1. Investments in Debts and Equity Securities

2. Learning Objectives Determine why companies invest in other companies.
Understand the varying classifications associated with securities.
Account for the purchase of debt and equity securities.
Account for the recognition of revenue from investments.

3. Learning Objectives Account for the change in value of securities.
Account for the sale of securities.
Record the transfer of securities between categories.
Explain the proper classification and disclosure of investments in securities.

4. Learning Objectives
Compare the accounting for securities under U.S. GAAP with the international standard in IAS 39.
EXPANDED MATERIAL
Account for changes to and from the equity method of accounting for securities.
Account for the impairment of a loan receivable. 11

5. ? Time Line of Business Issues Involved with Investment Securities
DETERMINE purpose of investment ?

6. Time Line of Business Issues Involved with Investment Securities
CLASSIFY investments
a, b, c

7. Time Line of Business Issues Involved with Investment Securities
Cloud Corporation
$100 par value
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Good Buy Corporation
$10 par value
PURCHASE securities

8. Time Line of Business Issues Involved with Investment Securities
Cloud Corporation
$100 par value
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Good Buy Corporation
$10 par value
EARN AND RECOGNIZE
a return

9. Time Line of Business Issues Involved with Investment Securities
MONITOR
changes in value + -
Cloud Corporation
$100 par value
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Good Buy Corporation
$10 par value

10. Time Line of Business Issues Involved with Investment Securities
Cloud Corporation
$100 par value
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Good Buy Corporation
$10 par value
SELL
securities

11. a b c Time Line of Business Issues Involved with Investment Securities
TRANSFER securities between categories
a b c

12. Time Line of Business Issues Involved with Investment Securities
DISCLOSE
status of portfolio at the end of the period

13. Classification of Securities
Debt securities typically have the following characteristics:
A maturity value, representing the amount to be repaid to the debt holder at maturity.
An interest rate that specifies the periodic interest payments.
A maturity date, indicating when the debt obligation will be redeemed.

14. Classification of Securities
Equity securities represent ownership in a company.
These shares of stock typically carry with them the right to collect dividends and vote on corporate matters.
Equity securities have the potential for significant increases in price.

15. Classification of Securities
Debt/Equity
Securities
Trading
Securities purchased for sale
in the near future.
Held-to-Maturity
Securities purchased with the
intent to hold until maturity.
Available-for-sale
Securities not classified as
trading or held-to-maturity.

16. Classification of Securities
Debt
Equity
Held-to-maturity
Available-for-sale
Trading
Equity Method

17. Purchases of Debt Securities
On May 1, Douglas, Inc. purchases $100,000 in U.S. Treasury notes at 104¼, including brokerage fees. Interest is 9% payable semiannually on January 1 and July 1. The debt securities are classified by the purchaser as trading securities.
Accrued interest on May 1 is $3,000, calculated as follows:
$100,000 x .09 x 4/12 = $3,000

18. Purchases of Debt Securities
Asset Approach
Purchase date:
May 1 Investment in Trading Securities 104,250
Interest Receivable 3,000
Cash 107,250

19. Purchases of Debt Securities
Revenue Approach
Purchase date:
May 1 Investment in Trading Securities 104,250
Interest Revenue 3,000
Cash 107,250

20. Purchases of Debt Securities
July 1 Cash 4,500
Interest Receivable 3,000
Interest Revenue 1,500
Receipt of semiannual payment:
Asset Approach
July 1 Cash 4,500
Interest Revenue 4,500
Revenue Approach

21. Interest Revenue for Debt Securities (Held-To-Maturity)
On January 1, 2001, Silmaril Technologies purchases 5-year, 10% bonds with a face value of $100,000 for $108,115. The bonds pay interest on January 1 and July 1. The market rate (yield) is 8%.
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Jan. 1 Investment in Held-to-
Maturity Securities 108,115
Cash 108,115

22. Interest Revenue for Debt Securities (Held-To-Maturity)
When the first interest payment is received from Silmaril, the following entry would be made:
July 1 Cash 5,000
Interest Revenue 4,325
Investment in Held-to-
Maturity Securities 675
$108,115 x .08 x 6/12

23. Equity Securities
Equity securities represent ownership in a company. These shares of stock typically carry with them the right to collect dividends and to vote on corporate matters.

24. Determining the Appropriate Securities Accounting Method
Account for as trading or available-for-sale
Equity method and consolidation procedures
Equity method
Ownership Percentage No
significant
influence
Significant
influence
Control 0%
20%
50%
100%

25. Purchase of Equity Securities
Purchased 100 shares of Dave’s Deli common shares at $2 per share.
Available-for-Sale
Investment in Available-for-
Sale Securities 200
Cash 200

26. Purchase of Equity Securities
Purchased 1,000 shares of Dave’s Deli common shares at $2 per share.
Equity Method
Investment in Dave’s Deli
Common Stock 2,000
Cash 2,000
(Representing a 20%
ownership)

27. Purchase of Equity Securities
Received $0.80 per share dividend.
Available-for-Sale
Cash 80
Dividend Revenue 80
Equity Method
Cash 800
Investment in Dave’s Deli
Common Stock 800

28. Purchase of Equity Securities
Dave’s Deli announces earnings for the
year of $10,000.
Available-for-Sale
No Entry
Equity Method
Investment in Dave’s Deli
Common Stock 2,000
Income from Investments 2,000

29. Reporting Temporary Changes in Value
Classification
of Security
Disclosed at
Report FMV
Change On
Fair market
Income
Trading
value
statement
Available-
for-sale
Fair market
value
Stockholder’s
equity
Held-to-
maturity
Amortized
cost
Not
recognized

30. Example: Temporary Changes in Value
Rocky’s Financial Corp. has the following securities in its portfolio:
Trading securities:
Purchase price $ 8,000
Value end of year $ 7,000
Available-for-sale securities:
Purchase price $ 5,000
Value end of year $ 6,100
Held-to-maturity securities:
Purchase price $20,000
Value end of year $23,000

31. Example: Temporary Changes in Value
Assuming all securities were purchased on the same day, prepare Rocky’s journal entries for:
Purchase.
Year-end adjustments.

32. Example: Temporary Changes in Value (Solution)
Date of Purchase:
Investment in Trading Securities 8,000
Investment in Available-for-Sale
Securities 5,000
Investment in Held-to-Maturity
Securities 20,000
Cash 33,000

33. Example: Temporary Changes in Value (Solution)
End of Year:
Unrealized Loss on Trading Securities 1,000
Market Adjustment--Trading Securities 1,000
Market Adjustment--Available-for-Sale. 1,100
Unrealized Increase/Decrease in
Value Available-for-Sale Securities 1,100
No entry is required for the held-to-maturity securities.

34. FASB No. 115 puts an end to “cherry-picking
FASB No. 115 puts an end to “cherry-picking.” This is the practice of selectively selling securities whose prices have increased, while keeping those that have experienced losses or have maintained their historical cost.

35. Financial Statement Disclosure of Securities
Partial Balance Sheet for Rocky’s
Assets
Invest. in trading securities $8,000
Market adjustment (1,000) $ 7,000
Invest. in available-for-sale sec. 5,000
Market adjustment 1, ,100
Invest. in held-to-maturity sec ,000
Stockholders’ Equity
Add unrealized increase in
available-for-sale securities $ 1,100

36. Financial Statement Disclosure of Securities
Partial Income Statement for Rocky’s
Other Expenses and Losses
Unrealized loss on trading
securities $1,000

37. Sale of Securities
On April 1, 2003, the investment in Silmaril’s debt securities is sold for $103,000, which includes accrued interest of $2,500. Interest revenue of $2,105 ($105,248 x .08 x 3/12) would be recorded. On January 1, the debt securities had a carrying value of $105,248. The required amortization for the three-months’ premium between January 1 and April 1 is $395. To review the purchase transaction, click on the green dot.

38. Sale of Securities
Entry to record accrued revenue and to amortize premium:
Apr. 1 Interest Receivable 2,500
Investment in Held-to
Maturity Securities 395
Interest Revenue 2,105
Entry to record sale:
Apr. 1 Cash 103,000
Realized Loss on Sale of
Securities 4,353
Interest Receivable 2,500 Investment in Held-to
Maturity Securities 104,853

39. Transferring Securities Between Categories
Treatment of
Transferred
Change in Value
From “Trading”
1. Recognize any previously
unrecognized changes.
2. Do not reverse previously
recognized changes.

40. Example: From “Trading”
Assume:
Cost of trading security $1,000
Fair market value, end of Year 1 1,600
Fair market value at transfer in Year 2 1,800
Proper adjusting entries were
made at end of Year 1
Record a transfer to “Available-for-Sale” category.

41. Example: From “Trading”
Investment in Available-for-Sale
Securities 1,800
Market Adjustment--Trading
Securities
Unrealized Gain on Transfer
of Securities
Investment in Trading Securities 1,000
Record a transfer to “Available-for-Sale” category.

42. Transferring Securities Between Categories
Treatment of
Transferred
Change in Value
From “Trading”
1. Recognize any previously
unrecognized changes.
2. Do not reverse previously
recognized changes.
To “Trading”
Recognize any previously
unrecognized changes.

43. Record a transfer to “Trading” classification.
Example: To “Trading”
Assume:
Cost of Available-for-Sale Sec. $10,000
Fair market value, end of Year ,700
Fair market value at Transfer in Year ,300
Proper adjusting entries were
made at End of Year 1
Record a transfer to “Trading” classification.

44. Example: To “Trading” Investment in Trading Securities 8,300
Market Adjustment--Available-for-
Sale Securities 1,300
Unrealized Loss on Transfer
of Securities 700
Unrealized Increase/Decrease in
Value of Available-for-Sale
Securities 1,300
Investment in Available-for-Sale
Securities ,000

45. Transferring Securities Between Categories
Treatment of
Transferred
Change in Value
From “Trading”
1. Recognize any previously
unrecognized changes.
2. Do not reverse previously
recognized changes.
To “Trading”
Recognize any previously
unrecognized changes.
From “Held-to-Maturity” to
Recognize any unrealized
“Available-for-Sale”
changes in value.

46. Example: From “Held-to-Maturity” to “Available for Sale”
Assume:
Cost of Held-to-Maturity Security $40,000
FMV End of Year ,700
FMV at Transfer in Year ,400
Proper adjusting entries were
made at End of Year 1
Record a transfer from “Held-to-Maturity” to “Available-for-Sale” classification.

47. Example: From “Held-to-Maturity” to “Available for Sale”
Investment in Available-for-Sale
Securities ,400
Unrealized Increase/Decrease
in Value of Available-for-
Sale Securities 400
Investment in Held-to-Maturity
Securities 40,000

48. Transferring Securities Between Categories
Treatment of
Transferred
Change in Value
From “Trading”
1. Recognize any previously
unrecognized changes.
2. Do not reverse previously
recognized changes.
To “Trading”
Recognize any previously
unrecognized changes.
From “Held-to-Maturity” to
Recognize any unrealized
“Available-for-Sale”
changes in value.
From “Available-for-Sale” to
Amortize any recognized
“Held-to-Maturity”
unrealized change using the
effective-interest method.

49. Example: From “Available-for-Sale” to “Held-to-Maturity”
Assume:
Cost of Available-for-Sale
securities $6,000
Fair market value, end of Year 1 7,500
Fair market value at Transfer in,
Year 2 6,900
Proper adjusting entries were made
at end of Year 1
Record a transfer from “Available-for-Sale” to “Held-to-Maturity”

50. Example: From “Available-for-Sale” to “Held-to-Maturity”
Investment in Held-to-Maturity Securities 6,900
Unrealized Increase/Decrease
in Value of Available-for-Sale Securities 600
Investment in Available-for-
Sale Securities 6,000
Market Adjustment--Available-
for-Sale Securities 1,500

51. Additional Disclosures Required by FASB 115
Trading securities
The change in net unrealized holding gain or loss that is included in the income statement.
Available-for-sale securities
Aggregate fair value, gross unrealized holding gains and gross unrealized holding losses, and amortized cost basis by major security type.
The proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales and the basis on which cost was determined in computing realized gains and losses.

52. Additional Disclosures Required by FASB 115
Available-for-sale securities (continued):
The change in net unrealized holding gain or loss on available-for-sale securities that has been included in stockholders’ equity during the period.
Held-to-maturity securities:
Aggregate fair value, gross unrealized holding gains and gross unrealized holding losses, and amortized cost basis by major security type.
The company should disclose information about contractual maturities.

53. Additional Disclosures Required by FASB 115
Transfers of securities between categories:
Gross gains and losses included in earnings from transfers of securities from available-for-sale into the trading category.
For securities transferred from held-to-maturity, the company should disclose the amortized cost amount transferred, the related realized or unrealized gain or loss, and the reason for transferring the securities.

54. The End