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

2. 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.

3. 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

4. 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)

5. 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.

6. Exercise 17-3 1.Determine the amount of interest income to be recognized on December 31, 2003 2.Determine the amount to be credited to bond investment on December 31, 2004

7. Exercise 17-18 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

8. 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

9. 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

10. 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

11. 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

12. 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

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

14. 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

15. 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)

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

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

18. Exercise 17-12 (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

19. 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.

20. Answers 1.(slide 6a) $32,274.44 2.(slide 6b) $ 4,098.11 3.(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