CHAPTER 17Investmentsin Debt and Equity Securities……..…………………………………………………………...

Debtheld-to-maturity

Debtplan to sell

Equityplan to sell

Equityexercise some control

Amortized cost

Fair value

Fair value

Equity method

DEBT SECURITIES

Held-to-maturity intent and ability to hold security until it matures

Trading held primarily for sale in the near term

Available-for-sale none of the above

HELD-TO-MATURITY SECURITIES

1/1/03 Purchased a $50,000, 10% bond for $51,388. The bond pays semiannual interest and matures 7/1/04.

Periods Rate PV Annuity FV AD?

Most firms do not record separate premium or discount.

1/1/03

Effective interest = 8%

DateCash Rec’d

Interest Rev.

PremiumAmortiz

Carrying Amount

1/1/03 $51,388

7/1/03

1/1/04

7/1/04

7/1/03

6/1/04 Sold bond for $50,050 plus $2,083 accrd interest.

DateCash Rec’d

Interest Rev.

PremiumAmortiz

Carrying Amount

1/1/04 2,500 2,038 462 50,482

7/1/04 2,500 2,018 482 50,000

12/31/03

6/1/04

AVAILABLE-FOR-SALE SECURITIES

6/30/02 Purchased a $20,000, 4-year, 7% bond for $18,681 (effective yield=9%).

DateCash Rec’d

Interest Rev.

PremiumAmortiz

Carrying Amount

12/31/02 700 841 141 18,822

6/30/02

12/31/02

12/31/02 Fair value = $19,340; carrying amount = $18,822.

1/1/03 Sold bonds for $19,440.

12/31/03 Adjust fair value adjustment account.

1/1/03

12/31/02

12/31/03

Securities Fair Value Adjustment (AFS) is an asset valuation account that is added to or subtracted from the Available-for-Sale Securities account.

Unrealized Holding Gain or Loss - Equity is reported as part of Other Comprehensive Income.

The year-end adjustment will eliminate any unrealized gains or losses accumulated in the Securities Fair Value Adjustment (AFS) account related to securities that have been sold.

Adjusting Securities to Fair Value

TRADING SECURITIES

12/31/02 Secur FV Adjustment (Trading) 518Unrealiz Holding G/L - Income 518

Similar to available-for-sale securities, except unrealized gains and losses are closed to net income.

EQUITY SECURITIES

Holdings of less than 20%

• fair value method• AFS or trading

Holdings between 20% and 50%

• equity method

Holdings of more than 50%

• consolidated statements

Accounting treatment the sameas with debt securities.

HOLDINGS BETWEEN 20% AND 50%

Investor is presumed to exercise “significant influence” if holding 20% or more of voting stock.

Unless there is evidence to the contrary. Investment:

recorded at cost not adjusted to market price increased by share of net income

(revenue distinguished from extraordinary G/L)

decreased by amortization of excess of cost over share of book value

decreased by amount of dividends received

OTHER REPORTING ISSUES

Financial Statement Presentation

Total fair value, unreal holding G/L, amortized cost

for each major security type Summary info. about debt maturities

Notes for AFS & Held-to Maturity

Notes for Equity Method Investments

Name of investee & % ownership Underlying equity (if different from carrying

value) Fair value

10,000

Trading Secur50,000

40,000

Loss: Sale of Sec

600

Sec FV Adjust

1,4001,000

400

Unreal Hold G/L

1,000

Reclassification Adjustments

Other comprehensive incomeTotal holding gains for periodLess: Reclass adj for losses included in net income

Trading Secur50,000

Sec FV Adjust

1,400

Impairment of Value

2/1/07 Loss on Impairment 1,400Sec FV Adjust 1,400

Unrealiz Hold G/L 1,400Trading Securities 1,400

If decline in value in not temporary, record impairment.