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1、InvestmentsCHAPTER 12 The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillAccounting for Investment SecuritiesBonds and notes (Debt securities)Common and preferred stock (Equity securities)Investments can be accounted for in six different ways, depending on the nature of the investment relationshi
2、p. The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillHeld to maturity (HTM) securities are those where the investor intends and has the ability to hold the security to maturity date.Trading securities (TS) are bought and held primarily to be sold in the near term.Securities available for sale (S
3、AS) are expected to be held for an unspecified period of time. The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillHeld for an Unspecified Period of TimeWhen an investment is held for an unspecified period of time, it is reported at the fair value of the security on the reporting date.Must be “rea
4、dily determinable”Otherwise, the investment is reported at cost. The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillSecurities Available for SaleAdjustments to fair value are recorded as:ua direct adjustment to the investment account, anduan allowance account in the equity section of the balance
5、sheet called “Unrealized Holding Gains/Losses”. The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillSecurities Available for SaleUnrealized holding gains and losses from available -for-sale securities are reported in the equity section of the balance sheet. The McGraw-Hill Companies, Inc., 2001Irw
6、in/McGraw-HillFoot, Inc. purchased the securities listed below in 1999. They are classified as Securities Available for Sale (SAS). Prepare the journal entries for Foot, Inc. to adjust the securities to fair value at Dec. 31, 1999.Securities Available for Sale Example The McGraw-Hill Companies, Inc.
7、, 2001Irwin/McGraw-HillSecurities Available for Sale ExampleThe Unrealized Holding Gain is reported as an allowance in the Equity Section. The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillThe new cost basis (the impaired fair value) is not changed for subsequent recoveries in fair value.Securit
8、ies Available for SaleIf the value is impaired . . . . . . the recorded cost of the security is reduced to the impaired fair value, and the difference is included in the current periods income. The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillTrading SecuritiesAdjustments to fair value are reco
9、rded as:ua direct adjustment to the investment account, andua net unrealized holding gain/loss on the Income Statement. The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillTrading SecuritiesUnrealized holding gains and losses from trading securities are reported on the income statement. The McGraw
10、-Hill Companies, Inc., 2001Irwin/McGraw-HillFoot, Inc. purchased the addition securities classified as Trading Securities (TS) in 1999. Prepare the journal entries for Foot, Inc. to adjust the securities to fair value at 12/31/99.Trading Securities Example The McGraw-Hill Companies, Inc., 2001Irwin/
11、McGraw-HillTrading Securities & Securities Available for Sale - ExampleThe Net Unrealized Holding Loss is reported on the Income Statement. The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillTransfers Between Reporting CategoriesTransfers are accounted for at fair value on the transfer date.Unrea
12、lized holding gains or losses at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred. The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillDisclosures The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillWhen an inves
13、tment results in the control of the investee (generally greater than 50%), the subsidiary is consolidated with the parent company. The cost method is used for investments in equity securities when significant influence is not present.The equity method is used for investments in equity securities res
14、ulting in significant influence (20%-50%). The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillEquity MethoduThe investment account is increased by: vOriginal investment cost. vProportionate share of investees earnings.uThe investment account is decreased by: vDividends received. The McGraw-Hill C
15、ompanies, Inc., 2001Irwin/McGraw-HilluThe investment account is reported on the balance sheet as a single amount.uThe investors share of the investees earnings is reported as a single item on the investors income statement.Equity Method The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillIf the in
16、vestor acquires the equity securities of an investee by paying more than the fair value of net assets . . . . . the difference is treated as GOODWILL and must be amortized on a straight-line basis.Equity Method The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-HillEquity Method ExampleRings & More acquired 45% of the equity securities of Di
