CHAPTER
17
Investments
in
Debt
and
Equity
Securities
……..…………………………………………………………...
Debt
held-to-maturity
Amortized cost
Debt
plan to sell
Fair value
Equity
plan to sell
Fair value
Equity
exercise some control
Equity method
DEBT SECURITIES
 Held-to-maturity
intent and ability to hold
security until it matures
 Trading
held primarily for sale in
the near term
 Available-for-sale
none of the above
HELD-TO-MATURITY SECURITIES
1/1/03 Purchased a $50,000, 10% bond for $51,388.
The bond pays semiannual interest and matures
7/1/04.
Periods
Rate
PV
Annuity
FV
1/1/03
Most firms do not record separate premium or discount.
AD?
Effective interest = 8%
Date
1/1/03
7/1/03
1/1/04
7/1/04
7/1/03
Cash Rec’d
Interest
Rev.
Premium
Amortiz
Carrying
Amount
$51,388
Date
Cash Rec’d
Interest
Rev.
Premium
Amortiz
Carrying
Amount
1/1/04
2,500
2,038
462
50,482
7/1/04
2,500
2,018
482
50,000
12/31/03
6/1/04 Sold bond for $50,050 plus $2,083 accrd interest.
6/1/04
AVAILABLE-FOR-SALE SECURITIES
6/30/02 Purchased a $20,000, 4-year, 7% bond for
$18,681 (effective yield=9%).
6/30/02
Date
Cash Rec’d
Interest
Rev.
Premium
Amortiz
Carrying
Amount
12/31/02
700
841
141
18,822
12/31/02
12/31/02 Fair value = $19,340; carrying amount = $18,822.
12/31/02
1/1/03
Sold bonds for $19,440.
1/1/03
12/31/03 Adjust fair value adjustment account.
12/31/03
Adjusting Securities to Fair Value
 Securities Fair Value Adjustment (AFS) is an asset
valuation account that is added to or subtracted
from the Available-for-Sale Securities account.
 Unrealized Holding Gain or Loss - Equity is
reported as part of Other Comprehensive Income.
 The year-end adjustment will eliminate any
unrealized gains or losses accumulated in the
Securities Fair Value Adjustment (AFS) account
related to securities that have been sold.
TRADING SECURITIES
 Similar to available-for-sale securities, except
unrealized gains and losses are closed to net
income.
12/31/02
Secur FV Adjustment (Trading)
518
Unrealiz Holding G/L - Income
518
EQUITY SECURITIES
 Holdings of less than
20%
• fair value method
• AFS or trading
Accounting treatment the same
as with debt securities.
 Holdings between
20% and 50%
• equity method
 Holdings of more
than 50%
• consolidated statements
HOLDINGS BETWEEN 20% AND 50%
 Investor is presumed to exercise “significant
influence” if holding 20% or more of voting stock.
 Unless there is evidence to the contrary.
 Investment:
 recorded at cost
 not adjusted to market price
 increased by share of net income (revenue
distinguished from extraordinary G/L)
 decreased by amortization of excess of cost
over share of book value
 decreased by amount of dividends received
OTHER REPORTING ISSUES
Financial Statement Presentation
Notes for AFS & Held-to Maturity
 Total fair value, unreal holding G/L, amortized cost
 for each major security type
 Summary info. about debt maturities
Notes for Equity Method Investments
 Name of investee & % ownership
 Underlying equity (if different from carrying value)
 Fair value
Reclassification Adjustments
Trading Secur
50,000
10,000
40,000
Loss: Sale of Sec
600
Other comprehensive income
Total holding gains for period
Less: Reclass adj for losses
included in net income
Sec FV Adjust
1,400
1,000
400
Unreal Hold G/L
1,000
Impairment of Value
Trading Secur
50,000
Sec FV Adjust
1,400
 If decline in value in not temporary, record
impairment.
2/1/07
Loss on Impairment
Sec FV Adjust
Unrealiz Hold G/L
Trading Securities
1,400
1,400
1,400
1,400