Intermediate accounting 17e stice skousen cengage chapter 14

Stice | Stice | Skousen Intermediate Accounting,17E Investments in Debt and Equity Securities PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University 14-1 © 2010 Cengage Learning Why Companies Invest in Other Companies • Safety cushion • Cyclical cash needs • Investment for a return • Investment for influence • Purchase for control 14-2 Classifications of Investment Securities • Debt securities are financial instruments issued by a company that (1) have a maturity value, (2) have a fixed or variable interest rate that specifies the periodic interest payments, and (3) a maturity date • Equity securities represent ownership in a company 14-3 14-4 Held-to-Maturity Securities • Held-to-maturity securities are debt securities purchased by a company with the intent to hold those securities until they mature • This category includes only debt securities because equity securities typically not mature 14-5 Available-for-Sale Securities • Available-for-sale securities are equity securities that are not considered trading securities and are not accounted for using the equity method • Debt securities that are not being held until maturity and are not classified as trading securities are considered to be “available-for-sale” securities 14-6 Trading Securities Trading securities are debt and equity securities purchased with the intent of selling them in the near future 14-7 Equity Method Securities • Equity method securities are equity securities purchased with the intent of being able to control or significantly influence the operations of the investee • A large block of stock (presumably at least 20% of the outstanding stock) must be owned to be considered for classification as an equity method security 14-8 Classification of Investment Securities According to IFRS • The classification of investment securities under IFRS, specifically IAS 39, is essentially the same as under U.S GAAP • IAS 39 is broader in scope than SFAS No 115 • IAS 39 includes guidance on accounting for derivatives and accounting for loans and receivables 14-9 Purchase of Debt Securities On May 1, Douglas Company purchases $100,000 in U.S Treasury notes at 104¼, including brokerage fees Interest is 9% payable semiannually on January and July The debt securities are classified by the purchaser as trading securities Accrued interest on May is $3,000, calculated as follows: $100,000 × 09 × 4/12 = $3,000 14-10 From the Held-to-Maturity to the Available-for-Sale Category Eastwood Inc elects to reclassify security from a security being held until maturity to one that is available to be sold Investment in Available-for-Sale Securities 20,400 Unrealized Increase/Decrease in Value of Available-for-Sale Securities Investment in Held-to-Maturity Securities 400 20,000 14-57 From the Held-to-Maturity to the Available-for-Sale Category Eastwood Inc elects to reclassify security from one that is available to be sold to a security that will be held until maturity Investment in Held-to-Maturity Securities Unrealized Increase/Decrease in Value of Available-for-Sale Securities Investment in Available-for-Sale Securities Market Adjustments—Available-forSale Securities 5,900 600 5,000 1,500 14-58 Cash Flows from Gains and Losses on Available-for-Sale Securities Caesh Company began with a $1,000 investment on January 1, 2011 Cash sales Cash expenses Purchases of investment securities Sale of investment securities (costing $200) $1,700 (1,400) (600) 170 The market value of the remaining securities was $500 on December 31, 2011 (continues) 14-59 Cash Flows from Gains and Losses on Available-for-Sale Securities Caesh Company’s net income for 2011 can be computed as follows: Sales Expenses Operating income Realized loss on sale of securities ($200 ─ $170) Net income $1,700 (1,400) $300 (30) $ 270 (continues) 14-60 Cash Flows from Gains and Losses on Available-for-Sale Securities The statement of cash flows for Caesh Company for 2011 can be prepared as follows: 14-61 Cash Flows from Gains and Losses on Trading Securities If the investment securities purchased by Caesh Company are classified as trading securities and are deemed to have been acquired for operating purposes, the unrealized gain appears in the operating activities section 14-62 Required Additional Disclosures Trading securities  The change in net unrealized holding gain or loss that is included in the income statement Available-for-sale securities  Aggregate fair value, gross unrealized holding gains and gross unrealized holding losses, and amortized cost basis by major security type  The proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales and the basis on which cost was determined in computing realized gains and losses (continues) 14-63 Required Additional Disclosures Available-for-sale securities (continues):  The change in net unrealized holding gain or loss on available-for-sale securities that has been included in stockholders’ equity during the period Held-to-maturity securities:  Aggregate fair value, gross unrealized holding gains and gross unrealized holding losses, and amortized cost basis by major security type (continues) 14-64 Required Additional Disclosures Transfer of securities between categories:  Gross gains and losses included in earnings from transfers of securities from availablefor-sale into the trading category  For securities transferred from held-tomaturity, the company should disclose the amortized cost amount transferred, the related realized or unrealized gain or loss, and the reason for transferring the security 14-65 Accounting for the Impairment of a Loan • A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement • For loans with no market value, impairment is measured by comparing the present value of expected future cash flows with the carrying value of the investment 14-66 Accounting for the Impairment of a Loan Malone Enterprises reports a loan receivable from Stockton Co in the amount of $500,000 The repayment terms include a 10% interest rate plus annual principal payments of $100,000 on January of each year The loan was made on January 1, 2009 Stockton made the $50,000 interest payment in 2009 but did not make the $100,000 principal payment nor the $50,000 interest payment in 2010 (continues) 14-67 Accounting for the Impairment of a Loan Analysis of Stockton’s financial condition indicates the principal and interest currently due can probably be collected, but it is probable that no further interest can be collected The probable amount and timing of the collections is determined as follows: (continues) 14-68 Accounting for the Impairment of a Loan The present value at December 31, 2010, of the expected future cash flows discounted at 10% for the Stockton receivable is $455,860 (continues) 14-69 Accounting for the Impairment of a Loan The impairment loss to be reported for 2010 is $94,140, or the carrying value ($550,000) less the present value 2010 ($455,680) Dec 31 Bad Debt Expense Allowance for Loan Impairment 94,140 94,140 If Stockton makes the payments as projected, the amortization schedule in Slide 14-71 provides information for the necessary entries (continues) 14-70 Accounting for the Impairment of a Loan 14-71 ... broader in scope than SFAS No 115 • IAS 39 includes guidance on accounting for derivatives and accounting for loans and receivables 14- 9 Purchase of Debt Securities On May 1, Douglas Company purchases... “available-for-sale” securities 14- 6 Trading Securities Trading securities are debt and equity securities purchased with the intent of selling them in the near future 14- 7 Equity Method Securities... interest payments, and (3) a maturity date • Equity securities represent ownership in a company 14- 3 14- 4 Held-to-Maturity Securities • Held-to-maturity securities are debt securities purchased