1
Investments
in Debts and
Equity
Securities
Learning Objectives
 Determine why companies invest in
other companies.
 Understand the varying classifications
associated with securities.
 Account for the purchase of debt and
equity securities.
 Account for the recognition of revenue
from investments.
2
Learning Objectives
 Account for the change in value of
securities.
 Account for the sale of securities.
 Record the transfer of securities
between categories.
 Explain the proper classification and
disclosure of investments in securities.
3
Learning Objectives
 Compare the accounting for securities
under U.S. GAAP with the international
standard in IAS 39.
EXPANDED MATERIAL
 Account for changes to and from the
11
equity method of accounting for
securities.
Account for the impairment of a loan
receivable.
4
Time Line of Business Issues
Involved with Investment Securities
?
DETERMINE
purpose of
investment
5
Time Line of Business Issues
Involved with Investment Securities
a, b,
c
CLASSIFY
investments
6
Time Line of Business Issues
Involved with Investment Securities
Cloud Corporation
Cloud Corporation
Good Buy Corporation
$100 par value
$100 par value
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$10 par value
PURCHASE
securities
7
Time Line of Business Issues
Involved with Investment Securities
Cloud Corporation
Cloud Corporation
Good Buy Corporation
$100 par value
$100 par value
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$10 par value
EARN AND
RECOGNIZE
a return
8
Time Line of Business Issues
Involved with Investment Securities
+
+
Cloud Corporation
Cloud Corporation
Good Buy Corporation
$100 par value
-
$100 par value
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$10 par value
-
MONITOR
changes in value
+
9
Time Line of Business Issues
Involved with Investment Securities
Cloud Corporation
Cloud Corporation
Good Buy Corporation
$100 par value
$100 par value
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$10 par value
SELL
securities
10
Time Line of Business Issues
Involved with Investment Securities
a b
c
TRANSFER
securities between
categories
11
Time Line of Business Issues
Involved with Investment Securities
DISCLOSE
status of portfolio at the
end of the period
12
Classification of Securities
Debt securities typically have the following
characteristics:
 A maturity value, representing the amount
to be repaid to the debt holder at maturity.
 An interest rate that specifies the periodic
interest payments.
 A maturity date, indicating when the debt
obligation will be redeemed.
13
Classification of Securities
Equity securities represent ownership in a
company.
 These shares of stock typically carry with
them the right to collect dividends and vote
on corporate matters.
 Equity securities have the potential for
significant increases in price.
14
Classification of Securities
Debt/Equity
Securities
Trading
Securities purchased for sale
in the near future.
Held-toMaturity
Securities purchased with the
intent to hold until maturity.
Availablefor-sale
Securities not classified as
trading or held-to-maturity.
15
Classification of Securities
Debt
Held-tomaturity
Availablefor-sale
Equity
Trading
Equity
Method
16
Purchases of Debt Securities
On May 1, Douglas, Inc. 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
17
Purchases of Debt Securities
Asset Approach
Purchase date:
May 1 Investment in
Trading Securities 104,250
Interest Receivable
3,000
Cash
107,250
18
Purchases of Debt Securities
Revenue Approach
Purchase date:
May 1 Investment in
Trading Securities 104,250
Interest Revenue
3,000
Cash
107,250
19
Purchases of Debt Securities
Asset Approach
Receipt of semiannual payment:
July 1 Cash
4,500
Interest Receivable
Interest Revenue
3,000
1,500
Revenue Approach
July 1 Cash
Interest Revenue
4,500
4,500
20
Interest Revenue for Debt
Securities (Held-To-Maturity)
On January 1, 2001, Silmaril
Technologies purchases 5-year, 10%
bonds with a face value of $100,000
for $108,115. The bonds pay
interest on January 1 and July 1.
The market rate (yield) is 8%.
21
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arrow to
return to
Slide 37
Jan. 1 Investment in Held-toMaturity Securities 108,115
Cash
108,115
Interest Revenue for Debt
Securities (Held-To-Maturity)
When the first interest payment is
received from Silmaril, the following
entry would be made:
July 1 Cash
5,000
Interest Revenue
4,325
Investment in Held-toMaturity Securities
675
$108,115 x .08 x 6/12
22
23
Equity Securities
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.
Determining the Appropriate
Securities Accounting Method
Account for as
trading or
available-for-sale
Equity method
Ownership
No
significant
influence
0%
20%
Equity method
and consolidation
procedures
Percentage
Significant
influence
Control
50%
100%
24
Purchase of Equity Securities
Purchased 100 shares of Dave’s Deli
common shares at $2 per share.
Available-for-Sale
Investment in Available-forSale Securities
Cash
200
200
25
Purchase of Equity Securities
Purchased 1,000 shares of Dave’s Deli
common shares at $2 per share.
Equity Method
Investment in Dave’s Deli
Common Stock
Cash
2,000
(Representing a 20%
ownership)
2,000
26
Purchase of Equity Securities
Received $0.80 per share dividend.
Available-for-Sale
Cash
Dividend Revenue
80
80
Equity Method
Cash
Investment in Dave’s Deli
Common Stock
800
800
27
Purchase of Equity Securities
Dave’s Deli announces earnings for the
year of $10,000.
Available-for-Sale
No Entry
Equity Method
Investment in Dave’s Deli
Common Stock
Income from Investments
2,000
2,000
28
Reporting Temporary
Changes in Value
Classification
of Security
Disclosed
at
Report FMV
Change On
Trading
Fair market
value
Income
statement
Availablefor-sale
Fair market
value
Stockholder’s
equity
Held-tomaturity
Amortized
cost
Not
recognized
29
Example: Temporary
Changes in Value
Rocky’s Financial Corp. has the following securities in
its portfolio:
• Trading securities:
– Purchase price
$ 8,000
– Value end of year
$ 7,000
• Available-for-sale securities:
– Purchase price
$ 5,000
– Value end of year
$ 6,100
• Held-to-maturity securities:
– Purchase price
$20,000
– Value end of year
$23,000
30
Example: Temporary
Changes in Value
Assuming all securities were purchased
on the same day, prepare Rocky’s
journal entries for:
– Purchase.
– Year-end adjustments.
31
Example: Temporary
Changes in Value (Solution)
32
Date of Purchase:
Investment in Trading Securities 8,000
Investment in Available-for-Sale
Securities
5,000
Investment in Held-to-Maturity
Securities
20,000
Cash
33,000
Example: Temporary
Changes in Value (Solution)
End of Year:
Unrealized Loss on Trading Securities
Market Adjustment--Trading Securities
Market Adjustment--Available-for-Sale.
Unrealized Increase/Decrease in
Value Available-for-Sale Securities
33
1,000
1,000
1,100
No entry is required for the heldto-maturity securities.
1,100
34
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.
Financial Statement Disclosure
of Securities
35
Partial Balance Sheet for Rocky’s
Assets
Invest. in trading securities
Market adjustment
Invest. in available-for-sale sec.
Market adjustment
Invest. in held-to-maturity sec.
Stockholders’ Equity
Add unrealized increase in
available-for-sale securities
$8,000
(1,000) $ 7,000
5,000
1,100
6,100
20,000
$ 1,100
Financial Statement Disclosure
of Securities
Partial Income Statement for Rocky’s
Other Expenses and Losses
Unrealized loss on trading
securities
$1,000
36
Sale of Securities
On April 1, 2003, 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. To review the purchase transaction, click
on the green dot.
37
Sale of Securities
Entry to record accrued revenue and to amortize
premium:
Apr. 1 Interest Receivable
2,500
Investment in Held-to
Maturity Securities
395
Interest Revenue
2,105
Entry to record sale:
Apr. 1 Cash
103,000
Realized Loss on Sale of
Securities
4,353
Interest Receivable
2,500
Investment in Held-to
Maturity Securities
104,853
38
Transferring Securities
Between Categories
Transferred
From “Trading”
Treatment of
Change in Value
1. Recognize any previously
unrecognized changes.
2. Do not reverse previously
recognized changes.
39
Example: From “Trading”
Assume:
Cost of trading security
$1,000
Fair market value, end of Year 1
1,600
Fair market value at transfer
in Year 2
1,800
Proper adjusting entries were
made at end of Year 1
Record a transfer to
“Available-for-Sale” category.
40
Example: From “Trading”
Investment in Available-for-Sale
Securities
1,800
Market Adjustment--Trading
Securities
600
Unrealized Gain on Transfer
of Securities
200
Investment in Trading Securities
1,000
Record a transfer to
“Available-for-Sale” category.
41
Transferring Securities
Between Categories
Transferred
From “Trading”
To “Trading”
Treatment of
Change in Value
1. Recognize any previously
unrecognized changes.
2. Do not reverse previously
recognized changes.
Recognize any previously
unrecognized changes.
42
Example: To “Trading”
Assume:
–Cost of Available-for-Sale Sec.
–Fair market value, end of Year 1
–Fair market value at Transfer in
Year 2
–Proper adjusting entries were
made at End of Year 1
Record a transfer to
“Trading” classification.
$10,000
8,700
8,300
43
Example: To “Trading”
44
Investment in Trading Securities
8,300
Market Adjustment--Available-forSale Securities
1,300
Unrealized Loss on Transfer
of Securities
700
Unrealized Increase/Decrease in
Value of Available-for-Sale
Securities
1,300
Investment in Available-for-Sale
Securities
10,000
Transferring Securities
Between Categories
Transferred
From “Trading”
To “Trading”
From “Held-to-Maturity” to
“Available-for-Sale”
Treatment of
Change in Value
1. Recognize any previously
unrecognized changes.
2. Do not reverse previously
recognized changes.
Recognize any previously
unrecognized changes.
Recognize any unrealized
changes in value.
45
Example: From “Held-toMaturity” to “Available for Sale”
Assume:
Cost of Held-to-Maturity Security $40,000
FMV End of Year 1
40,700
FMV at Transfer in Year 2
40,400
Proper adjusting entries were
made at End of Year 1
Record a transfer from “Heldto-Maturity” to “Available-forSale” classification.
46
Example: From “Held-toMaturity” to “Available for Sale”
Investment in Available-for-Sale
Securities
40,400
Unrealized Increase/Decrease
in Value of Available-forSale Securities
400
Investment in Held-to-Maturity
Securities
40,000
47
Transferring Securities
Between Categories
Transferred
From “Trading”
To “Trading”
From “Held-to-Maturity” to
“Available-for-Sale”
From “Available-for-Sale” to
“Held-to-Maturity”
Treatment of
Change in Value
1. Recognize any previously
unrecognized changes.
2. Do not reverse previously
recognized changes.
Recognize any previously
unrecognized changes.
Recognize any unrealized
changes in value.
Amortize any recognized
unrealized change using the
effective-interest method.
48
Example: From “Available-forSale” to “Held-to-Maturity”
Assume:
Cost of Available-for-Sale
securities
$6,000
Fair market value, end of Year 1
7,500
Fair market value at Transfer in,
Year 2
6,900
Proper adjusting entries were made
at end of Year 1
Record a transfer from “Availablefor-Sale” to “Held-to-Maturity”
49
Example: From “Available-forSale” to “Held-to-Maturity”
50
Investment in Held-to-Maturity
Securities
6,900
Unrealized Increase/Decrease
in Value of Available-for-Sale
Securities
600
Investment in Available-forSale Securities
6,000
Market Adjustment--Availablefor-Sale Securities
1,500
Additional Disclosures Required
by FASB 115
• 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.
51
Additional Disclosures Required
by FASB 115
• 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.
52
Additional Disclosures Required
by FASB 115
• Transfers of securities between categories:
– Gross gains and losses included in earnings
from transfers of securities from available-forsale 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.
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The End