Part 5 - Investments Flashcards
(21 cards)
How are bond investments held for the purpose of selling them in the near term reported on the balance sheet?
The bonds are classified as trading securities and reported at fair value on the balance sheet.
Where do you recognize unrealized gains and losses (assuming no impairment) on available-for-sale securities?
in other comprehensive income (OCI), net of tax, in the period incurred, either as an individual line item or in aggregate with other components of OCI.
When and where do you record a credit loss for an available-for-sale-debt security while using the current expected credit losses (CECL) model?
CECL must be recorded on the income statement when:
the face value < amortized cost, but > present value of future cash flows
How are held-to-maturity securities valued?
at amortized cost
*adjustments to fair value and the resulting unrealized gains/losses are not recorded.
when do you use fair value method for an investor whom owns an investee’s common stock?
The fair value method used when an investor own less than 20% common stock and does not exercise significant influence over the investee. The investment carried at fair value through net income (FVTNI). Earnings of the investee sre NOT recorded by the investor and dividends are incme and do not affect the investment account.
How a stock split affect the investment account in dollars?
It does not double the investment account. The number of shares is doubled and cost per share is halved, which results in no change to the dollar amount of the investment.
The stock split changes the number of shares but does not change the total value of the investment.
Explain using the fair value method to account for the investment
The investment is recorded at cost or fair value (what originally paid), an the company’s earnings (profit) do not increase the investment value.
How do you value equity securities and where do you report them?
no matter if the company plans to hold them long-term or sell soon, all unrealized gains and losses (changes in value that haven’t been realized by selling) go directly into the income statement (profit and loss), not into other comprehensive income.
Rule: Equity securities are reported at fair value with unrealized gains and losses included in earnings. Fair value becomes the new basis (revalued cost) for computing realized gains or losses upon sale.
Fair value of inventory and Land at acquasition exceeds book value (carrying value). How their excess FV effects on earnings?
The excess of an asset’s fair value over its book value is amortized over the life of the asset!
Inventory is amortized through COGS (increases COGS: decreases net income) because the extra inventory value is amortized (spread out) as an expense.
Land is not amortized (no effect on income)
What is goodwill?
Excess of the purchase price over the fair value
How amortization causes the investor’s share of the investee’s net income?
Decrease
*because it is an expense!
Excess fair value must be enpensed (amortized) 0ver the equipment’s life.
Do not forget to substract it (per year expense) when calculating equity method investment income of investor’s share.
What is the percentage of range to apply the equity method?
between 20% and 50%
An investor has 25% ownership in an investee’s company without significant influence over either company’s operating and financial policies. How do you apply the equity method?
Although a 25% interest falls within the range, the equity method cannot be applied because of the lack of significant influence.
***However, when an investor owns less than 20 percent, if they exercise significant influence, they will use the equity method. The key is existence of the significant influence!
How an investor using equity method calculates received cumulative preffered stock dividends from an investee?
Preferred stock generally does not carry voting rights, so an investor does not use the equity method.
For example:
Investee has $100,000 of 10% cumulative preferred stock.
Investor has Preferred stock (20% ownership).
Preferred stock dividends = 10% × $100,000 = $10,000
10,000×20%=2,000 is recorded as dividend income on investee’s income statement
What amount an investor should report a dividend incomez end of year based on its common stock investments below:
- 30% ownership & receives $50,000 cash dividend
- 5% ownership & receives $6,000 liquidating dividend
- 2% ownership & investee declared $200,000 dividend
The investor reports only $4,000 dividend income because:
- owns 30%, which implies significant influence & uses the equity method. However, a CASH DIVIDEND is NOT recorded as dividend income but instead reduces the investment account for $50,000.
- owns only 5%, so no significant influence & the investment is accounted for using the “fair value” method. However, liquidating dividends are not recorded as dividend income but reduce the investment balance for $6.000.
-] - owns 2%, no significant influence & the investment is accounted for using the fair value method for declared a $200,000 dividend. Investor reports:
$200,000 x 2% = $4,000 DIVIDEND INCOME
How do you report cash dividends as an investment income?
Dividends received from the investee are not recorded as income. Instead,
dividends are treated as a return of capital and reduce the carrying amount of the investment on the balance sheet.
***Under the equity method, investment income equals the investor’s share of the investee’s net income, regardless of dividends paid.
Under the equity method, dividends received from the investee’s common stock are recorded as dividend income. True or false?
False
Dividends reduce the carrying amount of the investment on the balance sheet.
investments in preferred stock are accounted for using the equity method. True or false?
False
Preferred stock does not carry voting rights and investments in preferred stock are accounted for using the fair value method (or cost method if fair value is not readily available). So, under this method, dividends received from preferred stock are recorded as dividend income on the income statement.
How do you amortize goodwill under the equity method?
Goodwill amortization is no longer allowed under current accounting standards for any goodwill, whether in consolidated financial statements or equity method investments.
Valuation of goodwill is a calculation:
Of the residual paid above the fair value of the identifiable net assets.
Goodwill=Purchase Price−Fair Value of Identifiable Net Assets
*Fair Value of Identifiable Net Assets: The fair market value of all tangible and intangible assets acquired, minus liabilities assumed.
