Prepared by Coby Harmon University of California, Santa Barbara



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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.
  • 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
  • An investment (direct or indirect) of 20 percent or more of the voting stock of an investee should lead to a presumption that in the absence of evidence to the contrary, an investor has the ability to exercise significant influence over an investee.
  • In instances of “significant influence,” the investor must account for the investment using the equity method.
  • Investments in Equity Securities
  • Holding Between 20% and 50%
  • LO 4
  • Holdings Between 20% and 50%
  • Equity Method
  • Record the investment at cost and subsequently adjust the amount each period for
    • the investor’s proportionate share of the earnings (losses) and
    • dividends received by the investor.
  • If investor’s share of investee’s losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method and not recognize additional losses.
  • LO 4
  • Holdings Between 20% and 50%
  • LO 4
  • Advance slide in presentation mode to reveal journal entries.
  • LO 4
  • Controlling Interest - When one corporation acquires a voting interest of more than 50 percent in another corporation
    • Investor corporation is referred to as the parent.
    • Investee corporation is referred to as the subsidiary.
    • Investment in the subsidiary is reported on the parent’s balance sheet as a long-term investment.
    • Parent generally prepares consolidated financial statements.
  • LO 4
  • Investments in Equity Securities
  • Holding of More Than 50%

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
  • Companies have the option to report most financial instruments at fair value, with all gains and losses related to changes in fair value reported in the income statement.
    • Applied on an instrument-by-instrument basis.
    • Generally available only at the time a company first purchases the financial asset or incurs a financial liability.
    • Company must measure this instrument at fair value until the company no longer has ownership.
  • LO 5
  • Illustration: McCollum Company purchases stock in Fielder Company during 2014 that it classifies as available-for-sale. At December 31, 2014, the cost of this security is $100,000; its fair value at December 31, 2014, is $125,000. If McCollum chooses the fair value option to account for the Fielder Company stock, it makes the following entry at December 31, 2014.
  • Available-for-Sale Securities
  • Equity Investments 25,000
  • Unrealized Holding Gain or Loss—Income 25,000
  • Fair Value Option
  • LO 5
  • Fair Value Option
  • Illustration: Sullivan Company holds a 28 percent stake in Suppan Inc. Sullivan purchased the investment in 2014 for $930,000. At December 31, 2014, the fair value of the investment is $900,000. Sullivan elects to report the investment in Suppan using the fair value option. The entry to record this investment is as follows.
  • Unrealized Holding Gain or Loss—Income 30,000
  • Equity Investments 30,000
  • LO 5
  • LO 5
  • A company should evaluate every investment, at each reporting date, to determine if it has suffered impairment.
  • Impairments represent a
    • loss in value that is other than temporary.
    • realized loss that is included in net income.
    • Companies base impairment for debt and equity securities on a fair value test.
  • Additional Measurement Issues
  • Impairment of Value
  • LO 5
  • Impairment of Value
  • Illustration: Strickler Company holds available-for-sale bond securities with a par value and amortized cost of $1 million. The fair value of these securities is $800,000. Strickler has previously reported an unrealized loss on these securities of $200,000 as part of other comprehensive income. In evaluating the securities, Strickler now determines that it probably will not collect all amounts due. It records this impairment as follows.
  • Loss on impairment 200,000
  • Debt investments 200,000
  • LO 5
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