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Invest Investments – Debt and equity (long-term, short-term)

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1 Invest Investments – Debt and equity (long-term, short-term)
Trading securities (TS), available-for-sale (AFS) securities, held-to-maturity (HTM) securities, Equity method (EM)

2 Actively bought/sold for short- term profits
Held-t0-maturity securities (HTM) –long-term debt investments Available-for-sale securities(AFS) “most common -short /long-term, debt&equity” management intent to hold indefinitely (unless need funds or attractive selling price) Minority passive investment-no significant influence Debt and equity securities Valued at fair value so asset increases/decreases on balance sheet Changes in fair value -- “other comprehensive income” ,OCI+ Net Income=comprehensive. Income Changes in fair value also update “accumulated other comprehensive income AOCI (shareholder’s equity-balance sheet), not retained earnings Trading securities (TS) – short term debt & equity investments Actively bought/sold for short- term profits Minority passive investment- no significant influence Debt and equity securities Valued at fair value so asset increases/decreases on balance sheet Changes in fair value (unrealized gains, losses) in current period net income Changes in fair value also updates retained earnings (balance sheet) banks, insurance companies, stock brokerage firms Positive intent and ability to hold until maturity Minority passive investment-no significant influence Debt only Valued at amortized cost (face value adjusted for unamortized discount/premium) Changes in fair value not recognized on balance sheet or income statement Amortized premium lowers (amortized discount raises) interest revenue & carrying value on investment, (but no separate discount/ premium account)

3 Accounting for passive investments versus active investments
Trading security, Available-for-sale security, held-to-maturity Equity method security Equity investments only Realized gain/loss on sale of securities included in net income (though sale of equity securities infrequent) Investee paid out dividends influenced by investor (as active majority investment), not faithfully represented to add to income (investor not add to net income) % ownership used to determine amount of investee net income recorded on investor books as increase to investor net income & carrying value,of investment (or investee losses, share of net loss, decrease to carrying value) Dividends earned reduces investment account & increases cash (immediate return from investee earnings) minority active investment – significant influence (ownership between 20-50%) Majority active investment – over 50% of the voting stock (requiring consolidated statements) Parent -- subsidiary Accounting for passive investments versus active investments Equity and debt investments (HTM just debt) Realized gain/loss on sale of securities included in net income (HTM rare) Dividend and/or interest earned on investment included in net income as revenue Minority passive investment- no significant influence – less than 20-25% ownership

4 Cash flows from investment transactions -- Cash Flow Statement
Operating – Cash from purchase/sale/maturity of trading securities (unless company does not routinely invest in this – then investing section) Cash received from interest revenue and dividend revenue Investing – Cash from purchase/sale/maturity of available for sale securities Cash from purchase/sale/maturity of held-to-maturity securities Cash flows from investment transactions -- Cash Flow Statement

5 Financial statements – available-for- sale (AFS) securities
Balance Sheet Income Statement Financial statements – available-for- sale (AFS) securities Revenues Gains on sale of securities Dividend revenue Interest revenue Expenses Loss on sale of securities Net income Plus: Other comprehensive income (current change in fair value of AFS– unrealized gain/loss) Equals: Total comprehensive income Current assets (if plan to sell shortly or maturing soon) AFS securities +/- allowance for change in fair value Fair value or carrying value Long-term assets AFS securities (probably most are here) +/- allowance for change in fair value fair value or carrying value Total assets Current liabilities Long-term liabilities Total liabilities Stockholder’s equity (SE) Common stock Retained earnings Accumulated other comprehensive income(AOCI) (cumulative amount of unrealized gains/losses in holding AFS) Total stockholder’s equity Liabilities plus Stockholder’s equity

6 Financial statements – held-to-maturity (HTM) securities
Balance Sheet Income Statement Current assets (if maturing in 1 year) HTM securities (not fair value but cost adjusted for unamortized discount/premium) Long-term assets Total assets Current liabilities Long-term liabilities Total liabilities Stockholder’s equity (SE) Common stock Retained earnings Total stockholder’s equity Liabilities plus Stockholder’s equity Financial statements – held-to-maturity (HTM) securities Revenues Gains on sale of HTM securities (rare) Interest revenue (adjusted for amortized discount/premium) Expenses Loss on sale of HTM securities (rare) Net income

7 Financial statements – Trading securities (TS)
Balance Sheet Income Statement Current assets HTM securities +/- allowance for change in fair value Fair value or carrying value Long-term assets Total assets Current liabilities Long-term liabilities Total liabilities Stockholder’s equity (SE) Common stock Retained earnings Total stockholder’s equity Liabilities plus Stockholder’s equity Financial statements – Trading securities (TS) Revenues Gains on sale of TS Interest revenue Dividend revenue Unrealized Gain on sale of TS Expenses Loss on sale of TS Unrealized Loss on sale of TS Net income

8 Financial statements – equity method (not consolidated)
Income Statement Balance Sheet Financial statements – equity method (not consolidated) Current assets (not common) Investment in XYZ Co stock (not fair value but original cost + % of profit (or -% of loss) – dividend) Long term Assets Investment in XYZ Co stock (not fair value but original cost + % of profit (or - % of loss) -dividend) Total assets Current liabilities Long-term liabilities Total liabilities Stockholder’s equity (SE) Common stock Retained earnings Total stockholder’s equity Liabilities plus Stockholder’s equity Revenues Gains on sale of Investment Investment income % share of investee net income Expenses Loss on sale of investment Investment loss % share of investee net loss Net income

9 Non-interest bearing Long-term Notes Receivable
Received for property, goods or services No interest rate stated (or stated rate is unreasonable)-- but no such thing as no interest cost Value of asset received or services, if not readily determinable, use present value of future payment(s) on notes receivable, using the borrower’s incremental interest rate. Present value of future cash flows = notes receivable less discount on notes receivable “Discount on Notes Receivable” (contra asset for notes receivable, when amortized, becomes interest revenue, and raises carrying value of note) Use the effective interest method Notes Receivable…………………………………………………………….………...XX Gain (or loss) on sale of land………………………………………………..………………….…XX Land (at cost)………………………………………………………………………………….……XX Discount on Notes Receivable…………………………………………………………………XX (record note at the present value of future payments ) Discount on Notes Receivable………………………………………………………………XX Interest Revenue…………………………………………………………………………………….XX (amortize discount with adjusting entries) Cash…………….……………………………………………………………………………………XX Notes Receivable…………………………………………………………………………………..XX (repayment of principal at maturity) Non-interest bearing Long-term Notes Receivable

10 Impairment of notes receivable
If probable that issuer of the note is unable to make all payments (or all on time) for interest or principal, the note is impaired and thus the creditor will be unable to fully collect. Review the normal loan procedures to determine impairment Compute the present value of future cash flows that will be paid from impaired loan and compare to carrying value of loan. Then record the difference as a bad debt. Bad debt expense………………………………………………….XX Allowance for Doubtful Notes…………………………………XX Each year some interest is recognized using effective interest method. Allowance for Doubtful Notes…………………………………..xx Interest Revenue……………………………………………………XX Impairment of notes receivable

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