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Transcript of Ch17 Reviewed
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8/9/2019 Ch17 Reviewed
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Investments in
Debt Securities
Investments in
Equity Securities
Other Reporting
Issues
Held-to-maturity
securities
Available-for-sale
securities
Trading securities
Holdings of less than
20%
Holdings between 20%
and 50%
Holdings of more than
50%
Fair value option
mpairment of value
!eclassification
ad"ustments
Investments
Investments
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Different motivations for investing:
To earn a high rate of return#
To secure certain operating or financing arrangements
with another company#
Investment Accounting Approaches
Investment Accounting Approaches
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$ompanies account for investments based on
the type of security &debt or e'uity(
their intent with respect to the investment#
Investment Accounting Approaches
Investment Accounting Approaches
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)ebt securities &creditor relationship(
Investments in Debt Securities
Investments in Debt Securities
* +#,# governmentsecurities
* unicipal securities
* $orporate bonds
* $onvertible debt
* $ommercial paper
Type
* Held-to-maturity* Trading
* Available-for-sale
Accounting $ategory
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Investments in Debt Securities
Investments in Debt Securities
Accounting for )ebt ,ecurities by $ategory
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Heldto!aturity Securities
Heldto!aturity Securities
$lassify a debt security as heldtomaturityonly if it has
both
&.( the positive intent and
&2( the abilityto hold securities to maturity#
Accounted for atamorti"ed cost/ not fair value#
Amortie premium or discount using the effectiveinterestmethod unless the straight-line method yields a similar
result#
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!obinson $ompany purchased1.00/000 of percent bonds
of 3vermaster $orporation on 4anuary ./ 20.5/ at a discount/
paying 12/26# The bonds mature 4anuary ./ 2020 and yield
.0%7 interest is payable each 4uly . and 4anuary .# !obinsonrecords the investment as follows
#anuary $% &'$(
)ebt investments 2/26
$ash 2/26
Heldto!aturity SecuritiesHeldto!aturity Securities
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Heldto!aturity SecuritiesHeldto!aturity Securities
Effective Interest Calculation
8% bond, 10% yield, 100,000 face, semi-annual
Date Cash Rec'v Interest RevDisc
!morti"ation Carryin# !mt
1$1$01& ,(8(
($1$01& ),00000 ),*1+1 *1+1 ,818
1$1$01* ),00000 ),*))*1 *))*1 +,&+*(
($1$01* ),00000 ),*(*8) *(*8) ),1+*+
1$1$01( ),00000 ),(10*8 (10*8 ),)+1
($1$01( ),00000 ),()* ()* &,*(0&
1$1$018 ),00000 ),(8+&+ (8+&+ *,)&)0&($1$018 ),00000 ),8(0 8(0 (,(*(&
1$1$01 ),00000 ),8*+8) 8*+8) 8,1)0&
($1$01 ),00000 ),0(0+ 0(0+ ,0)(*
1$1$00 ),00000 ),&+8 &+8 100,00000
)0,00000 )(,(1(+ (,(1(+ 100,00000
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!obinson $ompany records the receiptof the first semiannualinterest payment on 4uly ./ 20.5/ as follows
$ash 8/000
)ebt nvestments 9.8
nterest !evenue 8/9.8
Heldto!aturity SecuritiesHeldto!aturity Securities
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!obinson is on a calendar-year basis/ it accrues interest andamorties the discount at )ecember :./ 20.5/ as follows
nterest !eceivable 8/000
)ebt nvestments 985
nterest !evenue 8/985
Heldto!aturity SecuritiesHeldto!aturity Securities
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Heldto!aturity SecuritiesHeldto!aturity Securities
Assume that !obinson $ompany sells its investment in
3vermaster bonds on ;ovember ./ 20./ at < plus accrued
interest# !obinson records this discount amortiation as
follows
)ebt nvestments 9:5
nterest !evenue 9:5
)*(& + ,-. / ).0(
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Heldto!aturity SecuritiesHeldto!aturity Securities
LO 2
$omputation of gain on sale of bonds
Cash 10,)1( (&0.**(/Interest Revenue )$* ),000/ ,**(
Debt Investments ,*8+
2ain on 3ale of 3ecurities *(
3ellin# 4rice of bonds ,(&000
5ess6 7oo 9alue of 7onds on 11$1$1
!morti"ed cost ($1$1 ,0)800
!dd6 Discount amorti"ed from ($1 - 11$1$1 *+&00 ,*8+002ain on 3ale of 7onds *(00
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YOU TRY #1
3ateboardin# :ee4s, 55:, 4urchased &0,000 of 10% bonds from ;ot Rod:ee4s on
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Debt Investment )*,+1*
Cash )*,+1*
Cash ,&0000Debt Investment (0
Interest Revenue ,((0
Effective Interest Calculation
10% bond, 1% yield, &0,000 face, semi-annual
Date Cash Rec'v Interest Rev Disc !morti"ation Carryin# !mt
1$1$01& )*,+1*
($1$01& ,&0000 ,((0 (0 )*,&1&
1$1$01* ,&0000 ,(&& && )*,8&10
($1$01* ,&0000 ,81+(1 +1+(1 )(,0881
1$1$01( ,&0000 ,8+&+ ++&+ )(,&)1+)
($1$01( ,&0000 ,8&)8 +&)8 )(,8+8
1$1$018 ,&0000 ,8(+*+ +(+*+ )8,*()&
($1$018 ,&0000 ,8*0& +*0& )8,**+)
1$1$01 ,&0000 ,181 )181 ),08++0
($1$01 ,&0000 ,)&00 ))&00 ),&8+0
1$1$00 ,&0000 ,(1(0 )(1(0 &0,00000 &,00000 8,*800) +,*800) &0,00000
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YT #1, CONT.
>o? 4resume 3ateboard :ee4s sells its investment in ;ot Rod at&, 4lus accrued interest on @ctober 1, 01
Record the discount and the sale
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YT# 1 CONCLUSION
3ellin# :rice of 7onds &0A &/ ),(&000
5ess6 7oo 9alue of 7onds on 10$1$1
!morti"ed cost ($1$1 ),&8+0
Discount ($1 to 10$1 )(1(0 B +$*// +&8& ),(*)1&
5oss on 3ale of 7onds 1)1&/
Cash &1,00000
5oss on 3ale 1)1&
Debt Investment ),&8+0 +&8&/ ),(*)1&
Interest Revenue ,&00 +$*// 1,&000
&1,01)1& &1,01)1&
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$ompanies report available-for-sale securities at
* fair value/ with
* unrealied holding gains and losses reported as part
of comprehensive income &e'uity(#
* Any discount or premium is amortied#
AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities
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=raff $orporation purchases 1.00/000/ .0 percent/ five-year
bonds on 4anuary ./ 20.5/ with interest payable on 4uly . and
4anuary .# The bonds sell for 1.0/..0#0/ which results in a
bond premium of 1/..0#0 and an effective interest rate of percent# =raff records the purchase of the bonds on 4anuary ./
20.5/ as follows#
)ebt nvestments .0/..0#0
$ash .0/..0#0
AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities
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AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities
Effective Interest Calculation
10% bond, 8% yield, 100,000 face, semi-annual
Date Cash Rec'v Interest RevDisc
!morti"ation Carryin# !mt
1$1$01& 108,1100
($1$01& &,00000 ),+))) *(&&* 10(,)+&++1$1$01* &,00000 ),()1 (0& 10*,(+()
($1$01* &,00000 ),*+1 (+0* 10*,000&
1$1$01( &,00000 ),)008 (& 10&,)1)
($1$01( &,00000 ),0* (0+1 10),)&18
1$1$018 &,00000 ),1(80( 81+ 10+,*8($1$018 &,00000 ),1)&0 8&)80 10,((&0
1$1$01 &,00000 ),11100 8800 101,88*0
($1$01 &,00000 ),0(&)) )&* 100,*1&)
1$1$00 &,00000 ),0+8)* *1&) 100,00000
&0,00000 )1,8810 8,1100 100,00000
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At )ecember :./ 20.5/ =raff ma>es the following entry to
recognie interest revenue#
nterest !eceivable 5/000)ebt nvestments 60:
nterest !evenue 8/26
=raff reports revenue of 1/92. for 20.5 &18/:28 ? 18/26(#
AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities
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To apply the fair value method to these debt securities/ assumethat at year-end the fair value of the bonds is 1.05/000 and that
the carrying amount of the investments is 1.09/6:2# =raff
ma>es the following entry#
+nrealied Holding =ain or @oss3'uity ./6:2
Fair Balue Ad"ustment &AF,( ./6:2
AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities
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Cebb $orporation has two debt securities classified as
available-for-sale# The following illustration identifies the
amortied cost/ fair value/ and the amount of the unrealied gain
or loss#
AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities
!3 Debt 3ecurity :ortfolio
1$+1$01*
Investments !morti"ed Cost air 9alue R 2ain$5oss
atson Cor4 8% 7onds +,&+(00 10+,*0000 10,0*+00!nacom4 Cor4 10% 7onds 00,00000 180,)0000 1,*0000/
=otal +,&+(00 8),00000 ,&+(00/
7alance in 9 adFustment account -
9 !dFustment Credit/ ,&+(00/
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Cebb ma>es an ad"usting entry to a valuation allowance on
)ecember :./ 20.9 to record the decrease in value and to
record the loss as follows#
+nrealied Holding =ain or @oss3'uity /5:6
Fair Balue Ad"ustment &AF,( /5:6
Cebb reports the unrealied holding loss of 1/5:6 as other
comprehensive income and a reduction of stoc>holdersD e'uity#
AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities
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PETER COTTONTAIL
In his first year in business, :eter Cottontail Enter4rises has + debt securities
classified as !3 =he follo?in# details these holdin#s6
Investment !morti"ed Cost air 9alue R 2ain$5oss
;i44ity ;o4 ;a44enin#s &0,00000 *1,00000 11,00000Chicadee Cheesy 4oufs 1*&,00000 1&8,00000 (,00000/
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PETER, CONCLUDED
9 !dFustment !3/ ,&0000
nreali"ed ;oldin# 2ain EHuity/ ,&0000
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Sale of AvailableforSale Securities
f company sells bonds before maturity date
* ust ma>e entry to remove the/
* $ost in Available-for-,ale ,ecurities and
* ,ecurities Fair Balue Ad"ustment accounts#
* Any realied gain or loss on sale is reported in the
Ether eGpenses and losses section of the income
statement#
AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities
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Cebb $orporation sold the Catson bonds on 4uly ./ 20.6/ for10/000/ at which time it had an amortied cost of 18/2.8#
$ash 0/000
@oss on ,ale of nvestments 8/2.8
)ebt nvestments 8/2.8
AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities
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Cebb reports this realied loss in the Ether eGpenses andlosses section of ther $omprehensive ncome# Assuming no
other purchases and sales of bonds in 20.6/ Cebb on
)ecember :./ 20.6/ prepares the information
AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities
!3 Debt 3ecurity :ortfolio
1$+1$01(
Investments !morti"ed Cost air 9alue R 2ain$5oss
!nacom4 Cor4 10% 7onds 00,00000 1&,00000 &,00000/=otal 00,00000 1&,00000 &,00000/
7alance in 9 adFustment account ,&+(00/
9 !dFustment Debit/ ),&+(00
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3rading Securities3rading Securities
$ompanies report trading securities at
fair value/ with
unrealied holding gains and losses reported as part
of net income#
Any discount or premium is amortied#
DebtSecurities
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n )ecember :./ 20.5/ Cestern Iublishing $orporationdetermined its trading securities portfolio to be as follows
3rading Securities3rading SecuritiesDebtSecurities
=3 Debt 3ecurity :ortfolio1$+1$01&
Investments !morti"ed Cost air 9alue R 2ain$5oss
7urlin#ton >orth 10% bonds )+,8*000 &1,&0000 (,*)000
2 Cor4 11% bonds 18),+000 1(&,0000 ,0+000/
=ime arner 8% bonds 8*,+*000 1,&0000 &,1)000
=otal )+,8*000 &1,&0000 +,(&000
7alance in 9 adFustment account -
9 !dFustment Debit/ +,(&000
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At )ecember :./ Cestern Iublishing ma>es an ad"usting entry
Fair Balue Ad"ustment &Trading( :/650
+nrealied Holding =ain or @ossncome :/650
3rading Securities3rading SecuritiesDebtSecurities
=3 Debt 3ecurity :ortfolio
1$+1$01&
Investments !morti"ed Cost air 9alue R 2ain$5oss
7urlin#ton >orth 10% bonds )+,8*000 &1,&0000 (,*)000
2 Cor4 11% bonds 18),+000 1(&,0000 ,0+000/
=ime arner 8% bonds 8*,+*000 1,&0000 &,1)000
=otal )+,8*000 &1,&0000 +,(&000
7alance in 9 adFustment account -
9 !dFustment Debit/ +,(&000
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Hendric>s $orporation purchased trading investment bonds for150/000 at par# At )ecember :./ Hendric>s received annual
interest of 12/000/ and the fair value of the bonds was 186/800#
&a( Irepare the "ournal entry for the purchase of the
investment#
&b( Irepare the "ournal entry for the interest received#
&c( Irepare the "ournal entry for the fair value ad"ustment#
3rading Securities3rading SecuritiesDebtSecurities
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Irepare the "ournal entries for &a( the purchase of the investment/&b( the interest received/ and &c( the fair value ad"ustment#
&a( )ebt investments 50/000
$ash 50/000
&b( $ash 2/000
nterest revenue 2/000
&c( +nrealied Holding @oss - ncome 2/900
Fair Balue Ad"ustment &Trading( 2/900
3rading Securities3rading SecuritiesDebtSecurities
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Investments in Equity SecuritiesInvestments in Equity Securities
!epresent ownership of capital stoc>#
$ost includes
price of the security/ plus
bro>erDs commissions and fees related to purchase#
The degree to which one corporation 1investor2ac'uires an
interest in the common stoc> of another corporation 1investee2
generally determines the accounting treatment for the investment
subse'uent to ac'uisition#
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Investments in Equity SecuritiesInvestments in Equity Securities
Accounting and !eporting for 3'uity ,ecurities by $ategory
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Holdings of 9ess 3han &'Holdings of 9ess 3han &'
AvailableforSale Securities+pon ac'uisition/ companies record available-for-sale securities
at cost#
n ;ovember :/ 20.5 !epublic $orporation purchased common
stoc> of three companies/ each investment representing less than
a 20 percent interest#
Cost
>orth?est Industries, Inc &,(0000
Cam4bell 3ou4 Co +1(,&0000
3t Re#is :ul4 Co 1)1,+&000
(18,&&000
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Holdings of 9ess 3han &'Holdings of 9ess 3han &'
!epublic records these investments on ;ovember :/ 20.5/ as
follows#
3'uity nvestments 6./550$ash 6./550
n )ecember 9/ 20.5/ !epublic receives a cash dividend of
18/200 from $ampbell ,oup $o#$ash 8/200
)ividend revenue 8/200
AvailableforSale Securities
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Holdings of 9ess 3han &'Holdings of 9ess 3han &'
!epublicDs available-for-sale e'uity security portfolio on )ecember :./ 20.5
AvailableforSale Securities
Cost air 9alue nreali"ed 2$5
>orth?est Industries, Inc &,(0000 (&,00000 1&,+0000
Cam4bell 3ou4 Co +1(,&0000 +0),00000 1+,&0000/
3t Re#is :ul4 Co 1)1,+&000 10),00000 +(,+&000/
(18,&&000 *8+,00000 +&,&&000/
:revious 9 !dFustment 7al -
9 !dFustment - CR6 +&,&&000/
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Holdings of 9ess 3han &'Holdings of 9ess 3han &'
n )ecember :./ 20.5/ !epublic records the net unrealied
gains and losses related to changes in the fair value of available-
for-sale e'uity securities in an +nrealied Holding =ain or @oss
3'uity account#
+nrealied Holding =ain or @oss3'uity :5/550
Fair Balue Ad"ustment &AF,( :5/550
AvailableforSale Securities
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Holdings of 9ess 3han &'Holdings of 9ess 3han &'
n 4anuary 2:/ 20.9/ !epublic sold all of its ;orthwest
ndustries/ nc# common stoc> receiving net proceeds of
126/220#
AvailableforSale Securities
>et :roceeds from 3ale 8(,000
Cost of >orth?est 3toc &,(0000
2ain on 3ale (,&000
Cash 8(,000
EHuity Investment - !3 (&,00000
9 !dFustment - !3 1&,+0000
2ain on 3ale (,&000
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Holdings of 9ess 3han &'Holdings of 9ess 3han &'
n February .0/ 20.9/ !epublic purchased 20/000 shares of
$ontinental Truc>ing at a price of 1.2#65 per share plus
bro>erage commissions of 1./50 &total cost/ 1259/50(#
AvailableforSale Securities
Cost air 9alue nreali"ed 2$5
Continental =rucin# &*,8&000 (8,+&000 1,&0000
Cam4bell 3ou4 Co +1(,&0000 +*,&&000 )&,0&000
3t Re#is :ul4 Co 1)1,+&000 1+,0&000 ,+0000/
(1&,(0000 ((,&000 *),&000
:revious 9 !dFustment 7al - CR &0,8&000/
9 !dFustment - DR6 11&,10000
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Holdings of 9ess 3han &'Holdings of 9ess 3han &'
Cost air 9alue nreali"ed 2$5
Continental =rucin# &*,8&000 (8,+&000 1,&0000Cam4bell 3ou4 Co +1(,&0000 +*,&&000 )&,0&000
3t Re#is :ul4 Co 1)1,+&000 1+,0&000 ,+0000/
(1&,(0000 ((,&000 *),&000
:revious 9 !dFustment 7al - CR &0,8&000/9 !dFustment - DR6 11&,10000
9 !dFustment - !3 11&,10000
nreali"ed ;oldin# 2$5 - EHuity 11&,10000
>ote6 Endin# 7alance in 9 !dFustment account &0,8&0/ .11&,100 *),&000
-+&,&&0 - 1&,+00 -&0,8&0
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c3lroy $ompany has the following portfolio of securities at
,eptember :0/ 20.5/ its last reporting date#
Holdings of 9ess 3han &'Holdings of 9ess 3han &'
Date =radin# 3ecurities Event Cost 9 $+0$1& 1$+1$1& 9
$+0$01&;orton &,000 c/ 1&,00000 00,00000 >$!
$+0$01&onty +,&00 4/ 1++,00000 1)0,00000 10*,00000
$+0$01&@a?ood 1,000 c/ 180,00000 1(,00000 1+,00000
10$10$01&;orton &,000 c/ 3ales &)00 4er share (0,00000 >$!
11$$01&:atriot +,000 c/:urchase &)&0 4ershare
1*+,&0000 1+,00000
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Irepare the "ournal entries to record the sale/ purchase/ and
ad"usting entries related to the trading securitiesin the last
'uarter of 20.5#
Holdings of 9ess 3han &'Holdings of 9ess 3han &'
8ortfolio at September 0'% &'$(
Date =radin# 3ecurities Cost 9 $+0$1& nreali"ed 2$5
$+0$01& ;orton &,000 c/
1&,00000 00,00000 1&,00000/
$+0$01& onty +,&00 4/
1++,00000 1)0,00000 (,00000
$+0$01& @a?ood 1,000 c/
180,00000 1(,00000 1,00000/
=otal &8,00000 &1,00000 ,00000/
:revious 9 adFustment balance -
9 adFustment - CR ,00000/
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Irepare the "ournal entries to record the sale/ purchase/ and
ad"usting entries related to the trading securitiesin the last
'uarter of 20.5#
Holdings of 9ess 3han &'Holdings of 9ess 3han &'
10$10$1& - ;orton
Cash (0,00000
9 !dFustment - I3 1&,00000
EHuity Investment 00,00000
2ain on 3ale 8&,00000
11$$1& - :atriot
EHuity Investment 1*+,&0000
Cash 1*+,&0000
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Holdings of 9ess 3han &'Holdings of 9ess 3han &'
Date =radin# 3ecurities Cost 1$+1$1& 9 nreali"ed 2$5
$+0$01& onty +,&00 4/
1++,00000 10*,00000 (,00000/
$+0$01& @a?ood 1,000 c/
180,00000 1+,00000 1+,00000
11$$01& :atriot +,000 c/
1*+,&0000 1+,00000 +1,&0000/
)&,&0000/
:revious 7alance 9 !dFustment -,000 . 1&,000/ *,00000
&1,&0000/
nreali"ed ;oldin# 5oss - I3
&1,&0000
9 adFustment =3 &1,&0000
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How would the entries change if the securities were classified as
availableforsaleJ
Holdings of 9ess 3han &'Holdings of 9ess 3han &'
The entries would be the same eGcept that the
+nrealied Holding =ain or @oss3'uity account is used
instead of +nrealied Holding =ain or @ossncome#
The unrealied holding loss would be deducted from the
stoc>holdersD e'uity section rather than charged to the
income statement#
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Holdings ;et7een &' and ('Holdings ;et7een &' and ('
An investment &direct or indirect( of 20 percent or more of thevoting stoc> of an investee should lead to a presumption that
in the absence of evidence to the contrary/ an investor has the
ability to eGercise significant influenceover an investee#
n instances of Esignificant influence/ the investor must
account for the investment using the equity method#
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Holdings ;et7een &' and ('Holdings ;et7een &' and ('
Equity !ethod!ecord the investment at cost and subse'uently ad"ust
the amount each period for
the investorDs proportionate share of the earnings&losses( and
dividends received by the investor#
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n 4anuary ./ 20.5/ eredith $orporation purchased 25% of thecommon shares of Iirates $ompany for 1200/000# )uring the
year/ Iirates earned net income of 10/000 and paid dividends of
120/000#
Irepare the entries for eredith to record the purchase and any
additional entries related to this investment in Iirates $ompany
in 20.5#
Holdings ;et7een &' and (': Equity !ethodHoldings ;et7een &' and (': Equity !ethod
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Irepare the entries for eredith to record the purchase and any
additional entries related to this investment in Iirates $ompany in
20.5#
Holdings ;et7een &' and ('Holdings ;et7een &' and ('
&10/000 G 25%(
EHuity Investment - :irates 00,00000
Cash 00,00000
Purchase
EHuity Investment - :irates 0,00000
Investment Revenue 0,00000
Income
Cash &,00000
EHuity Investment - :irates &,00000
Dividends
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YT3: EQUITY METHOD
@n
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Holdings of !ore 3han ('Holdings of !ore 3han ('
6ontrolling Interest- Chen one corporation ac'uires a
voting interest of more than 50 percent in another
corporation
* nvestor is referred to as the parents as a long-term investment#
* Iarent generally prepares consolidated financial
statements#
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Impairment of 5alueImpairment of 5alue
,tric>ler $ompany holds available-for-sale bond securities with apar value and amortied cost of 1. million# The fair value of these
securities is 100/000# ,tric>ler has previously reported an
unrealied loss on these securities of 1200/000 as part of other
comprehensive income# n evaluating the securities/ ,tric>ler nowdetermines that it probably will not collect all amounts due# t
records this impairment as follows#
@oss on impairment 200/000)ebt investments 200/000
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Reclassification Ad=ustmentsReclassification Ad=ustments
The reporting of changes in unrealied gains or losses incomprehensive income is straightforward unless a company sells
securities during the year#
n that case/ double counting results when the company reports
realied gains or losses as part of net income but also shows theamounts as part of other comprehensive income in the current
period or in previous periods#
To ensure that gains and losses are not counted twice when a sale
occurs/ a reclassification ad=ustmentis necessary#
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3ransfers ;et7een 6ategories3ransfers ;et7een 6ategories
Illustration $>0'
K Assumes that ad"usting entries to report changes in fair value for the current period are not yetrecorded#
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3ransfers ;et7een 6ategories3ransfers ;et7een 6ategories
Illustration $>0'
KKAccording to =AAI/ these types of transfers should be rare#