1. Relate to investments which: a. Have a readily determinable “fair value” 1) Defined: sale price available on a securities exchange registered with.

Slides:



Advertisements
Similar presentations
Chapter 9--Learning Objectives
Advertisements

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Investments 12.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Reporting and Interpreting Investments in Other Corporations Chapter 12.
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
Appendix D Investments in Other Corporations © 2009 The McGraw-Hill Companies, Inc.
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Appendix D Investments in Other Corporations PowerPoint Authors:
Topic 6 INVESTMENTS Chapter 12: Investments
Principles of Accounting II
13 Investments and Fair Value Accounting
1 Investment in Debt and Equity Securities An electronic presentation by Douglas Cloud by Douglas Cloud Pepperdine University Pepperdine University An.
BUS780 Chapter 11 Marketable Securities, Derivatives and Investments.
1 Investments ACCTG 5120 David Plumlee. page2 Financial Instruments Any contract that Imposes on a 1st entity on potentially unfavorable terms with 2nd.
© Copyright D Hillman Investments in Stocks and Bonds.
Chapter 9  Investments. Chapter 9Mugan-Akman Investments Idle cash Strategic investments Financial instruments –Equity instruments (stocks)
© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Chapter 12 Investments.
1 Investments in Debts and Equity Securities. 2  Determine why companies invest in other companies.  Understand the varying classifications associated.
Investments.
12-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA.
1 Chapter 6 Investments and Receivables Financial Accounting, Alternate 4e by Porter and Norton.
© 1999 by Robert F. Halsey Agenda Items to be covered: Equity investments Debt investments.
© 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 10A-1 CHAPTER 10 Part A Accounting for Long-Term Investments and.
Accounting Clinic III.
4/20/2017 Chapter 12 Investments.
Investments in Debt and Equity Securities. TEMPORARY INVESTMENTS  Use of idle cash  Low risk investments  Quickly and easily converted to cash  Securities.
15 Investments and Fair Value Accounting
McGraw-Hill /Irwin© 2009 The McGraw-Hill Companies, Inc. INVESTMENTS Chapter 12.
Investments and Fair Value Accounting 13.
Chapter 4 Investments.
BUS 120: Financial Accounting Chapter 13: Investments
©Cambridge Business Publishing, 2010 Motivations for Intercorporate Investments  As a temporary investment of excess cash  As part of a long-term risk-adjusted.
McGraw-Hill /Irwin© 2009 The McGraw-Hill Companies, Inc. INVESTMENTS Chapter 12.
John Wiley & Sons, Inc. © 2005 Chapter 17 Investments Prepared by Naomi Karolinski Monroe Community College and and Marianne Bradford Bryant College Accounting.
MANAGEMENT DECISIONS AND FINANCIAL ACCOUNTING REPORTS Baginski & Hassell.
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Investments and International Operations Chapter 16.
1InvestmentsInvestments C hapter Explain the classification and valuation of investments. 2. Account for investments in debt and equity trading.
Chapter 10 Investments. Learning Objectives 1.Identify why companies invest in debt and equity securities and classify investments 2.Account for investments.
Investments and Fair Value Accounting 13.
Click to edit Master title style Investments in Stocks 14.
Financial Accounting John J. Wild Sixth Edition John J. Wild Sixth Edition McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights.
Chapter 16-1 CHAPTER 16 INVESTMENTS. Chapter 16-2 Valuing and Reporting Investments Categories of Securities Companies classify debt and stock investments.
© The McGraw-Hill Companies, Inc., 2002 Slide 16-1 McGraw-Hill/Irwin 16 Long-Term Investments and International Transactions.
Investments C hapter 15 COPYRIGHT © 2010 South-Western/Cengage Learning Intermediate Accounting 11th edition Nikolai Bazley Jones An electronic presentation.
Investments and International Operations Appendix B Copyright © 2007 Prentice-Hall. All rights reserved.
PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA APPENDIX.
Accounting Clinic III McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide 12-1 Investments Financial Accounting, Seventh Edition Chapter 12.
Chapter 12: Shareholders’ Equity
Acct Chapter 181 Investments In general, investments in debt and equity securities are categorized as three types: Held to maturity (debt securities.
Chapter 17: Investments 1. 2 Investment in Marketable Equity Securities - Overview Equity investments represent ownership of another company’s outstanding.
Investments and Fair Value Accounting 13 Student Version.
©2008 Pearson Prentice Hall. All rights reserved Long-Term Investments and International Operations Chapter 10.
COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
C Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter Chapter 16-2 Chapter 16 Investments Accounting Principles, Ninth Edition.
Chapter 16-1 CHAPTER 16 INVESTMENTS Accounting Principles, Eighth Edition.
Invest Investments – Debt and equity (long-term, short-term)
Investments in Other Corporations
Accounting Principles, Ninth Edition
Chapter 12 Investments.
Chapter 18: Investments Intermediate Accounting, 10th Edition
C H A P T E R 17 INVESTMENTS Intermediate Accounting 13th Edition
Investments in Debts and Equity Securities
Chapter 10 Investments.
significant influence
Financial Accounting, 3e Weygandt, Kieso, & Kimmel
C 14 hapter Investments
An electronic presentation Pepperdine University
Investments and Fair Value Accounting
© 2015 Pearson Education, Limited.
Investments and Fair Value Accounting
Presentation transcript:

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.

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)

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

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.

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.

Francisco Company acquires the following securities on July 1, 2008 as and investment in SECURITIES AVAILABLE FOR SALE (SAS). A Co. common stock100 $50/sh. B Co. common stock300 $80/sh. C Co. preferred stock200 $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).

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

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

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

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.

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

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

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.

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, 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)

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

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

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.

Francisco Company acquires the following securities on July 1, 2008 as an investment in TRADING SECURITIES. A Co. common stock100 $50/sh. B Co. common stock300 $80/sh. C Co. preferred stock200 $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).

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

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

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.

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

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

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

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

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, 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)

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

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

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

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

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

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.

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

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

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

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

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