1

Sale of Securities

On April 1, 2006, the investment in Silmaril’s debt securities is sold for $103,000, which

includes accrued interest of $2,500. On January 1, the debt securities had a carrying value of $105,240, therefore interest revenue of $2,105 ($105,240 x .08 x 3/12) would be recorded The required amortization for the three-months’ premium between January 1

and April 1 would be $395.

On April 1, 2006, the investment in Silmaril’s debt securities is sold for $103,000, which

includes accrued interest of $2,500. On January 1, the debt securities had a carrying value of $105,240, therefore interest revenue of $2,105 ($105,240 x .08 x 3/12) would be recorded The required amortization for the three-months’ premium between January 1

and April 1 would be $395.

2

Sale of Debt SecuritiesEntry to record accrued revenue and to amortize premium:Apr. 1 Interest Receivable 2,500

Investment in Held-to Maturity Securities 395Interest Revenue 2,105

Entry to record sale:Apr. 1 Cash 103,000

Realized Loss on Sale of Securities 4,345

Interest Receivable 2,500Investment in Held-to Maturity Securities 104,845

3

Sale of Equity Securities

Date Activity ($)

Jan 1, 2003 Bought Trading Securities 10,000

Dec 31, 2003 Fair Market Value 12,000

Dec 31, 2004 Sold for its Fair Market Available 9,000

4

Sale of Equity Securities

Jan. 1, 2003 Investment in Trading Securities 10,000 Cash 10,000

Dec 31, 2003 Market Adjustment – Trading 2,000 Unrealized gain - Trading 2,000

Dec 31, 2004 Unrealized loss – Trading 2,000 Market Adjustment – Trading 2,000

Dec 31, 2004 Cash 9,000 Realized loss – Trading 1,000 Investment in Trading Securities 10,000

5Transferring SecuritiesBetween Categories

TransferredTreatment of

Change in ValueFrom trading Any unrealized change in value not

previously recognized will be recognized in net income in the current period.

To trading Any unrealized change in value not previously recognized will be recognized in net income in the current period.

From held to maturity to available for sale

Recognize any unrealized change in value in a stockholders’ equity account.

ContinuedContinuedContinuedContinued

6Transferring SecuritiesBetween Categories

TransferredTreatment of

Change in ValueFrom available for sale to held to maturity

Any unrealized change in value recorded in a stockholders’ equity account is to be amortized over the security’s remaining life using the effective-interest method.

Statement of Financial Standards No. 115, par. 15d

7

Assume:Cost of trading security $3,000Fair market value, end of 2006 3,600Fair market value at transfer

date (in 2007) 3,800

Transfer from the trading to available-for-sale category

ContinuedContinuedContinuedContinued

8Transfer from the trading to available-for-sale category

Investment in Available-for-Sale Securities 3,800

Market Adjustment--Trading Securities

600 Unrealized Gain on Transfer

of Securities 200

Investment in Trading Securities3,000

9Transfer from the available-for-sale category

to the trading security category

Assume:Cost of available-for-sale security

$12,000Fair market value, end of 2006

10,700

ContinuedContinuedContinuedContinued

10

Investment in Trading Securities 10,300Market Adjustment--Trading Securities 1,300Unrealized Loss on Transfer

of Securities 1,700Unrealized Increase/Decrease in Value of Available-for- Sale Securities 1,300

Investment in Available-for- Sale Securities 12,000

Transfer from the available-for-sale category to the trading security category

11

Assume:Cost of held-to-maturity security

20,000Fair market value, Dec. 31, 2006

20,700

Transfer from held-to-maturity to the available-for-sale category.

ContinuedContinuedContinuedContinued

12

Investment in Available-for- Sale Securities 20,400

Unrealized Increase/ Decrease in Value of Available-for-Sale

Securities400Investment in Held-to-

Maturity Securities 20,000

Transfer from held-to-maturity to the available-for-sale category.

13

Assume:Cost of available-for-sale

securities$5,000

Fair market value, end of 20066,500

Fair market value at transfer date5,900

Transfer from available-for-sale to held-to-maturity.

ContinuedContinuedContinuedContinued

14

Investment in Held-to-MaturitySecurities 5,900

Unrealized Increase/Decrease in Value of Available-for-Sale

Securities 600Investment in Available-for-

Sale Securities 5,000Market Adjustment—

Available-for-Sale Securities 1,500

Transfer from available-for-sale to held-to-maturity.

15Investment securities and the cash flow statement

The purchase and sale of available-for-sale, held-to-maturity, and equity method securities are reported in the Investing Activities section of the statement of cash flows. In contrast, the cash flows associated with the purchase and sale of trading securities are shown in the Operating Activities section. This difference stems from the fact that, by definition, a company that maintains a trading securities portfolio considers as part of its normal business operations the attempt to make money through the correct timing of purchases and sales of (trading) securities.

16Cash Flows from Gains and Losses on Available-for-Sale

Cash Company began with a $1,000 investment on January 1, 2005.

Cash sales $1,700Cash expenses (1,400)Purchases of investment securities (600)Sale of investment securities (costing $200) 170

ContinuedContinuedContinuedContinued

17Cash Flows from Gains and Losses on Available-for-Sale

The market value of the remaining securities was $500 on December 31, 2005.

ContinuedContinuedContinuedContinued

Sales $1,700Expenses (1,400

)Operating income $ 300Realized loss on sale of securities (30

) Net income $ 270

18Cash Flows from Gains and Losses on Available-for-SaleCash Company will report a $100

unrealized increase in the value of it available-for-sale portfolio.

This $100 unrealized increase is reported as an increase in

Accumulated Other Comprehensive Income.

This $100 unrealized increase is reported as an increase in

Accumulated Other Comprehensive Income.

However, if it were a Trading security, Cash Company would

report the $100 unrealized increase in the income statement

19Cash Flows from Gains and Losses on Available-for-Sale

The statement of cash flows for Caesh Company for 2005 appear as follows:

Operating activities:Net income $ 270Plus realized loss on sale of securities 30 $ 300

Investing activities:Purchase of investment securities $(600)Sale of investment securities 170 (430)

Financing activities:Initial investment by owner 1,000

Net increase in cash $ 870

20

Classification and Disclosure

• Trading securities– The change in net unrealized holding gain or

loss that is included in the income statement.• Available-for-sale securities

– Aggregate fair value, gross unrealized holding gains and gross unrealized holding losses, and amortized cost basis by major security type.

– The proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales and the basis on which cost was determined in computing realized gains and losses.

21

• Available-for-sale securities (continued):– The change in net unrealized holding gain or loss

on available-for-sale securities that has been included in stockholders’ equity during the period.

• Held-to-maturity securities:– Aggregate fair value, gross unrealized holding gains and gross

unrealized holding losses, and amortized cost basis by major security type.

– The company should disclose information about contractual maturities.

Classification and Disclosure

ContinuedContinuedContinuedContinued

22

• Transfers of securities between categories:– Gross gains and losses included in earnings from transfers of

securities from available-for-sale into the trading category.– For securities transferred from held-to-maturity, the company should

disclose the amortized cost amount transferred, the related realized or unrealized gain or loss, and the reason for transferring the securities.

Classification and Disclosure

23

The EndThe End

chapter 14