Intermediate accounting

Intermediate
Accounting

17-1

Prepared by
Coby Harmon
University of California, Santa Barbara


17 Investments

Intermediate Accounting
14th Edition

17-2

Kieso, Weygandt, and Warfield


Learning
Learning Objectives
Objectives
1.

Identify the three categories of debt securities and describe the accounting
and reporting treatment for each category.

2.

Understand the procedures for discount and premium amortization on bond

investments.

3.

Identify the categories of equity securities and describe the accounting and
reporting treatment for each category.

4.

Explain the equity method of accounting and compare it to the fair value
method for equity securities.

5.

Describe the accounting for the fair value option.

6.

Discuss the accounting for impairments of debt and equity investments.

7.

Explain why companies report reclassification adjustments.

8.

Describe the accounting for transfer of investment securities between
categories.

17-3

Investments
Investments

Investments in
Debt Securities

Investments in
Equity Securities

Other Reporting
Issues

Held-to-maturity
securities

Holdings of less than
20%

Fair value option

Available-for-sale
securities

Holdings between 20%
and 50%

Trading securities

Holdings of more than
50%

Impairment of value
Reclassification
adjustments
Transfers between
categories
Fair value
controversy
Summary

17-4


Investment
Investment Accounting
Accounting Approaches
Approaches
Different motivations for investing:


To earn a high rate of return.



To secure certain operating or financing arrangements
with another company.

17-5

Investment
Investment Accounting
Accounting Approaches
Approaches
Companies account for investments based on


the type of security (debt or equity) and



their intent with respect to the investment.
Illustration 17-1

17-6


Investments
Investments in
in Debt
Debt Securities
Securities
Debt securities (creditor relationship):
Type


17-7

U.S. government
securities



Municipal securities



Corporate bonds



Convertible debt



Commercial paper

Accounting Category


Held-to-maturity



Trading



Available-for-sale

LO 1 Identify the three categories of debt securities and describe the
accounting and reporting treatment for each category.


Investments
Investments in
in Debt
Debt Securities
Securities
Accounting for Debt Securities by Category
Illustration 17-2

17-8

LO 1 Identify the three categories of debt securities and describe the
accounting and reporting treatment for each category.


Held-to-Maturity
Held-to-Maturity Securities
Securities
Classify a debt security as held-to-maturity only if it has
both
(1) the positive intent and
(2) the ability to hold securities to maturity.
Accounted for at amortized cost, not fair value.
Amortize premium or discount using the effective-interest
method unless the straight-line method yields a similar

result.
17-9

LO 2 Understand the procedures for discount and
premium amortization on bond investments.


Held-to-Maturity
Held-to-Maturity Securities
Securities
Illustration: Robinson Company purchased $100,000 of 8
percent bonds of Evermaster Corporation on January 1, 2011,
at a discount, paying $92,278. The bonds mature January 1,
2016 and yield 10%; interest is payable each July 1 and
January 1. Robinson records the investment as follows:
January 1, 2011
Debt investments
Cash

17-10

92,278
92,278

LO 2 Understand the procedures for discount and
premium amortization on bond investments.


Held-to-Maturity
Held-to-Maturity Securities

Securities
Schedule of
Interest
Revenue and
Bond
Discount
Amortization—
Effective-Interest
Method

17-11

Illustration 17-3

LO 2


Held-to-Maturity
Held-to-Maturity Securities
Securities
Illustration: Robinson Company records the receipt of the
first semiannual interest payment on July 1, 2011, as follows:
July 1, 2011
Cash
Debt Investments

4,000
614

Interest Revenue

4,614

17-12

LO 2 Understand the procedures for discount and
premium amortization on bond investments.


Held-to-Maturity
Held-to-Maturity Securities
Securities
Illustration: Robinson is on a calendar-year basis, it accrues
interest and amortizes the discount at December 31, 2011, as
follows:
December 31, 2011
Interest Receivable
Debt Investments

4,000
645

Interest Revenue
4,645

17-13

LO 2 Understand the procedures for discount and
premium amortization on bond investments.

Held-to-Maturity
Held-to-Maturity Securities
Securities
Reporting of Held-to-Maturity Securities
Illustration 17-4

17-14

LO 2 Understand the procedures for discount and
premium amortization on bond investments.


Held-to-Maturity
Held-to-Maturity Securities
Securities
Illustration: Assume that Robinson Company sells its
investment in Evermaster bonds on November 1, 2015, at 99¾
plus accrued interest. Robinson records this discount
amortization as follows:
November 1, 2015
Debt Investments

635

Interest Revenue
635
$952 x 4/6 = $635
17-15

LO 2 Understand the procedures for discount and

premium amortization on bond investments.


Held-to-Maturity
Held-to-Maturity Securities
Securities
Computation of gain on sale of bonds

Cash
Interest Revenue (4/6 x $4,000)
Debt Investments
Gain on Sale of Securities
17-16

Illustration 17-5

102,417
2,667
99,683
67
LO 2


Available-for-Sale
Available-for-Sale Securities
Securities

Debt
Securities

Companies report available-for-sale securities at


fair value, with



unrealized holding gains and losses reported as part
of comprehensive income (equity).

Any discount or premium is amortized.

17-17

LO 2 Understand the procedures for discount and
premium amortization on bond investments.


Available-for-Sale
Available-for-Sale Securities
Securities

Debt
Securities

Illustration (Single Security): Graff Corporation purchases
$100,000, 10 percent, five-year bonds on January 1, 2011, with
interest payable on July 1 and January 1. The bonds sell for
$108,111, which results in a bond premium of $8,111 and an
effective interest rate of 8 percent. Graff records the purchase

of the bonds on January 1, 2011, as follows.
Debt Investments
Cash

17-18

108,111
108,111

LO 2 Understand the procedures for discount and
premium amortization on bond investments.


Available-for-Sale
Available-for-Sale Securities
Securities
Schedule of
Interest
Revenue and
Bond
Premium
Amortization—
Effective-Interest
Method

17-19

Debt
Securities
Illustration 17-6

LO 2


Debt
Securities

Available-for-Sale
Available-for-Sale Securities
Securities

Illustration (Single Security): The entry to record interest
revenue on July 1, 2011, is as follows.
Cash

17-20

5,000

Debt Investments

676

Interest Revenue

4,324

LO 2 Understand the procedures for discount and
premium amortization on bond investments.

Debt
Securities

Available-for-Sale
Available-for-Sale Securities
Securities

Illustration (Single Security): At December 31, 2011, Graff
makes the following entry to recognize interest revenue.
Interest Receivable

5,000

Debt Investments

703

Interest Revenue

4,297

Graff reports revenue for 2009 of $8,621 ($4,324 + $4,297).

17-21

LO 2 Understand the procedures for discount and
premium amortization on bond investments.

Available-for-Sale
Available-for-Sale Securities
Securities

Debt
Securities

Illustration (Single Security): To apply the fair value method to
these debt securities, assume that at year-end the fair value of
the bonds is $105,000 and that the carrying amount of the
investments is $106,732. Graff makes the following entry.
Unrealized Holding Gain or Loss—Equity
Fair Value Adjustment (AFS)

17-22

1,732
1,732

LO 2 Understand the procedures for discount and
premium amortization on bond investments.


Available-for-Sale
Available-for-Sale Securities
Securities

Debt
Securities

Illustration (Portfolio of Securities): Webb Corporation has
two debt securities classified as available-for-sale. The following
illustration identifies the amortized cost, fair value, and the
amount of the unrealized gain or loss.
Illustration 17-7

17-23

LO 2 Understand the procedures for discount and
premium amortization on bond investments.


Available-for-Sale
Available-for-Sale Securities
Securities

Debt
Securities

Illustration (Portfolio of Securities): Webb makes an adjusting
entry to a valuation allowance on December 31, 2012 to record
the decrease in value and to record the loss as follows.

Unrealized Holding Gain or Loss—Equity

9,537

Fair Value Adjustment (AFS)

9,537

Webb reports the unrealized holding loss of $9,537 as other
comprehensive income and a reduction of stockholders’ equity.

17-24

LO 2 Understand the procedures for discount and
premium amortization on bond investments.


Available-for-Sale
Available-for-Sale Securities
Securities

Debt
Securities

Sale of Available-for-Sale Securities
If company sells bonds before maturity date:




17-25

Must make entry to remove the,
►

Cost in Available-for-Sale Securities and

►

Securities Fair Value Adjustment accounts.

Any realized gain or loss on sale is reported in the
“Other expenses and losses” section of the income
statement.
LO 2 Understand the procedures for discount and
premium amortization on bond investments.