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Investments

Investments. Types: Debt Equity Derivatives Classification: Current (short term) Non-current (long term) Intent: Trading securities Available for sale securities Held to maturity Control. Debt Investments.

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Investments

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  1. Investments Types: Debt Equity Derivatives Classification: Current (short term) Non-current (long term) Intent: Trading securities Available for sale securities Held to maturity Control

  2. Debt Investments • Short term: CDs, commercial paper, near maturity bonds: Often used to temporarily invest idle funds. • Should not be likely to fluctuate in value • Reported on B/S at maturity value (current market value) • If decline in market value – write down.

  3. Debt Investments • Short term OR long term: corporate or government bonds • May be classified according to management intent as • Trading • Available for sale • Held to maturity – Long term investment

  4. Debt Investments • Trading and Available for sale: • May fluctuate in value, are reported at FMV on B/S • Different treatment for gain or loss: • Trading Securities: gain or loss is recognized in current income • Available for Sale Securities: gain or loss bypasses income statement (reported as part of comprehensive income only)

  5. Debt Investments • Held to Maturity • Temporary fluctuations are ignored – reported on B/S at historical cost (amortized discount/premium) • Permanent decline – recognized in current income, write down to FMV. NO recovery recognized.

  6. Exercise 17-3 • Determine the amount of interest income to be recognized on December 31, 2003 • Determine the amount to be credited to bond investment on December 31, 2004

  7. Exercise 17-18 On 12/31/03, Dominique Co. should recognize • Dr. unrealized loss (equity) $ 80,000 • Dr. loss on impairment $ 80,000 • Cr. Unrealized gain (equity) $ 80,000 • Both B and C • No adjustment is needed, bond investments are carried at amortized cost

  8. Equity Investments • No Held to Maturity • Trading or available for sale securities: Reported at FMV on B/S. Unrealized gains or losses treated the same as for debt securities (trading securities on income statement, available for sale directly to R/E, comprehensive income reported only

  9. Equity Investments Trading or available for sale securities: Income recognition: • Dividends • Gain or loss from fluctuations in market value (trading) • Gain or loss on sale of securities

  10. Exercise 17-7 On 12/31/2003 Tiger should record • Cr. unrealized gain (Income statement) $1,400 • Dr. unrealized loss (stockholders equity) $1,400 • Cr. Realized gain (income statement) $1,400 • Dr. unrealized loss (income statement) $1,400

  11. Exercise 17-7 In 2004 Tiger should record (in connection with the sale of the Colorado stock): • Dr. loss on sale (Income statement) $1,000 • Dr. unrealized loss (stockholders equity) $1,000 • Cr. loss on sale (income statement) $ 600 • Dr. unrealized loss (income statement) $ 600

  12. Exercise 17-7 On 12/31/2004 Tiger should record • Dr. unrealized loss (Income statement) $ 400 • Dr. unrealized loss (Income statement) $ 1,000 • Cr. Unrealized gain (income statement) $ 400 • Cr. unrealized gain (income statement) $ 1,000

  13. Exercise 17-9 • At what amount should Steffi Graf, Inc. report its portfolio of securities on 12/31/2003?

  14. Exercise 17-9 Steffi Graf should record which of the following on 12/31/2003 • Dr unrealized loss (income statement) $1,500 • Dr. unrealized loss (equity) $1,100 • Cr. Unrealized gain (income statement) $ 1,100 • Cr. Unrealized gain (equity) $1,500 • Cr. Unrealized gain equity) $1,100

  15. Equity Investments • Control Position – Levels of “control”: • Less than 20% – 25% - no control, trading or available for sale classification • More than 20% – 25%, but less than 50%: Accounted under the Equity Method • More than 50%: Consolidate • Special Issue: SPE (now VIE)

  16. Equity Investments Equity Method: • Initial investment: at cost • Temporary fluctuations in market value: Ignored • Income/Loss recognition: % of investee company income or loss.

  17. Equity Investments Equity Method: • Dividends: treated as a reduction of the investment, NOT income: • dr. cash • cr. investment

  18. Exercise 17-12 (b) Monica Co. should report for 2003 • Dividend income $36,000 • Dividend income $10,800 • Investment income $38,300 • Investment income $25,500 • Investment income $10,800

  19. Equity Investments Special Purpose Entities (SPEs) New term: Variable interest entities (VIEs) Special entities set up to segregate a pool of assets and sell interest stakes to investors.

  20. (slide 6a) $32,274.44 (slide 6b) $ 4,098.11 (slide 7) D (slide 10) D (slide 11) C (slide 12) D (slide 13) $54,400 (slide 14) E (slide 18) D Answers

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