Intermediate Chapter 13 Notes
Intermediate Chapter 13 Notes 3310
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This 5 page Class Notes was uploaded by Emily Sears on Saturday January 30, 2016. The Class Notes belongs to 3310 at Auburn University taught by Dr. Duane Brandon in Spring 2016. Since its upload, it has received 12 views. For similar materials see Intermediate Accounting I in Accounting at Auburn University.
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Date Created: 01/30/16
CHAPTER 13: Investments and Long-Term Receivables Classification and Valuation At acquisition, each investment is debt and equity marketable securities is classified into one of three categories 1. Trading Securities- purchased and held principally to sell in the near term (ex: banks & brokerage firms) 2. Available-for-Sale Securities- not categorized as trading or held-to-maturity 3. Held-to-Maturity (Debt) Securities- Company has the “positive intent and ability to hold the securities to maturity.” The “fair value” method is used to account for trading and AFS securities (NOT HTM securities). This method results in “unrealized holding gains and losses” Two additional methods applied depending on the level of ownership that the investor has in the investee: 1. Equity Method: used for minority active investments in equity securities when the investor has significant influence over the investee (generally between 20% and 50% of the voting common stock) 2. Consolidation: used for majority active investments when the investor controls the investee (generally > 50% of voting common stock of investee). Investor issues consolidated financial statements (combined f/s of both companies) See Exhibit 13.1 for summary of methods HTM (Debt) Securities Initially recorded at cost Reported at amortized cost (not fair market value) on the ending balance sheet Unrealized holding gains and losses are not recorded Interest revenue is included in net income of the current period Realized gains and losses on sales (if any) are included in net income of the current period Trading Securities Initially recorded at cost Reported at fair market value on the ending balance sheet Unrealized holding gains and losses are included in net income of the current period. Thus, cumulative holding gains and losses become part of retained earnings on the balance sheet Interest and dividend revenue are included in net income of the current period Realized gains and losses on sales are included in net income of the current period Trading Securities Accounts “investment in Trading Securities”- asset account “Unrealized Holding Gains/Loss- Trading Securities”- Holding (unrealized) gains/losses recognized when the fair value of the securities changes. The account is a temporary account on the Income Statement and affects net income. Sometimes seen as “Unrealized Holding Gain/Loss- Income” “Allowance for Change in Value of Trading Securities”- Permanent adjunct/contra investment asset account. Sometimes seen as “Securities Fair Value Adjustment- Trading” (Note, the use of this specific allowance is optional. The Whalen et al. text does not use it for trading securities) AFS Securities Initially recorded at cost Reported at fair market value on the ending balance sheet Unrealized holding gains and losses are included in other comprehensive income of the current period Cumulative holding gains and losses are reported in accumulated other comprehensive income section of the stockholders’ equity on the balance sheet Interest and dividend revenue are included in net income of the current period Realized gains and losses on sales are included in net income of the current period AFS Securities Accounts “Investment in AFS Securities”- asset account “Unrealized Holding Gain/Loss- AFS Securities—Holding (unrealized) gains/losses recognized when the fair value of the securities changes. The account is a permanent equity account, reported as Accumulated Other Comprehensive Income. Sometimes seen as “Unrealized Holding Gain/Loss- Equity” “Allowance for Change in Fair Value of AFS Securities”- Permanent adjunct/contra investment asset account. Sometimes seen as “Securities Fair Value Adjustment- AFS” EquityMethod In the absence of evidence to the contrary, an investment of 20% or more in the outstanding common stock of the investee leads to the presumption of “significant influence” and GAAP requires that the investment be accounted for using the equitymethod The following accounting procedures apply: Investor initially records the investment at cost Investor records income when it is reported by the investee The income increases the carrying value of the investment based on the investor’s % ownership Investor records dividends received (or receivable) as reductions in the carrying value of the investment when they are paid (or declared) by the investee Certain other adjustments to investment income are made Note, “sig inf.” May be obtained with <20% Certain adjustments are made on the investment income of the investor as follows: The effects of any intercompany transactions are eliminated; A proportionate share of the difference between the fair values and book values of the investee depreciable assets implied by the acquisition price of the investee assets is depreciated over the remaining useful life; [Any purchased goodwill is treated differently] Record the proportionate share of the investee’s equity adjustments for other comprehensive income as increases or decreases to the investment account with corresponding adjustments in equity Accounting for Investments Summary Transfers between Categories What ifwe change ourminds? The transfer of a security between investment categories is accounted for at the fair value at the time of the transfer. For example, a change from AFS to trading or from HTM to AFS. In the journal entry to record the transfer, the fair value is used as the “new” investment carrying value, and the “old” investment carrying value is eliminated The accounting for any related unrealized gain or loss varies, depending on the type of transfer Not responsible for journal entries on p. 13-21 & 13-22 Impairments There may be an “other than temporary” decline in the fair value of an investment in an equity or debt securities (across all 3 categories). The evaluation involves three steps: 1. Determine Whether the Investment is Impaired. An investment is impaired when its fair value (selling price) is less than its cost 2. EvaluateWhether the Impairment isOther Than Temporary. The company must evaluate whether it will be able to recover the cost of the investment 3. If the Impairment is Other Temporary, the company recognizes a loss equal to the difference between the cost of investment and its fair value. Subsequent increases in fair value of HTM (AFS) are NOT (are) recorded Long-Term Notes Receivable Recognize the L-T Notes Receivable concepts parallel L-T BondConcepts Regardless of how a note is structured legally, the note is recorded at its present value and the effective interest method is used to record the interest (or straight-line if results are not materially different). GAAP provides guidance for cases where the interest is not stated or the interest rate is clearly not appropriate GAAP addresses three major categories of notes: 1. Notes exchanged for cash 2. Notes exchanged for cash and rights or privileges 3. Notes exchanged for property, goods, or services It is presumed that a stipulated interest rate is fair unless: No interest rate is recorded Stated interest rate is clearly unreasonable Face value of the note is materially different from the cash sales price of the property, or services, or from the fair value of the note on the transaction date In any of the situations, the note receivable is recorded at the fair value of the property, goods, or services or the fair value of the note, whichever is more reliable. If neither of these values is reliable, the note is recorded at its present value by using the borrower’s incremental interest rate
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