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1、Accounting Clinic III,McGraw-Hill/Irwin,Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.,Accounting Clinic III,With contributions by Stephen H. Penman Columbia University,Accounting for Marketable Securities,Clinic III-2,Why do Firms Hold Debt and Equity Securities?,To invest i
2、dle funds (usually in debt securities) As part of their operational plan (usually equity securities) In an investment portfolio where investments are bought or sold As a permanent investment in affiliates and subsidiaries,Clinic III-3,Classifying Debt and Equity Securities by their Accounting Treatm
3、ent,Clinic III-4,What are Marketable Securities?,Debt securities Equity securities representing less then 20% interest in another corporation For the accounting for equity securities with greater than 20% ownership go to Accounting Clinic V,Clinic III-5,Classifications of Marketable Securities,Debt
4、securities are classified into one of three categories: held-to-maturity available-for-sale trading. Equity securities (representing less then 20% ownership) are classified into one of two categories: available-for-sale trading. The appropriateness of the classification should be reassessed at each
5、reporting date.,Clinic III-6,Held-to-Maturity Debt Securities,Investments in debt securities should be classified as held-to-maturity only if the reporting enterprise has the positive intent and ability to hold those securities to maturity. An enterprise should not classify a debt security as held-t
6、o-maturity if it intends to hold the security for only an indefinite period.,Clinic III-7,Held-to-Maturity Debt Securities The Accounting Rule,Held to maturity are measured at their historical cost. If debt were purchased at a discount or premium over par value, the discount of premium is amortized
7、to the income statement.,Clinic III-8,The Effective Interest Method,The effective interest rate is the internal rate of return or yield to maturity at the time of issue. Under the effective interest rate method, the interest expense for a period is calculated as the effective interest rate times the
8、 bonds book value at the beginning of the period. Thus, under this method, the implied interest rate is constant.,Clinic III-9,Trading Securities and Available-for-Sale Securities (both Debt and Equity),Investments in debt securities (not classified as held-to-maturity) and equity securities that ha
9、ve readily determinable fair values should be classified as either: Trading available-for-sale,Clinic III-10,Trading Securities,Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) should be classified as trading
10、 securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.,Clinic III-11,Available-for-Sale Securities,Investments not classified as trading securities (nor as
11、held-to-maturity securities) should be classified as available-for-sale securities.,Clinic III-12,Reporting Changes in Fair Value - Unrealized,Unrealized holding gains and losses for trading securities should be included in net income Unrealized holding gains and losses for available-for-sale securi
12、ties (including those classified as current assets) should be excluded from net income and reported as a net amount in other comprehensive income within shareholders equity until realized.,Clinic III-13,Reporting Changes in Fair Value - Realized,Dividend and interest income, including amortization o
13、f the premium and discount arising at acquisition, should be included in net income (for all securities). Realized gains and losses should be included in net income (for all securities).,Clinic III-14,Balance Sheet Presentation,An enterprise should report all trading securities as current assets in
14、the balance sheet and should report individual held-to-maturity securities and individual available-for-sale securities as either current or noncurrent, as appropriate.,Clinic III-15,Statement of Cash Flows,Cash flows from purchases, sales, and maturities of available-for-sale securities and held-to
15、-maturity securities should be classified as cash flows from investing activities and reported gross for each security classification in the statement of cash flows. Cash flows from purchases, sales, and maturities of trading securities should be classified as cash flows from operating activities.,C
16、linic III-16,Example: Marketable Equity Securities Journal Entries,Alexis Co. purchased 100 common shares of Ball Co. on February 1, 2004, for $500,000. The market value of the shares on December 31, 2004, was $560,000. Alexis Co. sold these shares on June 30, 2005, for $600,000. Give the journal entries to record this transaction assuming: the shares are classified as trading securities the shares are classified as available for sale securities,Clinic III-17,If the shares were classi
