Investments Types: –Debt –Equity –Derivatives Classification: –Current (short term) –Non-current (long term) Intent: –Trading securities –Available for sale securities –Held to maturity –Control

Debt Investments Short term: CDs, commercial paper, near maturity bonds: Often used to temporarily invest idle funds. Should not be likely to fluctuate in value Reported on B/S at maturity value (current market value) If decline in market value – write down.

Debt Investments Short term OR long term: corporate or government bonds May be classified according to management intent as –Trading –Available for sale –Held to maturity – Long term investment

Debt Investments Trading and Available for sale: May fluctuate in value, are reported at FMV on B/S Different treatment for gain or loss: Trading Securities: gain or loss is recognized in current income Available for Sale Securities: gain or loss bypasses income statement (reported as part of comprehensive income only)

Debt Investments Held to Maturity Temporary fluctuations are ignored – reported on B/S at historical cost (amortized discount/premium) Permanent decline – recognized in current income, write down to FMV. NO recovery recognized.

Exercise Determine the amount of interest income to be recognized on December 31, Determine the amount to be credited to bond investment on December 31, 2004

Exercise On 12/31/03, Dominique Co. should recognize A.Dr. unrealized loss (equity)$ 80,000 B.Dr. loss on impairment$ 80,000 C.Cr. Unrealized gain (equity)$ 80,000 D.Both B and C E.No adjustment is needed, bond investments are carried at amortized cost

Equity Investments No Held to Maturity Trading or available for sale securities: Reported at FMV on B/S. Unrealized gains or losses treated the same as for debt securities (trading securities on income statement, available for sale directly to R/E, comprehensive income reported only

Equity Investments Trading or available for sale securities: Income recognition: Dividends Gain or loss from fluctuations in market value (trading) Gain or loss on sale of securities

Exercise 17-7 On 12/31/2003 Tiger should record A.Cr. unrealized gain (Income statement) $1,400 B.Dr. unrealized loss (stockholders equity)$1,400 C.Cr. Realized gain (income statement)$1,400 D.Dr. unrealized loss (income statement)$1,400

Exercise 17-7 In 2004 Tiger should record (in connection with the sale of the Colorado stock): A.Dr. loss on sale (Income statement) $1,000 B.Dr. unrealized loss (stockholders equity)$1,000 C.Cr. loss on sale (income statement)$ 600 D.Dr. unrealized loss (income statement)$ 600

Exercise 17-7 On 12/31/2004 Tiger should record A.Dr. unrealized loss (Income statement)$ 400 B.Dr. unrealized loss (Income statement) $ 1,000 C.Cr. Unrealized gain (income statement)$ 400 D.Cr. unrealized gain (income statement)$ 1,000

Exercise 17-9 A.At what amount should Steffi Graf, Inc. report its portfolio of securities on 12/31/2003?

Exercise 17-9 Steffi Graf should record which of the following on 12/31/2003 A.Dr unrealized loss (income statement) $1,500 B.Dr. unrealized loss (equity)$1,100 C.Cr. Unrealized gain (income statement)$ 1,100 D.Cr. Unrealized gain (equity)$1,500 E.Cr. Unrealized gain equity) $1,100

Equity Investments Control Position – Levels of “control”: Less than 20% – 25% - no control, trading or available for sale classification More than 20% – 25%, but less than 50%: Accounted under the Equity Method More than 50%: Consolidate Special Issue: SPE (now VIE)

Equity Investments Equity Method: Initial investment: at cost Temporary fluctuations in market value: Ignored Income/Loss recognition: % of investee company income or loss.

Equity Investments Equity Method: Dividends: treated as a reduction of the investment, NOT income: dr. cash cr. investment

Exercise (b) Monica Co. should report for 2003 A.Dividend income $36,000 B.Dividend income$10,800 C.Investment income$38,300 D.Investment income$25,500 E.Investment income$10,800

Equity Investments Special Purpose Entities (SPEs) New term: Variable interest entities (VIEs) Special entities set up to segregate a pool of assets and sell interest stakes to investors.

Answers 1.(slide 6a) $32, (slide 6b) $ 4, (slide 7) D 4.(slide 10) D 5.(slide 11) C 6.(slide 12) D 7.(slide 13) $54,400 8.(slide 14) E 9.(slide 18) D