Investments
Sid Glandon, DBA, CPA
Associate Professor of Accounting
The University of Texas at El Paso
1
Debt Securities

Classified as trading


Classified as available-for-sale


Held for sale in near term to generate income
Not classified as held-to-maturity or trading
securities
Classified as held-to-maturity

Positive intent and ability to hold to maturity
2
Fact Pattern:
Investment in Debt Securities
Date
Activity
1/1/06 Purchase of bonds
12/31/06 Fair value of bonds
12/31/07 Fair value of bonds
Additional Information:
Par value
Discount
Stated interest rate
Effective interest rate
Amount
$924,183
1,000,000
975,000
1,000,000
75,817
8%
10%
3
Debt Securities, Classified as Trading

Valuation


Unrealized holding gains or losses


Fair value
Recognized in net income
Other income


Interest earned
Realized gains and losses from sale
4
Debt Security, Classified as trading
Date
1/1/06
Account
Debit
Credit
Investment, trading debt security
$924,183
Cash
$924,183
To record the purchase of a debt security on January 1, 2006, classified as a
trading debt investment.
5
Debt Security, Classified as trading
Unrealized holding gain (loss)
FMV, December 31, 2006
Original cost
Unrealized holding gain
$1,000,000
924,183
T-Account: Fair value adjustment, trading debt securities
Date
Description
Debit
1/1/06 Beginning balance
$0
12/31/06 Required adjusting journal entry
75,817
12/31/06 Required ending balance
$75,817
$75,817
Credit
6
Debt Security, Classified as trading
Date
Account
12/31/06 Fair value adjustment, trading debt securities
Unrealized holding gain, income
Debit
$75,817
Credit
$75,817
To recognize unrealized holding gain at December 31, 2006 on debt
security classified as trading.
7
Debt Security, Classified as trading
Unrealized holding gain (loss)
FMV, December 31, 2007
Original cost
Unrealized holding gain
$975,000
924,183
T-Account: Fair value adjustment, trading debt securities
Date
Description
Debit
1/1/07 Beginning balance
$75,817
12/31/07 Required adjusting journal entry
12/31/07 Required ending balance
$50,817
$50,817
Credit
$25,000
8
Debt Security, Classified as trading
Date
Account
12/31/07 Unrealized holding loss, income
Fair value adjustment, trading debt securities
Debit
$25,000
Credit
$25,000
To recognize unrealized holding loss at December 31, 2007 on debt
security classified as trading.
9
Date
1/1/06
12/31/06
12/31/06
12/31/07
12/31/07
T-Account: Fair value adjustment, trading debt securities
Description
Debit
Beginning balance
$0
Required AJE
$75,817
Ending balance
$75,817
Required AJE
Required ending balance
$50,817
Credit
$25,000
10
Debt Security, Classified as available-for-sale

Valuation


Unrealized holding gains or losses



Fair value
Recognized as other comprehensive income
Recognized as separate component of stockholders’
equity
Other income


Interest earned
Realized gains and losses from sale
11
Debt Security, Classified as available-for-sale
Amortization Schedule
Year
1/1/06
12/31/06
12/31/07
Interest
Received
$80,000
80,000
Interest
Revenue
$92,418
93,660
Amortization
of Discount
$12,418
13,660
Carrying Fair Value,
Value
End of Year
$924,183
936,601 $1,000,000
950,261
975,000
12
Debt Security, Classified as available-for-sale
Date
1/1/06
Account
Investment, available-for-sale debt security
Discount on debt security
Cash
Debit
$1,000,000
Credit
$75,817
924,183
To record the purchase of a debt security at a discount and classified as
available for sale.
13
Debt Security, Classified as available-for-sale
Unrealized holding gain (loss)
FMV, December 31, 2006
Carrying value, December 31, 2006
Unrealized holding gain
$1,000,000
936,601
T-Account: Fair value adjustment, AFS debt securities
Date
Description
Debit
1/1/06 Beginning balance
$0
12/31/06 Required adjusting journal entry
63,399
12/31/06 Required ending balance
$63,399
T-Account: Unrealized holding (gain) loss, equity
Date
Description
Debit
1/1/06 Beginning balance
12/31/06 Required adjusting journal entry
12/31/06 Required ending balance
$63,399
Credit
Credit
$0
63,399
$63,399
14
Debt Security, Classified as available-for-sale
Date
Account
12/31/06 Fair value adjustment, AFS debt securities
Unrealized holding gain, equity
Debit
$63,399
Credit
$63,399
To recognize unrealized holding gain at December 31, 2006 on debt
security classified as available-for-sale.
15
Debt Security, Classified as available-for-sale
Unrealized holding gain (loss)
FMV, December 31, 2007
Carrying value, December 31, 2007
Unrealized holding gain
$975,000
950,261
T-Account: Fair value adjustment, AFS debt securities
Date
Description
Debit
1/1/07 Beginning balance
$63,399
12/31/07 Required adjusting journal entry
12/31/07 Required ending balance
$24,739
T-Account: Unrealized holding (gain) loss, equity
Date
Description
Debit
1/1/07 Beginning balance
12/31/07 Required adjusting journal entry
$38,660
12/31/07 Required ending balance
$24,739
Credit
$38,660
Credit
$63,399
$24,739
16
Debt Security, Classified as available-for-sale
Date
Account
12/31/07 Unrealized holding loss, equity
Fair value adjustment, AFS debt securities
Debit
$38,660
Credit
$38,660
To recognize unrealized holding loss at December 31, 2007 on debt
security classified as available-for-sale.
17
Date
1/1/06
12/31/06
12/31/06
12/31/07
12/31/07
T-Account: Fair value adjustment, AFS debt securities
Description
Debit
Beginning balance
$0
Required AJE
63,399
Ending balance
63,399
Required AJE
Required ending balance
$24,739
Date
1/1/06
12/31/06
12/31/06
12/31/07
12/31/07
T-Account: Unrealized holding (gain) loss, equity
Description
Debit
Beginning balance
Required AJE
Ending balance
Required AJE
$38,660
Required ending balance
Credit
$38,660
Credit
$0
63,399
63,399
$24,739
18
Debt Securities, Classified as Held-to-Maturity

Valuation


Unrealized holding gains or losses


Amortized cost
Not recognized
Other income


Interest earned
Realized gains and losses from sale
19
Equity Securities



Ownership interests
Include rights to buy or sell ownership
Extent of ownership determines accounting
treatment for equity securities
20
Degrees of Control
0%
Little or None
Ownership Percentage
20%
50%
Significant
Level of Influence
100%
Control
21
Fact Pattern:
Investment in Equity Securities
Date
Security
9/1/06 Spencer Company
12/31/06 Spencer Company
12/31/07 Spencer Company
Shares
1,000
1,000
1,000
Market Value
FVM
of Investment
$27
$27,000
31
31,000
29
29,000
22
Equity Security, Classified as available-for-sale





Less than 20% ownership interest
Recorded at cost
Valued and reported at fair value
Dividends are recognized as income
Unrealized holding gains and losses


Part of comprehensive income
A component of stockholders’ equity
23
Equity Security, Classified as available-for-sale
Date
9/1/06
Account
Investment, AFS equity securities
Cash
Debit
$27,000
Credit
$27,000
To record the purchase of 1,000 shares of Spencer Company common
stock at $27 per share.
24
Equity Security, Classified as available-for-sale
Unrealized holding gain (loss)
FMV, December 31, 2006
Original cost
Unrealized holding gain
$31,000
27,000
T-Account: Fair value adjustment, AFS equity securities
Date
Description
Debit
9/1/06 Beginning balance
$0
12/31/06 Required adjusting journal entry
4,000
12/31/06 Required ending balance
$4,000
T-Account: Unrealized holding (gain) loss, equity
Date
Description
Debit
9/1/06 Beginning balance
12/31/06 Required adjusting journal entry
12/31/06 Required ending balance
$4,000
Credit
Credit
$0
4,000
$4,000
25
Equity Security, Classified as available-for-sale
Date
Account
12/31/06 Fair value adjustment, AFS equity securities
Unrealized holding gain, equity
Debit
$4,000
Credit
$4,000
To record the unrealized holding gain on Spencer Company common stock
on December 31, 2006.
26
Equity Security, Classified as available-for-sale
Unrealized holding gain (loss)
FMV, December 31, 2007
Original cost
Unrealized holding gain
$29,000
27,000
T-Account: Fair value adjustment, AFS equity securities
Date
Description
Debit
9/1/07 Beginning balance
$4,000
12/31/07 Required adjusting journal entry
12/31/07 Required ending balance
$2,000
T-Account: Unrealized holding (gain) loss, equity
Date
Description
Debit
9/1/07 Beginning balance
12/31/07 Required adjusting journal entry
$2,000
12/31/07 Required ending balance
$2,000
Credit
$2,000
Credit
$4,000
$2,000
27
Equity Security, Classified as available-for-sale
Date
Account
12/31/07 Unrealized holding loss, equity
Fair value adjustment, AFS equity securities
Debit
$2,000
Credit
$2,000
To record unrealized holding losses on AFS equity securities on December
31, 2007.
28
Equity Security, Classified as available-for-sale
Date
9/1/06
12/31/06
12/31/06
12/31/07
12/31/07
T-Account: Fair value adjustment, AFS equity securities
Description
Debit
Beginning balance
$0
Required AJE
4,000
Ending balance
4,000
Required AJE
Required ending balance
$2,000
Date
9/1/06
12/31/06
12/31/06
12/31/07
12/31/07
T-Account: Unrealized holding (gain) loss, equity
Description
Debit
Beginning balance
Required AJE
Ending balance
Required AJE
$2,000
Required ending balance
Credit
$2,000
Credit
$0
4,000
4,000
$2,000
29
Trading





Less than 20% ownership interest
Recorded at cost
Valued and reported at fair value
Dividends are recognized as income
Unrealized holding gains and losses

Recognized in net income
30
Equity Security, Classified as trading
Date
9/1/06
12/31/06
12/31/06
12/31/07
12/31/07
T-Account: Fair value adjustment, trading equity securities
Description
Debit
Credit
Beginning balance
$0
Required AJE
4,000
Ending balance
4,000
Required AJE
$2,000
Required ending balance
$2,000
31
Equity Security, Classified as trading
Date
Account
12/31/06 Fair value adjustment, trading equity securities
Unrealized holding gain, income
Debit
$4,000
Credit
$4,000
To record the unrealized holding gain on Spencer Company common stock
on December 31, 2006 which is classified as trading equity securities..
Date
Account
12/31/07 Unrealized holding loss, income
Fair value adjustment, trading equity securities
Debit
$2,000
Credit
$2,000
To record unrealized holding losses on trading equity securities on December
31, 2007.
32
Equity Method



Between 20% and 50% ownership interest
Substantive economic relationship
Investor’s carrying value


Increased by proportionate share of earnings
Decreased by
Dividends, and
 Proportionate share of losses

33
Consolidation





More than 50% voting interest
Investor is parent
Investee is subsidiary
Investor prepares consolidated financial
statements
Investor accounts for investment on its
books using the equity method
34
Investments In Equity Securities
Ownership in Capital Stock
< 20% voting
20-50% voting
>50% voting
Trading
Available
for Sale
No
Consolidation
Consolidation
Fair
Value
Fair
Value
Equity
Method
Equity
Method
35
Accounting by Category
Category
< 20% ownership
Trading
Available-for-Sale
Valuation
Unrealized Holding
Gains and Losses
Fair value
Net income
Fair value
Dividends; gain
or loss on sale
Comprehensive income,
Dividends; gain
separate component of
or loss on sale
shareholders' equity
20% - 50% ownership Equity method
Not recognized
> 50% ownership
Not recognized
Consolidate
Other Income
Proportionate
share of income
or loss
No applicable
36
Transfers of Classifications
UNREALIZED GAIN OR LOSS ON
TRANSFER
FROM
TO
Trading
Available-for-sale None, already recognized in income
Trading
Held-to-maturity None, already recognized in income
Available-for-sale Trading
Include in current income
Available-for-sale Held-to-maturity FV becomes amortized cost basis
Held-to-maturity Trading
Include in current income
Held-to-maturity Available-for-sale Include in equity, other comprehensive income
37