2. 1. Relate to investments which: a. Have a readily determinable “fair value” 1) Defined: sale price available on a securities exchange registered with SEC or publicly reported OTC market. AND 2) Do NOT result in having a significant influence (usually hold < 20% ownership). Rules: Come from SFAS 115. Into effect in December 1993.

3. This “fair value” accounting REPLACES the former cost method. New rules relate to EQUITY and DEBT. New investments (debt and equity marketable securities) are classified into one of (3) categories: 1) Securities Available for Sale (SAS) 2) Trading Securities (TS) 3) Debt Securities held to maturity (HTM)

4. RULES WHICH DETERMINE WHICH CLASSIFICATION IS USED FOR AN INVESTMENT. TRADING SECURITIES (TS). Debt and/or equity purchased and held principally for the purpose of selling in near future. Active/frequent buying/selling. CURRENT ASSETS

5. SECURITIES AVAILABLE FOR SALE (SAS) Debt securities not classified as held to maturity AND Debt and/or equity securities not classified as trading securities As CURRENT or LONG-TERM ASSETS depending upon the owner’s intent.

6. HELD TO MATURITY (HTM) Debt securities ONLY. Have the positive intent/ability to hold this debt to maturity. Sales PRIOR to maturity are rare. As a LONG-TERM INVESTMENT.

8. Francisco Company acquires the following securities on July 1, 2008 as and investment in SECURITIES AVAILABLE FOR SALE (SAS). A Co. common stock100 shares @ $50/sh. B Co. common stock300 shares @ $80/sh. C Co. preferred stock200 shares @ $120/sh. D Co. 10% bonds with a face value of $15,000 at par value. Interest on bonds is payable on July 1 and Jan 1each year).

9. RECORD INITIAL PURCHASE Initial Record is done at COST + related expenditures. Purchase of Stock:100 * $50/sh = $5,000: A stock 300 * $80/sh = $24,000: B stock 200 * $120/sh = $24,000: C stock $53,000 SAS……………………$53,000 CASH…………………..$53,000

10. Purchase of Bond: SAS………………………$15,000 CASH……………………..$15,000

11. RECORD INTEREST AND DIVIDEND REVENUE ON Dec 31. a. Semi-annual interest earned on D Co. bonds $15,000 * 0.10 * 6/12 = $750 Interest Receivable…$750 Interest Revenue…….$750 b.Assume Francisco receives $3,000 in dividends on stock Cash……………...…..$3,000 Dividend Revenue…..$3,000

12. RECOGNITION OF UNREALIZED HOLDING GAINS AND LOSSES. Securities available for sale must be recorded at FAIR VALUE at the balance sheet date. This will result in UNREALIZED HOLDING GAINS AND LOSSES.

13. Assume at year end that securities look like this: 12/31/08Cumulative SecurityCostFair Value  Fair Value 100 sh A Co. c/s5,0006,0001,000 300 sh B co c/s24,00023,500 (500) 200 sh C Co. p/s24,00026,0002,000 $15,000 D Co bond15,00015,500 500 TOTALS$68,000$71,000$3,000

14. To record the $3,000 increase in value: Market Adjustment (SAS)………...…….$3,000 Unrealized holding loss/gain (EQ)………$3,000

15. Afterwards the balance sheet looks like this: Assets Investments available for sale$68,000 + Market Adjustment 3,000 Net$71,000 Stockholders Equity: Balance$ XX.XX + Accumulated Other Comprehensive Inc.3,000 IMPORTANT!!!!!!!!!!!!!!! COMPREHENSIVE INC The unrealized adjustment is treated as a STOCKHOLDER’s EQUITY ACCOUNT with the SAS investment. It does NOT go into the current net income. Goes to COMPREHENSIVE INC.

16. NOW ASSUME AT THE END OF 2009 THE INVESTMENTS AVAILABLE FOR SALE APPEAR AS FOLLOWS: 12/31/09Cumulative SecurityCostFair Value  Fair Value 100 sh A Co. c/s5,0006,1001,100 300 sh B co c/s24,00022,700(1,300) 200 sh C Co. p/s24,00023,200(800) $15,000 D Co bond15,00014,000(1,000) TOTALS$68,000$66,000$(2,000)

17. The market adjustment account now requires a CREDIT balance of $2,000. The existing balance is a $3,000 DEBIT. The adjusting entry is thus: Unrealized holding gain/loss (EQ)………$5,000 Market Adjustment (SAS)……………….$5,000 Mkt Adj 3000 5000 2000

18. The balance sheet at 12/31/09 now looks like this: Assets: Investments available for sale$68,000 - Market Adjustment 2,000 Net$66,000 Stockholders Equity: Balance$XX.XX - Accumulated Other Comprehensive Inc. 2,000

20. a. Investment recorded at cost (same) b. Subsequently reported at fair value (same) c. Unrealized holding gains/losses reported in CURRENT INCOME (stockholders equity adjustment previously) d. Interest/dividend income reported in current income (same) e. These kind of securities are held primarily by institutions like banks/stockbrokers.

21. Francisco Company acquires the following securities on July 1, 2008 as an investment in TRADING SECURITIES. A Co. common stock100 shares @ $50/sh. B Co. common stock300 shares @ $80/sh. C Co. preferred stock200 shares @ $120/sh. D Co. 10% bonds with a face value of $15,000 at par value plus accrued interest. (Interest on bonds is payable on May 31 and Nov 30 each year).

22. RECORD INITIAL PURCHASE and DIVIDEND REVENUE TS...……………………$53,000 CASH…………………..$53,000 SAME as (SAS) @ cost STOCK BONDS TS...………………………$15,000 CASH……………………..$15,000

23. RECORD INTEREST AND DIVIDEND REVENUE ON Dec 31 Int Rec……………………$750 Interest Revenue…….$750 Dividend revenue Cash……………...…..$3,000 Dividend Revenue…..$3,000 Same as before Bond interest revenue

24. REALIZATION OF UNREALIZED HOLDING GAINS AND LOSSES. THIS IS DIFFERENT THAN SAS IN THE MANNER OF F/S PRESENTATION!!!!!!! Trading securities must also be recorded at FAIR VALUE at the balance sheet date. This will again result in UNREALIZED HOLDING GAINS and LOSSES.

25. Assume at year end that securities look like this: 12/31/08Cumulative SecurityCostFair Value  Fair Value 100 sh A Co. c/s5,0006,0001,000 300 sh B co c/s24,00023,500(500) 200 sh C Co. p/s24,00026,0002,000 $15,000 D Co bond15,00015,500 500 TOTALS$68,000$71,000$3,000

26. To record the $3,000 increase in value: Market Adjustment (TS)………...…….$3,000 Unrealized holding loss/gain (IS)………$3,000

27. THIS IS WHAT IS DIFFERENT. ASSETS: Trading Securities$68,000 + Market Adjustment 3,000 Net$71,000 STOCKHOLDERS EQUITY: Balance$XX.XX + Retained Earnings 3,000

28. IMPORTANT!!!!!!!!!!!! The unrealized adjustment is treated as a CURRENT INCOME ITEM in the INCOME STATEMENT. STATEMENT OF INCOME Revenue$xx.xx Other Revenue: Unrealized gain on fair value adjustment of TS security 3,000 Expense$xx.xx Net Income +$3,000

29. NOW ASSUME AT THE END OF 2009 THE INVESTMENTS (TRADING SECURITIES) APPEAR AS FOLLOWS: 12/31/02Cumulative SecurityCostFair Value  Fair Value 100 sh A Co. c/s5,0006,1001,100 300 sh B co c/s24,00022,700(1,300) 200 sh C Co. p/s24,00023,200(800) $15,000 D Co bond15,00014,000(1,000) TOTALS$68,000$66,000$(2,000)

30. The market adjustment account now requires a CREDIT balance of $2,000. The existing balance is a $3,000 DEBIT. The adjusting entry is thus: Unrealized holding gain/loss (IS)………$5,000 Market Adjustment (TS)……………….$5,000

31. The balance sheet at 12/31/09 now looks like this: Assets: Investments TS$68,000 - Market Adjustment 2,000 Net $66,000 Stockholders Equity: Balance $XX.XX - Retained earnings2,000

32. STATEMENT OF INCOME Revenue$xx.xx Expense xx.xx other expense: Unrealized loss on fair value adjustment of TS security 5,000 Net Income-$5,000

33. Summary of UGH/L changes SAS-  UHG/L---  OCI--  AOCI TS  UHG/L-  IS---  RE

35. Bond may be classified as “held to maturity” if the reporting entity has both the: 1. Positive intent 2. Ability to hold those securities to maturity

36. Accounted for by: 1. Record at COST 2. Subsequently reported at AMORTIZED COST. Not fair value. 3. Unrealized holding gains/losses are NOT recorded 4. Interest revenue and realized gains/losses are recorded in income.

38. Before Transfer Trading SecuritiesAvailable for Sale (SAS) Sills Co. Bonds.. $80,000 $100,000 Cost Fair Value Cedar Falls City Bonds $50,000 $70,000 $130,000 $170,000 Equity$70,000 $90,000 TRANSFER CEDAR FALLS BONDS FROM TRADING TO SAS. After Transfer Sills Co. Bonds $80,000 $100,000 Equity$70,000 $90,000 CF bonds... $70,000 $70,000 $140,000 $160,000 *Assume no fv adjustments made yet. Available for Sale (SAS)........ $70,000 Trading Securities................. $50,000 Unrealized Holding Gain-IS.. $20,000

39. Before Transfer Security Available for Sale (SAS) Trading Securities Sills Co. Bonds.. $80,000 $100,000 Cost Fair Value Cedar Falls City Bonds $50,000 $70,000 $130,000 $170,000 Equity$70,000 $90,000 TRANSFER CEDAR FALLS BONDS FROM SAS to TRADING After Transfer Sills Co. Bonds $80,000 $100,000 Equity$70,000 $90,000 CF bonds... $70,000 $70,000 $140,000 $160,000 *Assume no fv adjustments made yet. Trading Securities..... $70,000 Available for Sale Securities.... $50,000 Unrealized Holding Gain-IS... $20,000

40. Before Transfer HTMSAS CF Bonds.. $35,000 Russell Corp. bonds.. $75,000 $110,000 CostFair value $60,000 $90,000 Transfer the Russell Corp Bonds to SAS when their market is $80,000 After Transfer CF Bonds.... $35,000 $60,000 $90,000 Russell $75,000 $80,000 $135,000 $170,000 Available for Sale Securities....... $75,000 Held to Maturity........... $75,000 Unrealized holding gain-EQUITY $5,000 Market Adjustment- $5,000

41. Before Transfer SASHTM CF Bonds.. $35,000 $40,000 (fv) Russell Corp. bonds.. $75,000 (cost) $90,000 (fv) $110,000 (cost) $130,000 (market) Cost $60,000 Transfer the Russell Corp Bonds to HTM when their market is $90,000 After Transfer CF Bonds.... $35,000 $40,000 (fv) $60,000 Russell $75,000 $90,000 $135,000 $90,000 HTM............ $75,000 Available for Sale........... $75,000 Market Adj-HTM $15,000 UHG-EQ......................... $15,000

42. Before Transfer SASHTM CF Bonds.. $35,000 Russell Corp. bonds.. $75,000 (cost) $90,000 (fv) $110,000 Cost $60,000 Transfer the Russell Corp Bonds to HTM when their market is $90,000 After Transfer CF Bonds.... $35,000 $60,000 Russell $75,000 $90,000 $135,000 $90,000 HTM............ $75,000 Available for Sale........... $75,000 Market Adj-HTM $15,000 UHG-EQ......................... $15,000 FV adjustment is amortized $15,000/10 (assume) = ($1500) *its like writing off an asset. UHG-EQ is amortized $15,000/10 = $1500 * its like claiming a partial gain NET ADJUSTMENT..............$0