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1. Relate to investments which:a. Have a readily determinable “fair value”
1) Defined: sale price available on a securities exchange registered with SEC or publicly reported OTC market.
AND
2) Do NOT result in having a significant influence (usually hold < 20% ownership).
Rules: Come from SFAS 115.•Into effect in December 1993.
This “fair value” accounting REPLACES the former cost method.
New rules relate to EQUITY and DEBT.
New investments (debt and equity marketable securities) are classified into one of (3) categories:
1) Securities Available for Sale (SAS)
2) Trading Securities (TS)
3) Debt Securities held to maturity (HTM)
RULES WHICH DETERMINE WHICH CLASSIFICATION IS USED FOR AN INVESTMENT.
TRADING SECURITIES (TS).
• Debt and/or equity purchased and held principally for the purpose of selling in near future.
• Active/frequent buying/selling.
• CURRENT ASSETS
SECURITIES AVAILABLE FOR SALE (SAS)
• Debt securities not classified as held to maturity
AND
• Debt and/or equity securities not classified as trading securities
• As CURRENT or LONG-TERM ASSETS depending upon the owner’s intent.
HELD TO MATURITY (HTM)
• Debt securities ONLY.
• Have the positive intent/ability to hold this debt to maturity.
• Sales PRIOR to maturity are rare.
• As a LONG-TERM INVESTMENT.
Francisco Company acquires the following securities on July 1, 2008 as and investment in SECURITIES AVAILABLE FOR SALE (SAS).
A Co. common stock 100 shares @ $50/sh.
B Co. common stock 300 shares @ $80/sh.
C Co. preferred stock 200 shares @ $120/sh.
D Co. 10% bonds with a face value of $15,000 at par value. Interest on bonds is payable on July 1 and Jan 1each year).
RECORD INITIAL PURCHASE
•Initial Record is done at COST + related expenditures.
Purchase of Stock: 100 * $50/sh = $5,000 : A stock300 * $80/sh = $24,000 : B stock200 * $120/sh = $24,000 : C stock $53,000
SAS……………………$53,000CASH…………………..$53,000
Purchase of Bond:
SAS………………………$15,000CASH……………………..$15,000
RECORD INTEREST AND DIVIDEND REVENUE ON Dec 31.
a. Semi-annual interest earned on D Co. bonds
$15,000 * 0.10 * 6/12 = $750
Interest Receivable…$750Interest Revenue…….$750
b. Assume Francisco receives $3,000 in dividends on stock
Cash……………...…..$3,000Dividend Revenue…..$3,000
RECOGNITION OF UNREALIZED HOLDING GAINS AND LOSSES.
•Securities available for sale must be recorded at FAIR VALUE at the balance sheet date.
•This will result in UNREALIZED HOLDING GAINS AND LOSSES.
Assume at year end that securities look like this:
12/31/08 CumulativeSecurity Cost Fair Value Fair Value100 sh A Co. c/s 5,000 6,000 1,000300 sh B co c/s 24,000 23,500 (500)200 sh C Co. p/s 24,000 26,000 2,000$15,000 D Co bond 15,000 15,500 500 TOTALS $68,000 $71,000 $3,000
To record the $3,000 increase in value:
Market Adjustment (SAS)………...…….$3,000Unrealized holding loss/gain (EQ)………$3,000
Afterwards the balance sheet looks like this:
AssetsInvestments available for sale $68,000+ Market Adjustment 3,000Net $71,000
Stockholders Equity:Balance $ XX.XX+ Accumulated Other Comprehensive Inc. 3,000
IMPORTANT!!!!!!!!!!!!!!!
The unrealized adjustment is treated as a STOCKHOLDER’s EQUITY ACCOUNT with the SAS investment. It does NOT go into the current net income. Goes to COMPREHENSIVE INCCOMPREHENSIVE INC.
NOW ASSUME AT THE END OF 2009 THE INVESTMENTS AVAILABLE FOR SALE APPEAR AS FOLLOWS:
12/31/09 CumulativeSecurity Cost Fair Value Fair Value100 sh A Co. c/s 5,000 6,100 1,100300 sh B co c/s 24,000 22,700 (1,300)200 sh C Co. p/s 24,000 23,200 (800)$15,000 D Co bond 15,000 14,000 (1,000) TOTALS $68,000 $66,000 $(2,000)
The market adjustment account now requires a CREDIT balance of $2,000. The existing balance is a $3,000 DEBIT. The adjusting entry is thus:
Unrealized holding gain/loss (EQ)………$5,000Market Adjustment (SAS)……………….$5,000
Mkt Adj
3000 5000
2000
The balance sheet at 12/31/09 now looks like this:
Assets:Investments available for sale $68,000- Market Adjustment 2,000Net $66,000
Stockholders Equity:Balance $XX.XX- Accumulated Other Comprehensive Inc. 2,000
a. Investment recorded at cost (same)
b. Subsequently reported at fair value (same)
c. Unrealized holding gains/losses reported in CURRENT INCOME (stockholders equity adjustment previously)
d. Interest/dividend income reported in current income (same)
e. These kind of securities are held primarily by institutions like banks/stockbrokers.
Francisco Company acquires the following securities on July 1, 2008 as an investment in TRADINGSECURITIES.
A Co. common stock 100 shares @ $50/sh.B Co. common stock 300 shares @ $80/sh.C Co. preferred stock 200 shares @ $120/sh.D Co. 10% bonds with a face value of $15,000 at par value plus accrued interest. (Interest on bonds is payable on May 31 and Nov 30 each year).
RECORD INITIAL PURCHASE and DIVIDEND REVENUE
TS...……………………$53,000CASH…………………..$53,000
•SAME as (SAS) @ cost
STOCK
BONDS
TS...………………………$15,000CASH……………………..$15,000
RECORD INTEREST AND DIVIDEND REVENUE ON Dec 31
Int Rec……………………$750Interest Revenue…….$750
Dividend revenue
Cash……………...…..$3,000Dividend Revenue…..$3,000
Same as beforeBond interest revenue
REALIZATION OF UNREALIZED HOLDING GAINS AND LOSSES.
THIS IS DIFFERENT THAN SAS IN THE MANNER OF F/S PRESENTATION!!!!!!!
•Trading securities must also be recorded at FAIR VALUE at the balance sheet date.
•This will again result in UNREALIZED HOLDING GAINS and LOSSES.
Assume at year end that securities look like this:
12/31/08 CumulativeSecurity Cost Fair Value Fair Value100 sh A Co. c/s 5,000 6,000 1,000300 sh B co c/s 24,000 23,500 (500)200 sh C Co. p/s 24,000 26,000 2,000$15,000 D Co bond 15,000 15,500 500 TOTALS $68,000 $71,000 $3,000
To record the $3,000 increase in value:
Market Adjustment (TS)………...…….$3,000Unrealized holding loss/gain (IS)………$3,000
THIS IS WHAT IS DIFFERENT.
ASSETS:Trading Securities $68,000+ Market Adjustment 3,000Net $71,000
STOCKHOLDERS EQUITY:Balance $XX.XX+ Retained Earnings 3,000
IMPORTANT!!!!!!!!!!!!The unrealized adjustment is treated as a CURRENT INCOME ITEM in the INCOME STATEMENT.
STATEMENT OF INCOME
Revenue $xx.xxOther Revenue: Unrealized gain on fair value adjustment of TS security 3,000
Expense $xx.xxNet Income +$3,000
NOW ASSUME AT THE END OF 2009 THE INVESTMENTS (TRADING SECURITIES) APPEAR AS FOLLOWS:
12/31/02 CumulativeSecurity Cost Fair Value Fair Value100 sh A Co. c/s 5,000 6,100 1,100300 sh B co c/s 24,000 22,700 (1,300)200 sh C Co. p/s 24,000 23,200 (800)$15,000 D Co bond 15,000 14,000 (1,000) TOTALS $68,000 $66,000 $(2,000)
The market adjustment account now requires a CREDIT balance of $2,000. The existing balance is a $3,000 DEBIT. The adjusting entry is thus:
Unrealized holding gain/loss (IS)………$5,000Market Adjustment (TS)……………….$5,000
The balance sheet at 12/31/09 now looks like this:
Assets:Investments TS $68,000- Market Adjustment 2,000Net $66,000
Stockholders Equity:Balance $XX.XX
- Retained earnings 2,000
STATEMENT OF INCOME
Revenue $xx.xxExpense xx.xx
other expense: Unrealized loss on fair value adjustment of TS security 5,000
Net Income -$5,000
Summary of UGH/L changes
SAS- UHG/L---OCI-- AOCI
TS UHG/L- IS--- RE
Bond may be classified as “held to maturity” if the reporting entity has both the:
1. Positive intent
2. Ability to hold those securities to maturity
Accounted for by:
1. Record at COST
2. Subsequently reported at AMORTIZED COST. Not fair value.
3. Unrealized holding gains/losses are NOT recorded
4. Interest revenue and realized gains/losses are recorded in income.
Before Transfer
Trading Securities Available for Sale (SAS)
Sills Co. Bonds.. $80,000 $100,000Cost Fair Value Cost Fair Value
Cedar Falls CityBonds $50,000 $70,000
$130,000 $170,000
Equity $70,000 $90,000
TRANSFER CEDAR FALLS BONDS FROM TRADING TO SAS.
After Transfer
Sills Co. Bonds $80,000 $100,000 Equity $70,000 $90,000
CF bonds... $70,000 $70,000
$140,000 $160,000*Assume no fv adjustments madeyet.
Available for Sale (SAS)........ $70,000
Trading Securities................. $50,000
Unrealized Holding Gain-IS.. $20,000
Before Transfer
Security Available for Sale (SAS) Trading Securities
Sills Co. Bonds.. $80,000 $100,000Cost Fair Value Cost Fair Value
Cedar Falls CityBonds $50,000 $70,000
$130,000 $170,000
Equity $70,000 $90,000
TRANSFER CEDAR FALLS BONDS FROM SAS to TRADING
After Transfer
Sills Co. Bonds $80,000 $100,000 Equity $70,000 $90,000
CF bonds... $70,000 $70,000
$140,000 $160,000*Assume no fv adjustments madeyet.
Trading Securities..... $70,000
Available for Sale Securities.... $50,000
Unrealized Holding Gain-IS... $20,000
Before Transfer
HTM SAS
CF Bonds.. $35,000
Russell Corp. bonds.. $75,000
$110,000
Cost Fair value
$60,000 $90,000
Transfer the Russell Corp Bonds to SAS when their market is $80,000
After Transfer
CF Bonds.... $35,000$60,000 $90,000
Russell $75,000 $80,000
$135,000 $170,000
Available for Sale Securities....... $75,000
Held to Maturity........... $75,000
Unrealized holding gain-EQUITY $5,000Market Adjustment- $5,000
Before Transfer
SAS HTM
CF Bonds.. $35,000 $40,000 (fv)
Russell Corp. bonds.. $75,000 (cost) $90,000 (fv)
$110,000 (cost) $130,000 (market)
Cost
$60,000
Transfer the Russell Corp Bonds to HTM when their market is $90,000
After Transfer
CF Bonds.... $35,000 $40,000 (fv)$60,000
Russell $75,000 $90,000
$135,000 $90,000
HTM............ $75,000
Available for Sale........... $75,000
Market Adj-HTM $15,000
UHG-EQ......................... $15,000
Before Transfer
SAS HTM
CF Bonds.. $35,000
Russell Corp. bonds.. $75,000 (cost) $90,000 (fv)
$110,000
Cost
$60,000
Transfer the Russell Corp Bonds to HTM when their market is $90,000
After Transfer
CF Bonds.... $35,000$60,000
Russell $75,000 $90,000
$135,000 $90,000
HTM............ $75,000
Available for Sale........... $75,000
Market Adj-HTM $15,000
UHG-EQ......................... $15,000
FV adjustment is amortized $15,000/10 (assume) = ($1500) *its like writing off an asset.
UHG-EQ is amortized $15,000/10 = $1500 * its like claiming a partial gain
NET ADJUSTMENT.............. $0
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