1 Sale of Securities On April 1, 2006, the investment in Silmarils 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.

2 Sale of Debt Securities Entry to record accrued revenue and to amortize premium: Apr. 1Interest Receivable2,500 Investment in Held-to Maturity Securities395 Interest Revenue2,105 Entry to record sale: Apr. 1 Cash103,000 Realized Loss on Sale of Securities4,345 Interest Receivable2,500 Investment in Held-to Maturity Securities104,845

3 Sale of Equity Securities DateActivity($) Jan 1, 2003Bought Trading Securities10,000 Dec 31, 2003Fair Market Value12,000 Dec 31, 2004Sold for its Fair Market Available9,000

4 Sale of Equity Securities Jan. 1, 2003 Investment in Trading Securities 10,000 Cash 10,000 Dec 31, 2003 Market Adjustment – Trading 2,000 Unrealized gain - Trading 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

5 Transferring Securities Between Categories Transferred Treatment of Change in Value From tradingAny unrealized change in value not previously recognized will be recognized in net income in the current period. To tradingAny unrealized change in value not previously recognized will be recognized in net income in the current period. From held to maturity to available for sale Recognize any unrealized change in value in a stockholders equity account. ContinuedContinued

6 Transferring Securities Between Categories Transferred Treatment of Change in Value From available for sale to held to maturity Any unrealized change in value recorded in a stockholders equity account is to be amortized over the securitys remaining life using the effective-interest method. Statement of Financial Standards No. 115, par. 15d

7 Assume: Cost of trading security$3,000 Fair market value, end of 20063,600 Fair market value at transfer date ( in 2007) 3,800 Transfer from the trading to available-for-sale category ContinuedContinued

8 Investment in Available-for-Sale Securities3,800 Market Adjustment--Trading Securities 600 Unrealized Gain on Transfer of Securities 200 Investment in Trading Securities3,000

9 Transfer from the available-for-sale category to the trading security category Assume: Cost of available-for-sale security$12,000 Fair market value, end of ,700 ContinuedContinued

10 Investment in Trading Securities10,300 Market Adjustment--Trading Securities1,300 Unrealized Loss on Transfer of Securities 1,700 Unrealized Increase/Decrease in Value of Available-for- Sale Securities1,300 Investment in Available-for- Sale Securities12,000 Transfer from the available-for-sale category to the trading security category

11 Assume: Cost of held-to-maturity security20,000 Fair market value, Dec. 31, ,700 Transfer from held-to-maturity to the available-for-sale category. ContinuedContinued

12 Investment in Available-for- Sale Securities 20,400 Unrealized Increase/ Decrease in Value of Available-for-Sale Securities400 Investment in Held-to- Maturity Securities 20,000 Transfer from held-to-maturity to the available-for-sale category.

13 Assume: Cost of available-for-sale securities$5,000 Fair market value, end of 20066,500 Fair market value at transfer date5,900 Transfer from available-for-sale to held-to-maturity.ContinuedContinued

14 Investment in Held-to-Maturity Securities 5,900 Unrealized Increase/Decrease in Value of Available-for-Sale Securities600 Investment in Available-for- Sale Securities5,000 Market Adjustment Available-for-Sale Securities 1,500 Transfer from available-for-sale to held-to-maturity.

15 Investment securities and the cash flow statement The purchase and sale of available-for-sale, held-to- maturity, 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.

16 Cash Flows from Gains and Losses on Available-for-Sale Cash Company began with a $1,000 investment on January 1, Cash sales$1,700 Cash expenses(1,400) Purchases of investment securities(600) Sale of investment securities (costing $200)170 ContinuedContinued

17 Cash Flows from Gains and Losses on Available-for-Sale The market value of the remaining securities was $500 on December 31, ContinuedContinued Sales$1,700 Expenses (1,400) Operating income$ 300 Realized loss on sale of securities (30) Net income$ 270

18 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

19 Cash Flows from Gains and Losses on Available-for-Sale 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 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. Classification and DisclosureContinuedContinued

22 Transfers of securities between categories: –Gross gains and losses included in earnings from transfers of securities from available-for- sale 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. Classification and Disclosure

23 The End chapter 14