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ACC327_CH17_Notes

ACC327_CH17_Notes - Chapter 17 Investments 1 Accounting for...

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Chapter 17 Investments 1. Accounting for investments in debt securities A. Debt securities - are defined as instruments representing a creditor relationship (e.g., investments in gov't. securities, corporate bonds, etc). B. Debt securities are classified into three categories 1. Held-to-maturity - securities that the investor has the positive intent and ability to hold to maturity. 2. Trading - securities bought and held primarily for sale in the near future to generate income on a short-term price difference. 3. Available-for-sale - securities not classified as held-to- maturity or trading securities. C. Accounting for held-to-maturity (HTM) securities 1. They are accounted for at amortized cost. 2. Discounts and premiums on long-term investments in bonds are amortized using the effective interest method, unless the straight-line method or some other method yields a similar result. 3. The securities may be classified as current assets or non- current assets depending on their maturity dates. D. Accounting for available-for-sale (AFS) securities
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1. They are reported at fair value. 2. Unrealized holding gains/losses from changes in fair value are recorded in an owners' equity account (i.e., unrealized gains and losses do not affect net income, but they do affect comprehensive income). 3. An asset valuation account is used to adjust the investment account to fair value (i.e., actual cost basis is not affected by changes in fair value). As an example, assume a company had the following AFS securities: Investment in: cost & fair value fair value fair value BOY yr. 1 EOY yr. 1 EOY yr. 2 XYZ Co. $10,000 $11,000 $11,500 Acme Co. 15,000 12,000 15,500 Total $25,000 $23,000 $27,000 REQUIRED: Make any adjusting entries for this investment port- folio at the end of years 1 and 2. 4. L. T. investments in bonds classified as AFS are reported at amortized cost with premiums/discounts amortized using the effective interest method. 5. Sales of individual AFS securities result in realized gains or losses as follows: Sales proceeds XXX
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Amortized cost (XXX) Gain (loss) XXX 6. The investment valuation account and equity adjustment account are not affected directly by a sale of AFS securities. The adjustments to these accounts occur only at the year end based on the total portfolio values. As an example, assume that on June 30 of yr. 3 the XYZ Co. securities are sold for $12,000. Record the entry for the sale. Assume further that on December 31 of yr. 3 the Acme Co. securities have a fair value of 16,000. Record any adj. entry needed to adjust the valuation and equity adjustment accounts. 7. AFS securities may be classified as current assets or noncurrent assets depending on management's intent to hold them long term or short term. E. Accounting for trading securities 1. They are reported at fair value. 2. Any unrealized holding gains/losses are recorded in net income.
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