Sale of Securities
On April 1, 2006, the investment in Silmaril’s
debt securities is sold for $103,000, which
includes accrued interest of $2,500. On
January 1, the debt securities had a carrying
value of $105,240, therefore interest revenue
of $2,105 ($105,240 x .08 x 3/12) would be
recorded The required amortization for the
three-months’ premium between January 1
and April 1 would be $395.
1
Sale of Debt Securities
Entry to record accrued revenue and to amortize
premium:
Apr. 1 Interest Receivable
2,500
Investment in Held-to
Maturity Securities
395
Interest Revenue
2,105
Entry to record sale:
Apr. 1 Cash
103,000
Realized Loss on Sale of
Securities
4,345
Interest Receivable
2,500
Investment in Held-to
Maturity Securities
104,845
2
3
Sale of Equity Securities
Date
Activity
($)
Jan 1, 2003
Bought Trading Securities
10,000
Dec 31, 2003
Fair Market Value
12,000
Dec 31, 2004
Sold for its Fair Market Available
9,000
Sale of Equity Securities
4
Jan. 1, 2003 Investment in Trading Securities 10,000
Cash
10,000
Dec 31, 2003 Market Adjustment – Trading
Unrealized gain - Trading
2,000
2,000
Dec 31, 2004 Unrealized loss – Trading
2,000
Market Adjustment – Trading
2,000
Dec 31, 2004 Cash
9,000
Realized loss – Trading
1,000
Investment in Trading 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
Any unrealized change in value not
previously recognized will be
recognized in net income in the
current period.
Any unrealized change in value not
previously recognized will be
recognized in net income in the
current period.
Recognize any unrealized change in
value in a stockholders’ equity
account.
Continued
5
Transferring Securities
Between Categories
Transferred
From available for sale
to held to maturity
Treatment of
Change in Value
Any unrealized change in value
recorded in a stockholders’ equity
account is to be amortized over the
security’s remaining life using the
effective-interest method.
Statement of Financial Standards No. 115, par. 15d
6
7
Transfer from the trading to
available-for-sale category
Assume:
Cost of trading security
Fair market value, end of 2006
Fair market value at transfer
date (in 2007)
Continued
$3,000
3,600
3,800
Transfer from the trading to
available-for-sale category
Investment in Available-for-Sale
Securities
3,800
Market Adjustment--Trading
Securities
600
Unrealized Gain on Transfer
of Securities
200
Investment in Trading Securities
3,000
8
Transfer from the available-for-sale category
to the trading security category
Assume:
Cost of available-for-sale security
Fair market value, end of 2006
Continued
$12,000
10,700
9
Transfer from the available-for-sale category
to the trading security category
Investment in Trading Securities 10,300
Market Adjustment--Trading
Securities
1,300
Unrealized Loss on Transfer
of Securities
1,700
Unrealized Increase/Decrease
in Value of Available-forSale Securities
1,300
Investment in Available-forSale Securities
12,000
10
Transfer from held-to-maturity to the
available-for-sale category.
Assume:
Cost of held-to-maturity
security
Fair market value, Dec. 31,
2006
Continued
20,000
20,700
11
12
Transfer from held-to-maturity to the
available-for-sale category.
Investment in Available-forSale Securities
Unrealized Increase/
Decrease in Value of
Available-for-Sale
Securities
Investment in Held-toMaturity Securities
20,400
400
20,000
Transfer from available-for-sale to
held-to-maturity.
Assume:
Cost of available-for-sale
securities
Fair market value, end of 2006
Fair market value at transfer date
Continued
$5,000
6,500
5,900
13
Transfer from available-for-sale
to held-to-maturity.
Investment in Held-to-Maturity
Securities
5,900
Unrealized Increase/Decrease
in Value of Available-for-Sale
Securities
600
Investment in Available-forSale Securities
Market Adjustment—
Available-for-Sale
Securities
14
5,000
1,500
Investment securities and the
cash flow statement
The purchase and sale of available-for-sale, held-tomaturity, and equity method securities are reported
in the Investing Activities section of the statement
of cash flows. In contrast, the cash flows associated
with the purchase and sale of trading securities are
shown in the Operating Activities section. This
difference stems from the fact that, by definition, a
company that maintains a trading securities portfolio
considers as part of its normal business operations
the attempt to make money through the correct
timing of purchases and sales of (trading) securities.
15
Cash Flows from Gains and
Losses on Available-for-Sale
Cash Company began with a $1,000
investment on January 1, 2005.
Cash sales
Cash expenses
Purchases of investment securities
Sale of investment securities
(costing $200)
Continued
$1,700
(1,400)
(600)
170
16
Cash Flows from Gains and
Losses on Available-for-Sale
The market value of the remaining securities
was $500 on December 31, 2005.
Sales
Expenses
Operating income
Realized loss on sale of securities
Net income
Continued
$1,700
(1,400)
$ 300
(30)
$ 270
17
Cash Flows from Gains and
Losses on Available-for-Sale
Cash Company will report a $100
unrealized increase in the value of it
available-for-sale portfolio.
This $100 unrealized increase
is reported as an increase in
Accumulated Other
Comprehensive Income.
However, if it were a Trading
security, Cash Company would
report the $100 unrealized increase
in the income statement
18
Cash Flows from Gains and
Losses on Available-for-Sale
19
The statement of cash flows for Caesh
Company for 2005 appear as follows:
Operating activities:
Net income
$ 270
Plus realized loss on sale of securities
30 $ 300
Investing activities:
Purchase of investment securities
$(600)
Sale of investment securities
170 (430)
Financing activities:
Initial investment by owner
1,000
Net increase in cash
$ 870
20
Classification and Disclosure
• 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.
21
Classification and Disclosure
• 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.
Continued
22
Classification and Disclosure
• 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.
chapter 14
The End
23