Marketable Securities Flashcards
(24 cards)
trading securities
reported at fair value with unrealized gains and losses included in earnings (along with “realized” gains and losses, if any)
Available-for-sale securities
reported at fair value with unrealized gains and losses reported as a separate component of other comprehensive income until realized
net unrealized loss on available-for-sale securities in Accum OCI on the BALANCE SHEET
ASKING for NET means COST less YE FMV.
unrealized loss in Statement of OCI INCOME
If there was a loss adjustment in PY, deduct it to get the net for the CY. ie income statement reflects the COST less YE FMV less PP adjustments.
NO GAIN NO LOSS on the actual income statement
equity method - stock dividend
memorandum entry that reduces the unit cost of all stock owned. The total investment will simply be spread over a larger amount of shares, thereby reducing the unit cost of all stock owned.
equity method
“share of the investee’s earnings” (not “dividends received”) is recorded as revenue. Dividends are recorded by the investor as a reduction in the carrying amount of the investment on the B/S.
Changes in the market value of investee’s common stock are not considered income to the parent under the equity method.
From cost method to equity method
the investment account must retroactively reflect the proportionate share of investee income recognized at each percentage level investment.
Common vs Preferred Stock
Because Green, the investor, exercises significant influence over the investee corporation, it must use the equity method for recording common stock dividends. Under the equity method, the common stock dividends are recorded as a reduction to the Investment account. Preferred stock ownership does not allow the investor to exercise influence, so the preferred stock investment is accounted for using the cost method and the preferred stock dividends of $60,000 are recorded as dividend revenue on the income statement.
Any goodwill created in an investment
under the equity method is ignored. It is neither amortized nor tested for impairment. The entire investment (using the equity method) is subject to the impairment test.
from the equity method to the cost method
Changing does not require retroactive adjustment. The company should use the equity method for the first half of the year and the cost method for the second half.
consolidation accounting or equity method
In a vertical chain, where parent co. owns more than 50% of subsidiary co., and subsidiary owns more than 50% of a third company, consolidate:
Third co. into subsidiary co.
Subsidiary co. (now consolidated with third co.) into parent co.
acquisition - expenses
Fees of finders and consultants are expensed in the period incurred. Registration fees for equity securities issued decrease additional paid-in capital (stockholders’ equity).
Legal fees and due diligence costs are expensed in the period incurred
acquisition JE
The transaction is recorded at the fair market value of the stock issued. The journal entry would be:
DR Investment in sub - FMV
CR Common stock (par) - Par
CR APIC - Difference
When acquire for less than FMV
the following steps are required:
The balance sheet is adjusted to fair value, which creates a negative balance in the acquisition account.
Identifiable intangible assets are recognized at fair value, which increases the negative balance in the acquisition account.
The total negative balance in the acquisition account is recorded as a gain.
Acquisition - consolidated stockholders’ equity
parent stockholders’ equity plus the noncontrolling interest on December 31, Year 1
noncontrolling interest GAAP
Beg. Balance: noncontrolling % of FMV
+ NCI share of net income
- NCI share of dividends
= YE Noncontrolling interest
NCI share of net income GAAP
Beg RE + PLUG NI - Dividends = YE RE. NCI % of NI
Acquisition From control to non-control
the investor must recognize a gain or loss from the sale of the stock and then remeasure the remaining non-consolidating interest to fair value. The fair value adjustment is recognized as an additional gain or loss on the income statement.
Acquisition - Goodwill
Show 100% on the B/S
Acquisition From non-control to control
previously held equity investment must be adjusted to fair value. The fair value adjustment is recognized as a gain or loss by the investor in the period of the additional acquisition.
Acquisition: IFRS
Goodwill = Acquisition cost - Fair value of subsidiary's net assets acquired (not total FMV) NCI = (total) FV of subsidiary net assets × NCI %
CAR IN BIG
CAR − Subsidiary equity (BV) I − Investment (how much spent) N − Noncontrolling interest B − Balance sheet adjust (FV-BV) I − Identifiable intangibles G − Gain
If unrealized loss on available-for-sale marketable equity securities:
If Temporary :
Do not record loss in the income statement.
Record (debit) difference in other comprehensive income.
Record (credit) difference in a valuation (contra) account (a component of the noncurrent asset section of the balance sheet).
Subsequent recoveries in market value are debited to the valuation account and credited to other comprehensive income.
If Other Than Temporary:
Record realized loss (debit) in the income statement.
Credit the cost of the individual security account.
If decline and then increase in FMV (AfS)
Temporary declines in aggregate market values of available-for-sale securities are charged to (decrease) Stockholders’ Equity.
Subsequent recoveries and/or advances in aggregate market values are credited to (increase) other comprehensive income to reflect fair value.
