Investments
Sid Glandon, DBA, CPA
Assistant Professor of Accounting
The University of Texas at El Paso
Debt Securities

Classified as held-to-maturity


Classified as trading


Positive intent and ability to hold to maturity
Help for sale in near term to generate income
Classified as available-for-sale

Not classified as held-to-maturity or trading
securities
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
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
Debt Securities
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
Investment in Debt Securities
Cost to investing entity
Par value
Discount
Stated interest rate
Effective interest rate
Fair value of security;
End of year 1
End of year 2
$924,183
1,000,000
75,817
8%
10%
1,000,000
975,000
Classified as Trading: Journal Entry
Account
Debit
Investment, trading debt security
$924,183
Cash
To record the purchase of a debt security classified as trading
Credit
$924,183
Classified as Trading
Computation of Gain (Loss) at the End of Year 1
FMV
$1,000,000
Original cost
924,183
Unrealized holding gain
$75,817
Account
Debit
Securities Fair Value Adjustment, Trading
$75,817
Unrealized holding gain, Income
To recognized unrealized holding gain on debt security
Credit
$75,817
Classified as Trading
Computation of Gain (Loss) at the End of Year 2
FMV
$975,000
Original cost
924,183
Unrealized holding gain
50,817
Previously recognized holding gain
75,817
Unrealized holding loss
($25,000)
Account
Debit
Unrealized holding loss, Income
$25,000
Securities Fair Value Adjustment, Trading
To recognized unrealized holding loss on debt security
Credit
$25,000
Classified as Available-for-sale
Amortization Schedule
Interest Interest Amortization Carrying Fair Value,
Value End of Year
Year Revenue received of Discount
$924,183
1 $92,418 $80,000
$12,418 936,601 $1,000,000
2
93,660 80,000
13,660 950,261
975,000
Account
Debit
Investment, available-for-sale debt security
$924,183
Cash
To record the purchase of a debt security classified as available for sale
Credit
$924,183
Classified as Available-for-Sale
Computation of Gain (Loss) at the End of Year 1
FMV
$1,000,000
Carrying value
936,601
Unrealized holding gain
$63,399
Account
Securities Fair Value Adjustment, Available-for-Sale
Unrealized holding gain, Equity
To recognized unrealized holding gain on debt security
Debit
Credit
$63,399
$63,399
Classified as Available-for-Sale
Computation of Gain (Loss) at the End of Year 2
FMV
$975,000
Original cost
950,261
Unrealized holding gain
24,739
Previously recognized holding gain
63,399
Unrealized holding loss
($38,660)
Account
Unrealized holding loss, Equity
Securities Fair Value Adjustment, Available-for-Sale
To recognized unrealized holding loss on debt security
Debit
$38,660
Credit
$38,660
Classified as Held-to-Maturity



No entry for fair value adjustment
Fair value changes are not recognized at
the balance sheet date
Securities are reported at amortized cost
Equity Securities



Ownership interests
Include rights to buy or sell ownership
Extent of ownership determines accounting
treatment for equity securities
Degrees of Control
0%
Little or None
Ownership Percentage
20%
50%
Significant
Level of Influence
100%
Control
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
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
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

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
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
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
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