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57 Cards in this Set

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What are two motivations for investing in securites by other companies?
1. to earn a high rate of return
2. to secure certain operating or finance arrangements with another company.
Debt securities are ...
instruments representing a creditor relationship with an enterprise.
What are some examples of debt securities?
US govt securities, municipal securities, corporate bonds, convertible debt, commercial paper, and all securitized debt instruments
Are Trade accounts receivable debt securities?
No
What is the definition of a security?
a share, participation, or other interest in property or in an enterprise of the issuer.
Are loans receivable debt securities?
No they do not meet the definition of a security
What are the three type of debt securities?
Held-to-maturity, trading, available-for-sale
Define Held-to-maturity securities?
debt securities that the enterprise has the positive intent and ability to hold to maturity.
Define Trading Securities?
debt securities bought and held primarily for sale in the near term to generate income on short term price differences.
Define available-for-sale securities?
debt securities not classified as held to maturity or trading securities
how do you value Held-to-maturity, trading, available-for-sale?
Held-to-maturity-amortized cost
trading-fair value
available-for-sale-fair value
Are unrealized holding gains or losses recognized for held-to-maturity securities?
they are not recognized
Are unrealized holding gains or losses recognized for trading securities?
they are recognized in net income
Are unrealized holding gains or losses recognized for available-for-sale securities?
recognized as other comprehensive and as seperate component of stockholders equity.
what is amortized cost?
the acquisition cost adjusted for the amortization of discount or premium, if appropriate.
What is fair value?
the amount at which a financial instrument could be exchanged in a current transaction between willing parties.
Is a debt security a held-to-maturity if a company intends to hold the security for an indefinite period?
No, only if the company intends to hold to maturity and has the ability to should it be classified as held-to-maturity.
Why are held to maturity securities accounted for at ammortized cost and not fair value?
If management intends to hold until maturity and has no intent to sell fair value is irrelevent.
Show the journal entry to record the purchase of held to maturity securities
dr. held to maturity securities
cr. cash
in the effective interest rate method what is the formula for interest revenue/expense? in this ch Revenue
interest revenue/expense=Effective Interest Rate x Carrying Value of Bonds
in the effective interest rate method for ammortizing a discount or premium what is the formula for interest payable?
Interest Payable = Stated Interest Rate x Face Value of Bonds.
in the effective interest rate method what is the formula for carrying value?
Carrying Value of Bonds = Face Value + Premium (or Less Discount).
Show the entry for an held to maturity interest payment received of 4000 cash and bond discount amortization of 614?
dr. cash 4,000
dr. HTM Securities 614
cr. Interest revenue 4614

notice you do not use bond discount or premium you directly reduce or increase HTM securities
what would be the dec adjusting entry look like for the last entry?
dr. Interest Recievable
dr. HTM Securities
Cr. Interest Revenue
What is an available for sale security?
Debt and equity securities that do not meet the criteria for either held-to-maturity or trading securities.
How are AFS securities accounted for?
Accounted for in the same way as trading securities except that the unrealized gain or loss is not reported on the income statement.
What are unrealized gains and losses on trading securities? On what statement are they reported?
Unrealized gains and losses on trading securities are changes in the fair or market value of securities that have not been sold. Because the securities have not been sold, the gains or losses have not been realized. Unrealized gains and losses are reported on the income statement.
Are changes in fair value of AFS Securities reported as part of net income?
No not until the security is sold
On dec 31 2003 your AFS bonds have a carrying value of 106,732 and a fair value of 105,000 what would the entry be if any?
Dr. Unrealized holding gain or loss-Equity 1,732
cr. Securities Fair Value Adjustment (AFS) 1732
entry of purchase of AFS bonds
AFS Securities XXX
Cash XXX
entry to record interest received on AFS premium Bonds
Cash XXX
AFS SEcurities XXX
Interest Revenue XXX
what would be the adjusting entry on dec 31 on a premium AFS bond
Interest receivable XXX
AFS Securities XXX
Interest Revenue XXX
How is the value of the AFS reported on the B/S?
It is reported at fair value by Repoting the AFS Securities account at ammortized cost and increasing or reducing the value with the Unrealized holding gain or loss-Equity account
In a portfolio how do you arrive at the unrealized gain or loss for the portfolio?
take the gain or loss for each individual and calculate total.
what if there is a balance already in the Securities fair value adjustment account
calculate what addition or subtraction to the account to arrive at what the balance should be.
How are the losses reported on the balance sheet?
Investments
AFS Securities, at fair value xxx

Stockholder's Equity
Accumulated other Comprehensive loss xxx
how are trading securities used to generate profits ?
from short term differences in price
What is the general holding period?
3 months
How are trading securities reported?
at fair value
Are discounts or premiums ammortized on trading securities?
no
Where are unrealized holding gains or losses reported?
As part of net income
What is the entry to record a $3,750 gain on the FV of a portfolio of trading securities?
dr. Securities FV Adj (trading) 3750
cr. Unrealized holding gain or loss-income 3750
What are equity securities?
securities representing ownership interests such as common, preferred, or other capital stock.
Are convertible debt securities and redeemable preferred stocks equity securities?
no they are not treated as equity securities
What costs are included in the costs of equity securities?
purchase price, brokers commissions, and other fees
Equity holdings of less than 20% of ownership interest?
investor has passive interest and the holdings are accounted for at the fair value method
Equity holdings of 20% - 50% of ownership interest?
investor has significant influence and the holdings are accounted for at the equity method.
Equity holdings of more than 50% of ownership interest?
investor has controlling interest and the consolidated statements method is used.
Equity securities should be recorded at cost what about equity securities aqcuired in exchange for noncash consideration?
recorded at the fv of the consideration given or at the fair value of the securities received
whichever is more clear.
What is the fair value method for equity securities require?
the requirement that securities with 20% or less be classified as AFS securities or trading securities.
how do you record the receipt of a dividend on an equity AFS security ?
Cash XXXX
Dividend Revenue XXXX
show the entry to record the sale of AFS Equity security with a gain in FV
Cash xxxx
AFS Securities xxxx
Gain on sale of stock xxxx
Are discounts or premiums ammortized on trading securities?
no
Where are unrealized holding gains or losses reported?
As part of net income
What is the entry to record a $3,750 gain on the FV of a portfolio of trading securities?
dr. Securities FV Adj (trading) 3750
cr. Unrealized holding gain or loss-income 3750
What are equity securities?
securities representing ownership interests such as common, preferred, or other capital stock.
Are convertible debt securities and redeemable preferred stocks equity securities?
no they are not treated as equity securities