Professional Documents
Culture Documents
ACCOUNTING
Chapter 13
Investments and Long-Term Receivables
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Investing for the Future
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How Are Investments Classified And Valued?
(Slide 1 of 4)
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How Are Investments Classified And Valued?
(Slide 2 of 4)
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How Are Investments Classified And Valued?
(Slide 3 of 4)
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How Are Investments in Held-To-Maturity
Securities Measured and Recorded?
When a company has the positive ability and intent to
hold a debt security to maturity, it can be reported as a
held-to-maturity security.
The investment is initially recorded at cost.
The investment is subsequently reported at amortized cost on
the ending balance sheet(s).
Unrealized holding gains and losses are not recorded but are
disclosed in the notes to the financial statements.
Interest income is recognized in net income as it is earned,
along with any realized gains and losses on sales.
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Recording Initial Cost
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Recognition of Interest Income and
Amortization of Bond Premiums and
Discounts
The amount of interest income recognized each
accounting period is based on the effective interest rate
determined at the time of acquisition using the following
formula:
Interest Income = Market Interest Rate × Book Value of the Investment at
the Beginning of Period
The effective interest method (interest method) of
amortizing bond discounts and premiums:
Amortization of = Interest Revenue ‒ Cash Interest Payment
Discount/Premium
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How Are Investments in Trading Securities
Measured and Recorded?
Recall that when investments in debt and equity securities are
actively bought and sold with the intention to profit on short-
term changes in price, they are classified as trading securities.
The accounting for trading securities applies the most
complete fair value measurement approach, as follows:
The investment is initially recorded at cost.
The investment is subsequently reported at fair value on the balance
sheet.
Unrealized holding gains and losses resulting from changes in the fair
value of the securities are included in the net income of the current
period.
Interest and dividend income, as well as realized gains and losses, are
included in net income of the current period.
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Recognition of Unrealized Holding
Gains and Losses
On its ending balance sheet, a company reports any
investments in trading securities at fair value.
An increase in the fair value of investment securities is an
unrealized holding gain.
A decrease in the fair value of investment securities is an
unrealized holding loss.
For investments in trading securities, the Unrealized
holding Gain/Loss account is a temporary account that is
closed to Retained Earnings.
A debit balance in the account represents a net unrealized loss.
A credit balance represents a net unrealized gain.
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How Are Investments in Available-for-Sale
Securities Measured and Recorded?
The investment is initially recorded at cost.
The investment is subsequently reported at fair value on the
balance sheet.
Unrealized holding gains and losses resulting from changes in the
fair value of the securities are reported as a component of other
comprehensive income of the current period.
Interest and dividend income are included in net income for the
current period.
When a security is sold, realized gains and losses are included in
net income for the current period, and any unrealized holding
gains or losses must be reclassified from accumulated other
comprehensive income into net income.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Recognition of Unrealized Holding
Gains and Losses
On its ending balance sheet, a company reports any investments in
available-for-sale securities at fair value.
The major difference in the accounting for investments in available-for-
sale and trading securities is that in available-for-sale securities, a
company reports its unrealized gains and losses in its other comprehensive
income.
A credit balance in the Unrealized Holding Gain/Loss account represents
the cumulative net unrealized holding gains and is reported as a positive
element in the accumulated other comprehensive income section of
shareholders’ equity.
A debit balance in the account represents the cumulative net unrealized
holding losses and is reported as a negative element in the accumulated
other comprehensive income section of stockholders’ equity.
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Summary of Accounting for Investments
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Transfer of Investments between Categories
(Slide 2 of 2)
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Impairments
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Minority Active Investments: The Equity
Method
When an investor company owns a sufficiently large
percentage of the common stock of another company, it is
able to exert significant influence over the financial and
operating policies of the investee company.
Significant influence is determined by factors such as
representation on the board and participation in policy-making
processes.
In the absence of the contrary, an investment of 20% or more
in the outstanding common stock of the investee leads to the
presumption of significant influence.
The equity method of accounting is used to account for
investments in which significant influence exists.
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Impairment: Other Than Temporary
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Change to Equity Method
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How are Investments Disclosed
in the Financial Statements? (Slide 1 of 3)
Trading Securities: A company should disclose:
Aggregate fair value
Change in the net unrealized holding gain or loss that
is included in each income statement
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How are Investments Disclosed
in the Financial Statements? (Slide 2 of 3)
For each income statement period, a company
should disclose:
Proceeds from sales and the gross realized gains and
losses on those sales
Basis on which cost was determined
Gross gains and gross losses included in net income
from transfers of securities from this category into the
trading category
Change in the net unrealized holding gain or loss
included as a separate component of other
comprehensive income
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How are Investments Disclosed
in the Financial Statements? (Slide 3 of 3)
Held-to-Maturity Debt Securities: For each
balance sheet date, a company should disclose
Aggregate fair value
Gross unrecognized holding gains and losses
Amortized cost
The related realized or unrealized gain or loss and the
circumstances leading to the decision to sell or transfer
the security
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Long-Term Notes Receivable
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Loan Fees and Loan Origination Costs
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Cash Surrender Value of Life Insurance
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Investment in Funds
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Derivatives of Financial Instruments
(Slide 1 of 3)
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Derivatives of Financial Instruments
(Slide 2 of 3)
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