Presentation on theme: "CHAPTER 17 Investments in Debt and Equity Securities ……..…………………………………………………………... Debt held-to-maturity Debt plan to sell Equity plan to sell Equity exercise."— Presentation transcript:
CHAPTER 17 Investments in Debt and Equity Securities ……..…………………………………………………………... Debt held-to-maturity Debt plan to sell Equity plan to sell Equity exercise some control Amortized cost Fair value Equity method
DEBT SECURITIES Held-to-maturity intent and ability to hold security until it matures Tradingheld primarily for sale in the near term Available-for-salenone of the above
HELD-TO-MATURITY SECURITIES 1/1/03Purchased a $50,000, 10% bond for $51,388. The bond pays semiannual interest and matures 7/1/04. PeriodsRatePVAnnuityFVAD? Most firms do not record separate premium or discount. 1/1/03
6/1/04Sold bond for $50,050 plus $2,083 accrd interest. DateCash 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 12/31/036/1/04
AVAILABLE-FOR-SALE SECURITIES 6/30/02Purchased a $20,000, 4-year, 7% bond for $18,681 (effective yield=9%). DateCash Rec’d Interest Rev. Premium Amortiz Carrying Amount 12/31/02 700 841 141 18,822 6/30/0212/31/02
12/31/02Fair value = $19,340; carrying amount = $18,822. 1/1/03Sold bonds for $19,440. 12/31/03Adjust fair value adjustment account. 1/1/0312/31/0212/31/03
vSecurities Fair Value Adjustment (AFS) is an asset valuation account that is added to or subtracted from the Available-for-Sale Securities account. vUnrealized Holding Gain or Loss - Equity is reported as part of Other Comprehensive Income. vThe 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. Adjusting Securities to Fair Value
TRADING SECURITIES 12/31/02 Secur FV Adjustment (Trading)518 Unrealiz Holding G/L - Income518 vSimilar to available-for-sale securities, except unrealized gains and losses are closed to net income.
EQUITY SECURITIES Holdings of less than 20% fair value method AFS or trading Holdings between 20% and 50% equity method Holdings of more than 50% consolidated statements Accounting treatment the same as with debt securities.
HOLDINGS BETWEEN 20% AND 50% vInvestor is presumed to exercise “significant influence” if holding 20% or more of voting stock. vUnless there is evidence to the contrary. vInvestment: Ørecorded at cost Ønot adjusted to market price Øincreased by share of net income (revenue distinguished from extraordinary G/L) Ødecreased by amortization of excess of cost over share of book value Ødecreased by amount of dividends received
OTHER REPORTING ISSUES Financial Statement Presentation Total fair value, unreal holding G/L, amortized cost for each major security type Summary info. about debt maturities Notes for AFS & Held-to Maturity Notes for Equity Method Investments Name of investee & % ownership Underlying equity (if different from carrying value) Fair value
10,000 Trading Secur 50,000 40,000 Loss: Sale of Sec 600 Sec FV Adjust 1,400 1,000 400 Unreal Hold G/L 1,000 Reclassification Adjustments Other comprehensive income Total holding gains for period Less: Reclass adj for losses included in net income
Trading Secur 50,000 Sec FV Adjust 1,400 Impairment of Value 2/1/07 Loss on Impairment1,400 Sec FV Adjust1,400 Unrealiz Hold G/L1,400 Trading Securities1,400 vIf decline in value in not temporary, record impairment.