Investments

Sid Glandon, DBA, CPA

Assistant Professor of Accounting

The University of Texas at El Paso

Debt Securities Classified as held-to-maturity

Positive intent and ability to hold to maturity Classified as trading

Help for sale in near term to generate income Classified as available-for-sale

Not classified as held-to-maturity or trading securities

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

Debt SecuritiesClassified as Trading Valuation

Fair value Unrealized holding gains or losses

Recognized in net income Other income

Interest earned Realized gains and losses from sale

Debt SecuritiesClassified 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

Investment in Debt Securities

Cost to investing entity $924,183Par value 1,000,000Discount 75,817Stated interest rate 8%Effective interest rate 10%Fair value of security; End of year 1 1,000,000 End of year 2 975,000

Classified as Trading: Journal Entry

Account Debit CreditInvestment, trading debt security $924,183 Cash $924,183To record the purchase of a debt security classified as trading

Classified as Trading

FMV $1,000,000Original cost 924,183Unrealized holding gain $75,817

Account Debit CreditSecurities Fair Value Adjustment, Trading $75,817 Unrealized holding gain, Income $75,817

Computation of Gain (Loss) at the End of Year 1

To recognized unrealized holding gain on debt security

Classified as Trading

FMV $975,000Original cost 924,183Unrealized holding gain 50,817Previously recognized holding gain 75,817Unrealized holding loss ($25,000)

Account Debit CreditUnrealized holding loss, Income $25,000 Securities Fair Value Adjustment, Trading $25,000

Computation of Gain (Loss) at the End of Year 2

To recognized unrealized holding loss on debt security

Classified as Available-for-sale

YearInterest Revenue

Interest received

Amortization of Discount

Carrying Value

Fair Value, End of Year

$924,183 1 $92,418 $80,000 $12,418 936,601 $1,000,0002 93,660 80,000 13,660 950,261 975,000

Amortization Schedule

Account Debit CreditInvestment, available-for-sale debt security $924,183 Cash $924,183To record the purchase of a debt security classified as available for sale

Classified as Available-for-Sale

FMV $1,000,000Carrying value 936,601Unrealized holding gain $63,399

Account Debit Credit

Securities Fair Value Adjustment, Available-for-Sale $63,399 Unrealized holding gain, Equity $63,399

Computation of Gain (Loss) at the End of Year 1

To recognized unrealized holding gain on debt security

Classified as Available-for-SaleFMV $975,000Original cost 950,261Unrealized holding gain 24,739Previously recognized holding gain 63,399Unrealized holding loss ($38,660)

Account Debit CreditUnrealized holding loss, Equity $38,660

Securities Fair Value Adjustment, Available-for-Sale $38,660To recognized unrealized holding loss on debt security

Computation of Gain (Loss) at the End of Year 2

Classified as Held-to-Maturity No entry for fair value adjustment Fair value changes are not recognized at

the balance sheet date Securities are reported at amortized cost

Equity Securities Ownership interests Include rights to buy or sell ownership Extent of ownership determines accounting

treatment for equity securities

Degrees of Control

0% 20% 50% 100%

Little or None Significant Control

Ownership Percentage

Level of Influence

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

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

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

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

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

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

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