HTM (Bond)
When does the investor recognize income on Income Statement?
When HTM bonds are sold through realized gain and loss
When does the investor recognize income on Income Statement?
Every reporting period through unrealized gain or loss (due to fair value changes)
Why do we have bond discount/premium?
Because bonds can be purchased below/above face value.
When do firms use FV through NI to record equity investments?
When the investor lacks significant influence over the investee's operating and financing decisions.
What is the range of the voting stock percentage for equity method?
20%-50%
What is the valuation basis for HTM on Balance Sheet?
Amortized Cost
What is the valuation basis for Trading Securities (TS) on Balance Sheet?
Fair Value
OCI
How do cash dividends affect the investor's investment in investee on Balance Sheet?
No Change.
How do cash dividends affect the investor's investment in investee on Balance Sheet?
Reduce the asset's (Investment in Investee Stock's) value
How does investor recognize a gain and a loss?
DR Loss
CR Gain
Does the investor recognize any realized gain?
No. Gain or loss are picked up through fair value adjustment (unrealized gain or loss).
The investor does not plan to trade the investment actively, but the investment is available to be sold given the right combination of market
factors and investor’s cash situation
What is the Journal Entry to record the sale of the equity investment?
Dr. Cash
Cr. Investment in B’s stock
Dr./Cr. Fair value adjustment (to zero out balance)
What is the Journal Entry to record the sale of the equity investment?
Dr. Cash
Cr. Investment in stock
Dr. Loss on Sale or Cr. Gain on sale (plug)
What is the JE to record bond interest revenue for a bond that is purchased at a premium?
DR. Cash (based on coupon rate)
CR. Premium on bond (plug)
CR. Interest revenue (based on mkt rate)
How does the fair value option work for bonds?
The investment is carried at fair value
Unrealized gains and losses are included in net income
On January 12, Henderson Corporation purchased bonds of Honeycutt Corporation for $73 million and classified the securities as available-for-sale. At the close of the same year, the fair value of the securities is $81 million. Henderson Corporation should report:
A) A gain of $8 million on the income statement.
B) An increase in shareholders' equity of $8 million.
C) An investment of $73 million.
D) None of the choices are correct.
B) An increase in shareholders' equity of $8 million.
$81 million − $73 million = $8 million would be included in shareholders’ equity given that the investment is accounted for as an available-for-sale investment.
Unrealized holding gains and losses on trading securities are included in net income because:
A) The SEC mandates the inclusion.
B) The IRS mandates the inclusion.
C) They measure the success or failure of taking advantage of short-term price changes.
D) They measure the book value of the securities at the balance sheet date.
C) They measure the success or failure of taking advantage of short-term price changes.
Western Manufacturing Company owns 40% of the outstanding common stock of Eastern Supply Company. During 2024, Western received a $50 million cash dividend from Eastern. What effect did this dividend have on Western’s 2024 total assets?
Total assets are unchanged.
(The dividend increases cash but decreases the investment asset.)
Dr. Cash 20M
Cr. Investment in Eastern Supply Co. 20M
Level Company owns bonds of Leader Company classified as held-to-maturity. During 2024, the fair value of those bonds increased by $4 million. Interest was received of $3 million. What effect did the investment have on Level’s 2024 financial statements?
A) Shareholders’ equity increased by $4 million.
B) Net income increased by $7 million.
C) Total assets increased by $3 million.
D)Total assets increased by $7 million.
C) Total assets increased by $3 million.
Receipt of interest would increase cash by $3 million.
On March 25, 2024, Phillips Corporation purchased bonds of Atlas Corporation for $135 million and classified the securities as trading securities. On December 31, 2024, these bonds were valued at $162 million. Three months later, on April 3, 2025, Phillips Corporation sold these bonds for $147 million.
As part of the multistep approach to record the 2025 transaction, Phillips Corporation should first update the fair value adjustment by recording a(n):
A) gain of $12 million in 2025.
B) unrealized holding loss of $15 million in 2025.
C) unrealized holding gain of $12 million in 2025.
D) unrealized holding gain of $42 million in 2025.
B) unrealized holding loss of $15 million in 2025.
2025 unrealized loss of $147 million − $162 million = ($15 million).
Jeremiah Corporation purchased debt securities during 2024 and classified them as securities available-for-sale:
Security Cost Fair value 12/31/2024
Security A, Cost ($46,000), Fair value 12/31/2024 ($50,200)
Security B, Cost ($85,000), Fair value 12/31/2024 ($78,000)
Security C, Cost ($31,200), Fair value 12/31/2024 ($45,000)
All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation in the December 31, 2024, income statement relative to the portfolio?
A) $0
B) $11,000
C) $18,000
D) None of these answer choices are correct.
A) $0
Unrealized holding gains and losses are not included in net income for securities available-for-sale.
On January 1, 2024, Nana Company paid $100,000 for 6,700 shares of Papa Company common stock. The ownership in Papa Company is 10%. Nana Company does not have significant influence over Papa Company. Papa reported net income of $62,000 for the year ended December 31, 2024. The fair value of the Papa stock on that date was $50 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2024?
6,700 × $50 = $335,000
On January 2, 2024, Germane, Inc. bought 30% of the outstanding common stock of Quality, Inc. for $56 million cash. At the date of acquisition of the stock, Quality’s net assets had a book value and fair value of $120 million. Quality’s net income for the year ended December 31, 2024, was $30 million. During 2024, Quality declared and paid cash dividends of $10 million. On December 31, 2024, Germane’s should report investment revenue of:
A) $3 million.
B) $6 million.
C) $30 million.
D) $9 million.
D) $9 million.
30% × $30 million = $9 million.