500 Investment Held-to-Maturity Debt Securities 353 Interest revenue 6,147 Note: Because interest is received form the investment, the investments carrying value has decreased proportionally (353) to reflect the new carrying value of the security. The decrease is calculated by the effective interest or straight-line method. Discount: discounted at 97,616, yield 14%, interest rate 13% Investment in Held-to-Maturity Debt Securities 97,616 Cash 97,616 Recording Interest: Cash Investments Held-to-Maturity Debt Securities Interest revenue 6,500 333 6,833 Note: Due to the discounted purchase price of the bond, the carrying value of the bond is increased (333) over time to reach its face value. The increased amount varies by the new carrying value when effective interest method is used. CLASSIFY RECORD AT Trading Cost Available-for-Sale Cost Held-to-Maturity Cost CASH FLOW Operating Investing Investing BAL. SHEET Fair Value Fair Value Amortized Cost Realized gain/loses fort all securities is recorded to net income. Trading = Selling price – Fair value at most recent balance sheet. Available-for-Sale = Selling price- Amortized cost. Held-to-Maturity = Selling price – Amortized cost. UNREALIZED Net Income Other com. In. ----------- %, DIV. Net Income Net Income Net Income