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 AFS on Balance Sheet?
Fair Value
OCI
How do cash dividends affect the investor's investment in investee on Balance Sheet?
No impact; DR Cash, CR Dividend Revenue
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