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Investments. Types: Debt Equity Derivatives Classification: Current (short term) Non-current (long term) Intent: Trading securities Available for sale securities Held to maturity Control. Debt Investments.

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investments

Investments

Types:

Debt

Equity

Derivatives

Classification:

Current (short term)

Non-current (long term)

Intent:

Trading securities

Available for sale securities

Held to maturity

Control

debt investments
Debt Investments
  • Short term: CDs, commercial paper, near maturity bonds: Often used to temporarily invest idle funds.
  • Should not be likely to fluctuate in value
  • Reported on B/S at maturity value (current market value)
  • If decline in market value – write down.
debt investments3
Debt Investments
  • Short term OR long term: corporate or government bonds
  • May be classified according to management intent as
    • Trading
    • Available for sale
    • Held to maturity – Long term investment
debt investments4
Debt Investments
  • Trading and Available for sale:
  • May fluctuate in value, are reported at FMV on B/S
  • Different treatment for gain or loss:
  • Trading Securities: gain or loss is recognized in current income
  • Available for Sale Securities: gain or loss bypasses income statement (reported as part of comprehensive income only)
debt investments5
Debt Investments
  • Held to Maturity
  • Temporary fluctuations are ignored – reported on B/S at historical cost (amortized discount/premium)
  • Permanent decline – recognized in current income, write down to FMV. NO recovery recognized.
exercise 17 3
Exercise 17-3
  • Determine the amount of interest income to be recognized on December 31, 2003
  • Determine the amount to be credited to bond investment on December 31, 2004
exercise 17 18
Exercise 17-18

On 12/31/03, Dominique Co. should recognize

  • Dr. unrealized loss (equity) $ 80,000
  • Dr. loss on impairment $ 80,000
  • Cr. Unrealized gain (equity) $ 80,000
  • Both B and C
  • No adjustment is needed, bond investments are carried at amortized cost
equity investments
Equity Investments
  • No Held to Maturity
  • Trading or available for sale securities: Reported at FMV on B/S. Unrealized gains or losses treated the same as for debt securities (trading securities on income statement, available for sale directly to R/E, comprehensive income reported only
equity investments9
Equity Investments

Trading or available for sale securities:

Income recognition:

  • Dividends
  • Gain or loss from fluctuations in market value (trading)
  • Gain or loss on sale of securities
exercise 17 7
Exercise 17-7

On 12/31/2003 Tiger should record

  • Cr. unrealized gain (Income statement) $1,400
  • Dr. unrealized loss (stockholders equity) $1,400
  • Cr. Realized gain (income statement) $1,400
  • Dr. unrealized loss (income statement) $1,400
exercise 17 711
Exercise 17-7

In 2004 Tiger should record (in connection with the sale of the Colorado stock):

  • Dr. loss on sale (Income statement) $1,000
  • Dr. unrealized loss (stockholders equity) $1,000
  • Cr. loss on sale (income statement) $ 600
  • Dr. unrealized loss (income statement) $ 600
exercise 17 712
Exercise 17-7

On 12/31/2004 Tiger should record

  • Dr. unrealized loss (Income statement) $ 400
  • Dr. unrealized loss (Income statement) $ 1,000
  • Cr. Unrealized gain (income statement) $ 400
  • Cr. unrealized gain (income statement) $ 1,000
exercise 17 9
Exercise 17-9
  • At what amount should Steffi Graf, Inc. report its portfolio of securities on 12/31/2003?
exercise 17 914
Exercise 17-9

Steffi Graf should record which of the following on 12/31/2003

  • Dr unrealized loss (income statement) $1,500
  • Dr. unrealized loss (equity) $1,100
  • Cr. Unrealized gain (income statement) $ 1,100
  • Cr. Unrealized gain (equity) $1,500
  • Cr. Unrealized gain equity) $1,100
equity investments15
Equity Investments
  • Control Position – Levels of “control”:
  • Less than 20% – 25% - no control, trading or available for sale classification
  • More than 20% – 25%, but less than 50%: Accounted under the Equity Method
  • More than 50%: Consolidate
  • Special Issue: SPE (now VIE)
equity investments16
Equity Investments

Equity Method:

  • Initial investment: at cost
  • Temporary fluctuations in market value: Ignored
  • Income/Loss recognition: % of investee company income or loss.
equity investments17
Equity Investments

Equity Method:

  • Dividends: treated as a reduction of the investment, NOT income:
  • dr. cash
      • cr. investment
exercise 17 12 b
Exercise 17-12 (b)

Monica Co. should report for 2003

  • Dividend income $36,000
  • Dividend income $10,800
  • Investment income $38,300
  • Investment income $25,500
  • Investment income $10,800
equity investments19
Equity Investments

Special Purpose Entities (SPEs)

New term: Variable interest entities

(VIEs)

Special entities set up to segregate a pool of assets and sell interest stakes to investors.

answers
(slide 6a) $32,274.44

(slide 6b) $ 4,098.11

(slide 7) D

(slide 10) D

(slide 11) C

(slide 12) D

(slide 13) $54,400

(slide 14) E

(slide 18) D

Answers