ADMS 3585 Winter 2010 - Chapter 9 - Part II

ADMS 3585 Winter 2010 - Chapter 9 - Part II - C H A P T E R...

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Unformatted text preview: C H A P T E R 9 9 Part II Part II Investments Held-For-Trading Investments • Classification as held-for-trading (HFT) is for financial assets (except loans and receivables) acquired with the intention of selling in the near future • Examples: certificates of deposits, treasury bills, government and corporate bonds, preferred and common shares • Also referred to as : trading investments, temporary investments, short-term investments, or marketable securities • Cannot be reclassified once recorded as HFT – WHY? Held-For-Trading Investments • Also, entity can choose to classify other financial asset investments as HFT on acquisition, even if the intent is to hold the investment for the long term • This is called the “ fair value option ” • As a result, HFT could be either short-term or long-term investment Measurement of HFT Investments • When purchased, HFT investments are recorded at fair value • Transactions costs are expensed • At each balance sheet date, the HFT investments are adjusted to current fair value and any holding gain or loss is reported in net income • Any earned interest/dividend income and any holding gain or loss on the investment can be reported TOGETHER as “ Investment Income ” (more common in real world) • If interest income is reported SEPARATELY , the effective interest method must be used Assume the previous HTM investment is classified as HFT by management Given: Face amount: $100,000 Purchase date: January 1, 2005 Maturity date: January 1, 2010 Interest paid: July 1 st and January 1 st Year ends on Aug 31 Coupon (stated, promised) rate of interest: 8% Market (effective) rate of interest: 10% Prepare relevant journal entries, assuming (1) the fair value on Aug 31, 2005 is $93,000; (2) the bond was disposed on January 1, 2006 at $93,600 Held-For-Trading: Bond issued at Discount Jan 1, 2005 (Purchase date) HFT Bond Investment 92,278 Cash 92,278 July 1, 2005 (Interest receipt date) Cash 4,000 Investment Revenue 4,000 Aug 31, 2005 (reporting date) Interest Receivable 1,333 HFT Bond Investment 722 Investment Revenue 2,055 Jan 1, 2006 (Intst. receipt/disposal) Cash 4,000 Investment Revenue 2,667 Interest Receivable 1,333 Cash 93,600 HTM HFT Bond Investment 93,000 Investment Revenue 600 HFT (report interest income HFT (report interest income separately with holding G/L) separately with holding G/L) HFT (report interest income HFT (report interest income together with holding G/L) together with holding G/L)...
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This note was uploaded on 04/27/2010 for the course ADMS 3585 taught by Professor Sandra during the Spring '10 term at York University.

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ADMS 3585 Winter 2010 - Chapter 9 - Part II - C H A P T E R...

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