Investments
•
Types:
–
–
–
•
Debt
Equity
Derivatives
Classification:
–
–
•
Current (short term)
Non-current (long term)
Intent:
–
–
–
–
Trading securities
Available for sale securities
Held to maturity
Control
Debt Investments
• Short term: CDs, commercial paper, near
maturity bonds: Often used to temporarily
invest idle funds.
• Should not be likely to fluctuate in value
• Reported on B/S at maturity value (current
market value)
• If decline in market value – write down.
Debt Investments
• Short term OR long term: corporate or
government bonds
• May be classified according to
management intent as
– Trading
– Available for sale
– Held to maturity – Long term investment
Debt Investments
• Trading and Available for sale:
• May fluctuate in value, are reported at
FMV on B/S
• Different treatment for gain or loss:
• Trading Securities: gain or loss is
recognized in current income
• Available for Sale Securities: gain or loss
bypasses income statement (reported as
part of comprehensive income only)
Debt Investments
• Held to Maturity
• Temporary fluctuations are ignored –
reported on B/S at historical cost
(amortized discount/premium)
• Permanent decline – recognized in current
income, write down to FMV. NO recovery
recognized.
Exercise 17-3
1. Determine the amount of interest income
to be recognized on December 31, 2003
2. Determine the amount to be credited to
bond investment on December 31, 2004
Exercise 17-18
On 12/31/03, Dominique Co. should recognize
A.
B.
C.
D.
E.
Dr. unrealized loss (equity)
$ 80,000
Dr. loss on impairment
$ 80,000
Cr. Unrealized gain (equity)
$ 80,000
Both B and C
No adjustment is needed, bond investments
are carried at amortized cost
Equity Investments
• No Held to Maturity
• Trading or available for sale securities:
Reported at FMV on B/S. Unrealized
gains or losses treated the same as for
debt securities (trading securities on
income statement, available for sale
directly to R/E, comprehensive income
reported only
Equity Investments
Trading or available for sale securities:
Income recognition:
• Dividends
• Gain or loss from fluctuations in market
value (trading)
• Gain or loss on sale of securities
Exercise 17-7
On 12/31/2003 Tiger should record
A.
B.
C.
D.
Cr. unrealized gain (Income statement)
Dr. unrealized loss (stockholders equity)
Cr. Realized gain (income statement)
Dr. unrealized loss (income statement)
$1,400
$1,400
$1,400
$1,400
Exercise 17-7
In 2004 Tiger should record (in connection
with the sale of the Colorado stock):
A.
B.
C.
D.
Dr. loss on sale (Income statement)
Dr. unrealized loss (stockholders equity)
Cr. loss on sale (income statement)
Dr. unrealized loss (income statement)
$1,000
$1,000
$ 600
$ 600
Exercise 17-7
On 12/31/2004 Tiger should record
A.
B.
C.
D.
Dr. unrealized loss (Income statement)
Dr. unrealized loss (Income statement)
Cr. Unrealized gain (income statement)
Cr. unrealized gain (income statement)
$ 400
$ 1,000
$ 400
$ 1,000
Exercise 17-9
A.
At what amount should Steffi Graf, Inc. report its
portfolio of securities on 12/31/2003?
Exercise 17-9
Steffi Graf should record which of the following on
12/31/2003
A.
B.
C.
D.
E.
Dr unrealized loss (income statement)
Dr. unrealized loss (equity)
Cr. Unrealized gain (income statement)
Cr. Unrealized gain (equity)
Cr. Unrealized gain equity)
$1,500
$1,100
$ 1,100
$1,500
$1,100
Equity Investments
• Control Position – Levels of “control”:
• Less than 20% – 25% - no control, trading
or available for sale classification
• More than 20% – 25%, but less than 50%:
Accounted under the Equity Method
• More than 50%: Consolidate
• Special Issue: SPE (now VIE)
Equity Investments
Equity Method:
• Initial investment: at cost
• Temporary fluctuations in market value:
Ignored
• Income/Loss recognition: % of investee
company income or loss.
Equity Investments
Equity Method:
• Dividends: treated as a reduction of the
investment, NOT income:
• dr. cash
• cr. investment
Exercise 17-12 (b)
Monica Co. should report for 2003
A. Dividend income
$36,000
B. Dividend income
$10,800
C. Investment income
$38,300
D. Investment income
$25,500
E. Investment income
$10,800
Equity Investments
Special Purpose Entities (SPEs)
New term: Variable interest entities
(VIEs)
Special entities set up to segregate
a pool of assets and sell interest
stakes to investors.
Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
(slide 6a) $32,274.44
(slide 6b) $ 4,098.11
(slide 7) D
(slide 10) D
(slide 11) C
(slide 12) D
(slide 13) $54,400
(slide 14) E
(slide 18) D