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  • Intermediate Accounting
  • Intermediate Accounting
  • Prepared by
  • Coby Harmon
  • University of California, Santa Barbara
  • Westmont College
  • INTERMEDIATE
  • ACCOUNTING
  • F I F T E E N T H E D I T I O N
  • Prepared by
  • Coby Harmon
  • University of California, Santa Barbara
  • Westmont College
  • kieso
  • weygandt
  • warfield
  • team for success
  • PREVIEW OF CHAPTER
  • Intermediate Accounting
  • 15th Edition
  • Kieso Weygandt Warfield
  • 17

Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.

  • Explain the equity method of accounting and compare it to the fair value method for equity securities.
  • Describe the accounting for the fair value option and for impairments of debt and equity investments.
  • Describe the reporting of reclassification adjustments and the accounting for transfers between categories.
  • After studying this chapter, you should be able to:
  • Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.
  • Understand the procedures for discount and premium amortization on bond investments.
  • Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
  • Investments
  • 17
  • Different motivations for investing:
    • To earn a high rate of return.
    • To secure certain operating or financing arrangements with another company.
  • LO 1
  • Companies account for investments based on
    • the type of security (debt or equity) and
    • their intent with respect to the investment.
  • Illustration 17-1
  • Summary of Investment
  • Accounting Approaches
  • Investment in Debt Securities
  • LO 1
    • U.S. government securities
    • Municipal securities
    • Corporate bonds
    • Convertible debt
    • Commercial paper
  • Type
    • Held-to-maturity
    • Trading
    • Available-for-sale
  • Accounting Category
  • Investment in Debt Securities
  • LO 1
  • Debt Investment Classifications
  • Investment in Debt Securities
  • ILLUSTRATION 17-2
  • Accounting for Debt
  • Securities by Category
  • Amortized cost is the acquisition cost adjusted for the amortization of discount or premium, if appropriate.
  • LO 1

Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.

  • Explain the equity method of accounting and compare it to the fair value method for equity securities.
  • Describe the accounting for the fair value option and for impairments of debt and equity investments.
  • Describe the reporting of reclassification adjustments and the accounting for transfers between categories.
  • After studying this chapter, you should be able to:
  • LEARNING OBJECTIVES
  • Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.
  • Understand the procedures for discount and premium amortization on bond investments.
  • Identify the categories of equity securities and describe the accounting and reporting treatment for each category.
  • Investments
  • 17
  • Classify a debt security as held-to-maturity only if it has both
    • the positive intent and
    • the ability to hold securities to maturity.
  • Accounted for at amortized cost, not fair value.
  • LO 2
  • Investment in Debt Securities
  • Held-to-Maturity Securities
  • Illustration: Z-Smith Company purchased $100,000 of 8 percent bonds of Bush Corporation on January 1, 2013, at a discount, paying $92,278. The bonds mature January 1, 2018 and yield 10%; interest is payable each July 1 and January 1. Z-Smith records the investment as follows:
  • January 1, 2013
  • Debt Investments 92,278
  • Cash 92,278
  • Held-to-Maturity Securities
  • LO 2
  • Illustration 17-3
  • Schedule of Interest
  • Revenue and Bond
  • Discount Amortization—
  • Effective-Interest Method
  • Held-to-Maturity Securities
  • LO 2
  • Held-to-Maturity Securities
  • Illustration 17-3
  • Illustration: Z-Smith Company records the receipt of the first semiannual interest payment on July 1, 2013, as follows:
  • Cash 4,000
  • Debt Investments 614
  • Interest Revenue 4,614
  • LO 2
  • Illustration 17-3
  • Illustration: Z-Smith is on a calendar-year basis, it accrues interest and amortizes the discount at December 31, 2013, as follows:
  • Interest Receivable 4,000
  • Debt Investments 645
  • Interest Revenue 4,645
  • Held-to-Maturity Securities
  • LO 2
  • Held-to-Maturity Securities
  • Reporting of Held-to-Maturity Securities
  • Illustration 17-4
  • LO 2
  • Held-to-Maturity Securities
  • Illustration 17-3
  • Illustration:
  • Assume Z-Smith sells its investment in Bush bonds on November 1, 2017, at 99¾ plus accrued interest. Z-Smith records discount amortization as follows:
  • Debt Investments 635
  • Interest Revenue 635
  • Calculation of amortization =
  • $952 x 4/6 = $635
  • LO 2
  • Held-to-Maturity Securities
  • LO 2
  • Cash 102,417
  • Interest Revenue (4/6 x $4,000) 2,667
  • Debt Investments 99,683
  • Gain on Sale of Securities 67
  • Illustration 17-5
  • Companies report available-for-sale securities at
    • fair value, with
    • unrealized holding gains and losses reported as other comprehensive income, a separate component of stockholder’s equity, until realized.
  • Any discount or premium is amortized.
  • Investment in Debt Securities
  • LO 2
  • Illustration (Single Security): Graffeo Corporation purchases $100,000, 10 percent, five-year bonds on January 1, 2013, with interest payable on July 1 and January 1. The bonds sell for $108,111, which results in a bond premium of $8,111 and an effective interest rate of 8 percent. Graffeo records the purchase of the bonds on January 1, 2013, as follows.
  • Debt Investments 108,111
  • Cash 108,111
  • Available-for-Sale Securities
  • Debt Securities
  • LO 2
  • Illustration 17-6
  • Schedule of Interest
  • Revenue and Bond
  • Premium Amortization—
  • Effective-Interest Method
  • Available-for-Sale Securities
  • Debt Securities
  • LO 2
  • Available-for-Sale Securities
  • Debt Securities
  • Illustration 17-6
  • Illustration (Single Security): The entry to record interest revenue on July 1, 2013, is as follows.
  • Cash 5,000
  • Debt Investments 676
  • Interest Revenue 4,324
  • LO 2
  • Available-for-Sale Securities
  • Debt Securities
  • Illustration 17-6
  • Illustration (Single Security): At December 31, 2013, Graffeo makes the following entry to recognize interest revenue.
  • Interest Receivable 5,000
  • Debt Investments 703
  • Interest Revenue 4,297
  • Interest Revenue for 2013 = $8,621
  • LO 2
  • Illustration (Single Security): To apply the fair value method to these debt securities, assume that at December 31, 2013 the fair value of the bonds is $105,000. Graffeo makes the following entry.
  • Unrealized Holding Gain or Loss—Equity 1,732
  • Fair Value Adjustment (AFS) 1,732
  • Available-for-Sale Securities
  • Debt Securities
  • Illustration 17-6
  • LO 2
  • Illustration (Portfolio of Securities): Herringshaw Corporation has two debt securities classified as available-for-sale. The following illustration identifies the amortized cost, fair value, and the amount of the unrealized gain or loss.
  • Illustration 17-7
  • Available-for-Sale Securities
  • Debt Securities
  • LO 2
  • Prepare the adjusting entry Herringshaw would make on December 31, 2014 to record the loss.
  • Unrealized Holding Gain or Loss—Equity 9,537
  • Fair Value Adjustment (AFS) 9,537
  • Available-for-Sale Securities
  • Debt Securities
  • Illustration 17-7
  • LO 2
  • Sale of Available-for-Sale Securities
  • If company sells bonds before maturity date:
    • It must make entries to remove from the Debt Investments account the amortized cost of bonds sold.
    • Any realized gain or loss on sale is reported in the “Other” section of the income statement.
  • Available-for-Sale Securities
  • Debt Securities
  • LO 2
  • Illustration (Sale of Available-for-Sale Securities): Herringshaw Corporation sold the Watson bonds (from Illustration 17-7) on July 1, 2015, for $90,000, at which time it had an amortized cost of $94,214.
  • Cash 90,000
  • Loss on Sale of Investments 4,214
  • Debt Investments 94,214
  • Illustration 17-8
  • Available-for-Sale Securities
  • Debt Securities
  • LO 2
  • Illustration (Sale of Available-for-Sale Securities): Herringshaw reports this realized loss in the “Other expenses and losses” section of the income statement. Assuming no other purchases and sales of bonds in 2015, Herringshaw on December 31, 2015, prepares the information:
  • Illustration 17-9
  • Available-for-Sale Securities
  • Debt Securities
  • LO 2
  • Illustration (Sale of Available-for-Sale Securities): Herringshaw records the following at December 31, 2015.
  • Fair Value Adjustment (AFS) 4,537
  • Unrealized Holding Gain or Loss—Equity 4,537
  • Illustration 17-9
  • Available-for-Sale Securities
  • Debt Securities
  • LO 2
  • Illustration 17-10
  • Reporting of Available-for-Sale Securities
  • Available-for-Sale Securities
  • Debt Securities
  • LO 2
  • LO 2
  • Companies report trading securities at
    • fair value, with
    • unrealized holding gains and losses reported as part of net income.
  • Any discount or premium is amortized.
  • A holding gain or loss is the net change in the fair value of a security from one period to another, exclusive of dividend or interest revenue recognized but not received.
  • Investment in Debt Securities
  • Trading Securities
  • Debt Securities
  • LO 2
  • Illustration: On December 31, 2014, Koopmans Publishing Corporation determined its trading securities portfolio to be as follows:
  • Trading Securities
  • Debt Securities
  • Illustration 17-11
  • Computation of Fair Value Adjustment—Trading Securities Portfolio (2014)
  • LO 2
  • Illustration: At December 31, Koopmans Publishing makes an adjusting entry:
  • Fair Value Adjustment (Trading) 3,750
  • Unrealized Holding Gain or Loss—Income 3,750
  • Illustration 17-11
  • Trading Securities
  • Debt Securities
  • LO 2
  • Illustration: (Trading Securities) Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31, Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400.
  • Instructions:
    • Prepare the journal entry for the purchase of the investment.
    • Prepare the journal entry for the interest received.
    • Prepare the journal entry for the fair value adjustment.
  • Trading Securities
  • Debt Securities
  • LO 2
  • Illustration: (Trading Securities) Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31, Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400. Prepare the journal entry for the purchase of the investment.
  • Trading Securities
  • Debt Securities
  • Debt investments 50,000
    • Cash 50,000
  • LO 2
  • Illustration: (Trading Securities) Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31, Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400. Prepare the journal entry for the interest received.
  • Trading Securities
  • Debt Securities
  • Cash 2,000
    • Interest Revenue 2,000
  • LO 2
  • Illustration: (Trading Securities) Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31, Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400. Prepare the journal entry for the fair value adjustment.
  • Trading Securities
  • Debt Securities
  • Unrealized Holding Loss – Income 2,600
    • Fair Value Adjustment (Trading) 2,600
  • LO 2
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