1 Investments Sid Glandon, DBA, CPA Associate Professor of Accounting The University of Texas at El Paso
1 Investments Sid Glandon, DBA, CPA Associate Professor of Accounting The University of Texas at El Paso.
Mar 28, 2015
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1
Investments
Sid Glandon, DBA, CPA
Associate Professor of Accounting
The University of Texas at El Paso
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Debt Securities Classified as trading
Held for sale in near term to generate income Classified as available-for-sale
Not classified as held-to-maturity or trading securities
Classified as held-to-maturity Positive intent and ability to hold to maturity
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Fact Pattern:Investment in Debt SecuritiesDate Activity Amount
1/1/06 Purchase of bonds $924,18312/31/06 Fair value of bonds 1,000,00012/31/07 Fair value of bonds 975,000
Additional Information: Par value 1,000,000 Discount 75,817 Stated interest rate 8% Effective interest rate 10%
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Debt Securities, Classified as Trading
Valuation Fair value
Unrealized holding gains or losses Recognized in net income
Other income Interest earned Realized gains and losses from sale
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Debt Security, Classified as tradingDate Account Debit Credit
1/1/06 Investment, trading debt security $924,183 Cash $924,183
To record the purchase of a debt security on January 1, 2006, classified as a trading debt investment.
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Debt Security, Classified as trading
FMV, December 31, 2006 $1,000,000Original cost 924,183 Unrealized holding gain $75,817
Date Description Debit Credit1/1/06 Beginning balance $0
12/31/06 Required adjusting journal entry 75,81712/31/06 Required ending balance $75,817
Unrealized holding gain (loss)
T-Account: Fair value adjustment, trading debt securities
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Debt Security, Classified as tradingDate Account Debit Credit
12/31/06 Fair value adjustment, trading debt securities $75,817 Unrealized holding gain, income $75,817
To recognize unrealized holding gain at December 31, 2006 on debt security classified as trading.
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Debt Security, Classified as trading
FMV, December 31, 2007 $975,000Original cost 924,183 Unrealized holding gain $50,817
Date Description Debit Credit1/1/07 Beginning balance $75,817
12/31/07 Required adjusting journal entry $25,00012/31/07 Required ending balance $50,817
Unrealized holding gain (loss)
T-Account: Fair value adjustment, trading debt securities
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Debt Security, Classified as trading
Date Account Debit Credit12/31/07 Unrealized holding loss, income $25,000
Fair value adjustment, trading debt securities $25,000
To recognize unrealized holding loss at December 31, 2007 on debt security classified as trading.
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Date Description Debit Credit1/1/06 Beginning balance $0
12/31/06 Required AJE $75,81712/31/06 Ending balance $75,81712/31/07 Required AJE $25,00012/31/07 Required ending balance $50,817
T-Account: Fair value adjustment, trading debt securities
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Debt Security, Classified as available-for-sale
Valuation Fair value
Unrealized holding gains or losses Recognized as other comprehensive income Recognized as separate component of stockholders’
equity
Other income Interest earned Realized gains and losses from sale
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Debt Security, Classified as available-for-sale
YearInterest Received
Interest Revenue
Amortization of Discount
Carrying Value
Fair Value, End of Year
1/1/06 $924,18312/31/06 $80,000 $92,418 $12,418 936,601 $1,000,00012/31/07 80,000 93,660 13,660 950,261 975,000
Amortization Schedule
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Debt Security, Classified as available-for-sale
Date Account Debit Credit1/1/06 Investment, available-for-sale debt security $1,000,000
Discount on debt security $75,817 Cash 924,183
To record the purchase of a debt security at a discount and classified as available for sale.
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Debt Security, Classified as available-for-sale
FMV, December 31, 2006 $1,000,000Carrying value, December 31, 2006 936,601 Unrealized holding gain $63,399
Date Description Debit Credit1/1/06 Beginning balance $0
12/31/06 Required adjusting journal entry 63,39912/31/06 Required ending balance $63,399
Date Description Debit Credit1/1/06 Beginning balance $0
12/31/06 Required adjusting journal entry 63,39912/31/06 Required ending balance $63,399
Unrealized holding gain (loss)
T-Account: Fair value adjustment, AFS debt securities
T-Account: Unrealized holding (gain) loss, equity
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Debt Security, Classified as available-for-sale
Date Account Debit Credit12/31/06 Fair value adjustment, AFS debt securities $63,399
Unrealized holding gain, equity $63,399
To recognize unrealized holding gain at December 31, 2006 on debt security classified as available-for-sale.
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Debt Security, Classified as available-for-sale
FMV, December 31, 2007 $975,000Carrying value, December 31, 2007 950,261 Unrealized holding gain $24,739
Date Description Debit Credit1/1/07 Beginning balance $63,399
12/31/07 Required adjusting journal entry $38,66012/31/07 Required ending balance $24,739
Date Description Debit Credit1/1/07 Beginning balance $63,399
12/31/07 Required adjusting journal entry $38,66012/31/07 Required ending balance $24,739
Unrealized holding gain (loss)
T-Account: Fair value adjustment, AFS debt securities
T-Account: Unrealized holding (gain) loss, equity
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Debt Security, Classified as available-for-saleDate Account Debit Credit
12/31/07 Unrealized holding loss, equity $38,660 Fair value adjustment, AFS debt securities $38,660
To recognize unrealized holding loss at December 31, 2007 on debt security classified as available-for-sale.
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Date Description Debit Credit1/1/06 Beginning balance $0
12/31/06 Required AJE 63,39912/31/06 Ending balance 63,39912/31/07 Required AJE $38,66012/31/07 Required ending balance $24,739
Date Description Debit Credit1/1/06 Beginning balance $0
12/31/06 Required AJE 63,39912/31/06 Ending balance 63,39912/31/07 Required AJE $38,66012/31/07 Required ending balance $24,739
T-Account: Fair value adjustment, AFS debt securities
T-Account: Unrealized holding (gain) loss, equity
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Debt Securities, Classified as Held-to-Maturity
Valuation Amortized cost
Unrealized holding gains or losses Not recognized
Other income Interest earned Realized gains and losses from sale
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Equity Securities Ownership interests Include rights to buy or sell ownership Extent of ownership determines accounting
treatment for equity securities
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Degrees of Control
0% 20% 50% 100%
Little or None Significant Control
Ownership Percentage
Level of Influence
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Fact Pattern:Investment in Equity Securities
Date Security Shares FVMMarket Value of Investment
9/1/06 Spencer Company 1,000 $27 $27,00012/31/06 Spencer Company 1,000 31 31,00012/31/07 Spencer Company 1,000 29 29,000
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Equity Security, Classified as available-for-sale
Less than 20% ownership interest Recorded at cost Valued and reported at fair value Dividends are recognized as income Unrealized holding gains and losses
Part of comprehensive income A component of stockholders’ equity
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Equity Security, Classified as available-for-sale
Date Account Debit Credit9/1/06 Investment, AFS equity securities $27,000
Cash $27,000
To record the purchase of 1,000 shares of Spencer Company common stock at $27 per share.
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Equity Security, Classified as available-for-sale
FMV, December 31, 2006 $31,000Original cost 27,000 Unrealized holding gain $4,000
Date Description Debit Credit9/1/06 Beginning balance $0
12/31/06 Required adjusting journal entry 4,00012/31/06 Required ending balance $4,000
Date Description Debit Credit9/1/06 Beginning balance $0
12/31/06 Required adjusting journal entry 4,00012/31/06 Required ending balance $4,000
Unrealized holding gain (loss)
T-Account: Fair value adjustment, AFS equity securities
T-Account: Unrealized holding (gain) loss, equity
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Equity Security, Classified as available-for-sale
Date Account Debit Credit12/31/06 Fair value adjustment, AFS equity securities $4,000
Unrealized holding gain, equity $4,000
To record the unrealized holding gain on Spencer Company common stock on December 31, 2006.
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Equity Security, Classified as available-for-sale
FMV, December 31, 2007 $29,000Original cost 27,000 Unrealized holding gain $2,000
Date Description Debit Credit9/1/07 Beginning balance $4,000
12/31/07 Required adjusting journal entry $2,00012/31/07 Required ending balance $2,000
Date Description Debit Credit9/1/07 Beginning balance $4,000
12/31/07 Required adjusting journal entry $2,00012/31/07 Required ending balance $2,000
Unrealized holding gain (loss)
T-Account: Fair value adjustment, AFS equity securities
T-Account: Unrealized holding (gain) loss, equity
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Equity Security, Classified as available-for-sale
Date Account Debit Credit12/31/07 Unrealized holding loss, equity $2,000
Fair value adjustment, AFS equity securities $2,000
To record unrealized holding losses on AFS equity securities on December 31, 2007.
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Equity Security, Classified as available-for-sale
Date Description Debit Credit9/1/06 Beginning balance $0
12/31/06 Required AJE 4,00012/31/06 Ending balance 4,00012/31/07 Required AJE $2,00012/31/07 Required ending balance $2,000
Date Description Debit Credit9/1/06 Beginning balance $0
12/31/06 Required AJE 4,00012/31/06 Ending balance 4,00012/31/07 Required AJE $2,00012/31/07 Required ending balance $2,000
T-Account: Fair value adjustment, AFS equity securities
T-Account: Unrealized holding (gain) loss, equity
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Trading Less than 20% ownership interest Recorded at cost Valued and reported at fair value Dividends are recognized as income Unrealized holding gains and losses
Recognized in net income
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Equity Security, Classified as trading
Date Description Debit Credit9/1/06 Beginning balance $0
12/31/06 Required AJE 4,00012/31/06 Ending balance 4,00012/31/07 Required AJE $2,00012/31/07 Required ending balance $2,000
T-Account: Fair value adjustment, trading equity securities
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Equity Security, Classified as tradingDate Account Debit Credit
12/31/06 Fair value adjustment, trading equity securities $4,000 Unrealized holding gain, income $4,000
Date Account Debit Credit12/31/07 Unrealized holding loss, income $2,000
Fair value adjustment, trading equity securities $2,000
To record unrealized holding losses on trading equity securities on December 31, 2007.
To record the unrealized holding gain on Spencer Company common stock on December 31, 2006 which is classified as trading equity securities..
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Equity Method Between 20% and 50% ownership interest Substantive economic relationship Investor’s carrying value
Increased by proportionate share of earnings Decreased by
Dividends, and Proportionate share of losses
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Consolidation More than 50% voting interest Investor is parent Investee is subsidiary Investor prepares consolidated financial
statements Investor accounts for investment on its
books using the equity method
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Investments In Equity Securities
Ownership in Capital Stock
< 20% voting 20-50% voting >50% voting
Trading Available for Sale
No Consolidation
Consolidation
Fair Value
Fair Value
EquityMethod
EquityMethod
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Accounting by Category
Category ValuationUnrealized Holding Gains and Losses Other Income
< 20% ownership
Trading Fair value Net incomeDividends; gain or loss on sale
Available-for-Sale Fair valueComprehensive income, separate component of
shareholders' equity
Dividends; gain or loss on sale
20% - 50% ownership Equity method Not recognizedProportionate
share of income or loss
> 50% ownership Consolidate Not recognized No applicable
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Transfers of Classifications
FROM TOUNREALIZED GAIN OR LOSS ON
TRANSFERTrading Available-for-sale None, already recognized in incomeTrading Held-to-maturity None, already recognized in incomeAvailable-for-sale Trading Include in current incomeAvailable-for-sale Held-to-maturity FV becomes amortized cost basisHeld-to-maturity Trading Include in current incomeHeld-to-maturity Available-for-sale Include in equity, other comprehensive income
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