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3 types of debt securities
Held to maturity
Trading
Available-for-sale
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Held-to-maturity debt securities
-definition
-recorded by...
Debt securities that the enterprise has the positive intent and ability to hold to maturity
Accounted for at amortized cost NOT fair value
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Trading debt securities
-definition
-accounting
Debt securities bought and held primarily for sale in the short term to generate income.
Reported at Fair Value and any discount or premium is amortized
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Available for sale debt securities
- definition
- accounting
Debt securities that are not held-to-maturity or trading securities
They are reported at Fair Value and any discount or premium is amortized
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Reporting of unrealized gains/loss for available-for-sale debt securities
Reported on the Balance Sheet and labeled "equity" in the journal entry
ie, Securities Fair Value Adjustment- equity
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Reporting of unrealized gains/losses for trading securities
Reported on the income statement under "other comprehensive income" on the income statement and labeled with "income" in the journal entry
ie, Securities Fair Value Adjustment- income
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What is the difference between debt securities and equity securities?
Debt securities represent a creditor relationship with an enterprise (ie, government securities, corporate bonds, convertible debt and commercial paper) and equity securities represent ownership interest (ie, common, preferred or capital stock) in an enterprise.
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How is the accounting of equity securities treated in comparison with debt securities?
Both available-for-sale and trading equity securities (there are NO held-to-maturity equity securities) are reported at Fair Value which is identical to the accounting for debt securities. The difference is where the Unrealized holdings gain/loss account is reported; equity on BS for available-for-sale securities and income on IS for trading securities.
However, if a company owns 20-50% of voting stock, then the equity method is used to account for equity available-for-sale and trading securities.
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When 20-50% of shares are purchased, it is recorded as _________ as opposed to when < 20% of shares are purchase, which is recorded as _____________
- Investment in XYZ company xxxx
- Cash XXX
versus
- Equity securities (available-for sale or trading) xxxx
- Cash XXX
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How are net income and net loss journalized when using the equity method
If the company earns income, the Investment in XYZ acct is increased by the percentage of ownership and Investment Revenue is credited.
If the company reports a net loss, the Investment in XYZ acct is decreased by the percentage of ownership and the Loss on Investment acct is debited.
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How are dividends treated using the equity method?
If a company takes dividends, then this reduces the amount of their investment. Therefore, Investment in XYZ acct is credited for the amount of the dividends (taking into account percentage of ownership) and Cash acct is debited.
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Examples of held-to-maturity securities
Only debt securities, such as bonds
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Investments in debt securities should be recorded on the date of acquisition at...
market value plus brokerage fees and other costs incident to the purchase
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A bond premium or discount is amortized using the _____ method
What is the journal entry for the amortization?
Effective interest method
- cash XXX
- held-to-maturity securities XXX
- Interest Revenue XXXX
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