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Intermediate Accounting I > Chapter 12 > Flashcards

Chapter 12 Flashcards

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1
Q

investing can be done

A

Equity securities:
CS (no fixed rate of dividends)
PS (fixed rate of dividends)
- stock holder

or…

Debt securities:
Bonds
Notes
- bondholder

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2
Q

purchased by individual investors, mutual funds, and corporations

A

to earn a return from dividends or interest the securities pay or from increases in the market prices of the securities

to develop ongoing affiliations with companies whose securities are acquired

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3
Q

details about debt securities

A

specified date when it matures

face amount paid to investors on maturity

in the meantime, interest paid to investors

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4
Q

calculating a debt investment: price

A

PV ordinary annuity (at the end of each period)
PV of $1

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5
Q

bond investments: premium and discounts

A

fair value of bond changes when market interest rate change

market value of a fixed rate investment moves in the opposite direction of market rate of interest

stated rate > market rate = prem

stated rate < market rate = discount

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6
Q

JE for purchasing a debt investment

A

debit: investment in bonds

credit: discount on bond investment
OR
debit: premium on bond investment

credit: cash

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7
Q

recording interest value

A

debit: cash (SR x face value)
debit: discount on bond investment
credit: interest revenue (MR x what you paid)

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8
Q

if bought at premium

A

the cash interest paid > interest market rate

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9
Q

if bought at discount

A

the cash interest paid < interest market rate

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10
Q

HTM

A

reporting approach: used for debt for which investor has the positive intent and ability to hold to maturity

unrealized g/l: NOT recognized

carried in BS at: amortized cost

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11
Q

trading

A

reporting approach:
used for debt hat is held in active trading account for immediate resale

unrealized gains/losses: recognized in NET INCOME therefore in retained earnings as part of shareholder’s equity

carried in BS:
fair value

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12
Q

AFS

A

reporting approach: used for debt that does not qualify as HTM or trading

unrealized g/l: recognized in OCI –> so its in AOCI in SE

carried in BS at:
FV

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13
Q

debt investment HTM

A

investor has “positive intent and ability” to hold securities to maturity

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14
Q

HTM do not recognize unrealized holding g/l

A

change in FV is ignored as long as it is viewed as temporary

the investment simply will be recorded at amortized cost

disclose FV of HTM in a note to the financial statements

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15
Q

sale of HTM investment

A

debit: cash
credit: investment in bonds

will have:
debit: loss on sale of investments
OR
credit: gain on sale of investments

will have:
debit: discount on bond investments (writing off)
credit: premium on bond investments

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16
Q
A
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16
Q

impairment of HTM investments

A

exception to HTM’s not recognizing g/l

companies must use the Current Expected Credit Loss (CECL) model to account for credit loss on HTM investments

  • companies have to make an estimate of the amount of int and principal payments they will not receive in the future
  • companies account for that estimate by recognizing a credit loss in NI and reducing the CV of the HTM investment with an allowance for credit losses
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17
Q

financial statement presentation for HTM: income statement and comprehensive income

A

realized gains and losses are shown in net income in the period in which securities are sold

unrealized holding g/l are disclosed in notes to financial statements

do not affect OCI

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18
Q

financial statement presentation for HTM: balance sheet

A

reported at amortized cost, less any allowance for credit losses

fair values of those investments are disclosed in notes to FS

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19
Q

financial statement presentation for HTM: cash flow statement

A

cash flows from buying/selling HTM securities are investing activities

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20
Q

trading securities (TS)

A

investments in debt/eq securities acquired for purpose of selling the in the near term

  • active buying/selling of securities
  • holding period generally measured in hours and days rather than months or years
  • usually reported among the investor’s current assets
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21
Q

as the investor, with debt investments

A

you are receiving back the interest from the stated rate

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22
Q

TS fair value is relevant…

A
  • carried at FV on balance sheet
  • unrealized holding g/l are included in net income in the income statement –> company A purchases small portion of company B for normal business operations
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23
Q

adjusting TS for changes in FV

Study These Flashcards
A

unrealized gain:
debit: FVA
credit: gain on investments (unrealized, NI)

orrrrr

debit: loss on investments (unrealized, NI)
credit: FVA

24
selling TS investments
1) adjust to FV 2) record FV JE 3) record sale with JE: debit: cash debit: discount on bond investment credit: investment in bonds credit: FVA
25
if a company fails to update FV adjustments as of 1/5/25
companies may not update the FVA to the Fair Value as of the date of sale before recording the sale
26
TS financial statement presentation: income statement and OCI
gains/losses are included in the income statement in the periods in which fair value changes, regardless of whether they are realized or unrealized does NOT affect OCI
27
TS financial statement presentation: balance sheet
investments in trading securities are reported at fair value typically as current assets
28
TS financial statement presentation: cash flow statement
cash flows from buying and selling trading securities are classified as operating activities
29
AFS debt investments
are not held for trading or designated to HTM - purpose of keeping investment for a while - investment is AFS - reported in BS at FV - unrealized holding g/l are not included in NI but reported in statement of comprehensive income as OCI
30
adjustments to AFS
debit: FVA credit: gain on investments (unrealized, OCI)
31
sale of AFS investments
1) adjust AFS investments to FV 2) reverse previous FV adjustments 3) record sale of transaction: debit: cash debit: discount on bond investment credit: investment in bonds credit: gain on investment (NI)
32
record unrealized g/l AFS in OCI because not for
main operations of investment
33
impairment of AFS investments
if Fair value < amortized cost = impairment intends to sell/more likely than not --> will have to sell before FV recovers AFS written down to FV and impairment loss recognized in net income does not intend to sell the investment/not believe it is more likely than not it will have to sell the investment before FV recovers - estimate/recognize credit losses - reduce CV of the AFS investment with an allowance for credit losses
34
financial statement presentation of AFS: income statement and comprehensive income
gains and losses are shown in OCI (periods in which FV occur) those amounts are reclassified out of OCI and recognized in net income in the periods in which securities are sold
35
financial statement presentation of AFS: balance sheet
reported at FV - unrealized holding gains/losses become part of AOCI in S/E (reclassified out of AOCI in periods in which securities are sold)
36
financial statement presentation of AFS: cash flow statement
buying/selling AFS: investing
37
Fair Value Option
optional but irrevocable on date of investment purchase: - HTM and AFS investments are shown in BS at FV - unrealized gains and losses are recognized in NI in period in which they occur - purchases and sales of investments are --> investing activities
38
Fair Value Option: IFRS
More restrictive than U.S. standards for determining when firms are allowed to elect the fair value option. Under IFRS No. 9, companies can elect the fair value option only in specific circumstances
39
Fair Value Option: GAAP
Less restrictive than IFRS. It indicates that the intent of the fair value option is to address specific circumstances, but it does not require that those circumstances exist
40
accounting for equity investments
purchasing investment recognizing investment revenue debt: interest equity: dividends holding investment during periods in which investment's fair value changes --> unrealized holding gains and losses selling the investment --> realized gains and losses
41
equity investment that does not have significant influence
investor does not have SI over another co. over the operating and financial policies of the investee (less than 20% voting stock) reporting method: fair value through net income - similar to Trading Securities; report at fair value (unrealized holding gains and losses in NI); unless FV is not readily determinable
42
Equity Investment where investor has significant influence
over the operating and financial policies of the investee (owns voting stock between 20% and 50%) reporting method: equity method - investment reported at cost adjusted for investor's share of subsequent earnings and dividends of the investee
43
equity investment where investor controls the investee
owns usually more than 50% of voting stock reporting method: consolidation - Financial statements of investor and investee are combined are combined as if they are a single co.
44
investor =
parent
45
investee =
subsidiary =
46
investor lacking significant influence JE:
debit: investment in equity securities credit: cash debit: cash credit: dividend revenue (because did not have significant influence) perform FVA selling investment: 1) adjusting journal entry for securities to FVA 2) record the sale: debit: cash debit: FVA credit: Investment equity securities
47
what type of account is FVA
valuation allowance account used to increase or decrease the CV of the invesment
48
what if investment in eq securities did not sell: for less than 20%
adjust FVA
49
financial statement presentation - equity securities: BS
short term: CA long term: non CA
50
financial statement presentation - equity securities: cash flow statement
short term: operating long term: investing
51
financial statement presentation - equity securities: notes to FS
disclose portion of unrealized gains and losses for the period - how CV was calculated when FV is not readily determinable
52
what does significant influence mean:
decisions can be swayed in the direction the investor desires ;
53
further adjustments under equity method
expenditure to acquire equity method investment > BV of underlying net assets acquired FV> BV purpose: approx. effects of consolidation (without actually consolidating financial statements
54
how are further adjustments made:
amortizing the differential between purchase price and BV - adjust investment account and investment revenue to act as if consolidation procedures have been followed - if assets would have been written up to FV, act as though this happened - impute higher expenses in subsequent periods when those assets are expense so that earning are lower by investor's share in that additional expense
55
further adjustment calc
fair value of investee fair value of investee's net identifiable net assets BV of investee's net identifiable assets
56
with further adjustments
goodwill will not cause higher expenses
57
depreciation adjustment reduces
investment in equity affiliate

Intermediate Accounting I (15 decks)

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