Chapter_17_Notes_#1_On_Investments

Chapter_17_Notes_#1_On_Investments - Acct 3021-Chapter 17...

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Acct 3021-Chapter 17 September 6, 2011-Class Notes A. (L.O. 1) Accounting for Investments in Debt Securities. 1. Debt securities are instruments representing a creditor relationship with an enterprise. 2. Debt securities include U.S. government securities, municipal securities, corporate bonds, convertible debt, commercial paper, and all securitized debt instruments. 3. Trade accounts receivable and loans receivable are not debt securities because they do not meet the definition of a security. 4. Investments in debt securities are classified into three separate categories: a. Held-to-maturity: Debt securities that the enterprise has the positive intent and ability to hold to maturity. b. Trading: Debt securities bought and held primarily for sale in the near term to generate income on short-term price differences. c. Available-for-sale: Debt securities not classified as held-to-maturity or trading securities. 5. Accounting and reporting for debt securities. See Illustration 17-1 on page 858. 6. (L.O. 2) Held-to-maturity securities are accounted for at amortized cost, not fair value. Rationale: If management intends to hold certain investment securities to maturity and has no plans to sell them, fair values are not relevant for measuring and evaluating the cash flows associated with these activities. a. Effective interest method is applied to bond investments in a fashion similar to bonds payable. b. Use of a separate discount or premium account as a valuation account is acceptable procedure for investments, but in practice is not widely used. Illustration 17-2 demonstrates the Accounting for Held-to-Maturity Securities-page 859 7. Available-for-sale debt securities are reported at fair value. a. The unrealized holding gains and losses related to changes in fair value of available-for-sale debt securities are recognized as other comprehensive
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income and reported as a separate component of stockholders’ equity. b. At each reporting date, available-for-sale debt securities are reported at fair value with an adjustment to an Unrealized Holding Gain or Loss—Equity account. c. A Securities Fair Value Adjustment (Available-for-Sale) account is used to record the difference between fair value and amortized cost.
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Chapter_17_Notes_#1_On_Investments - Acct 3021-Chapter 17...

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