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					  Investments

    Sid Glandon, DBA, CPA
Associate Professor of Accounting
The University of Texas at El Paso


                                     1
Debt Securities
   Classified as trading
       Held for sale in near term to generate income
   Classified as available-for-sale
       Not classified as held-to-maturity or trading
        securities
   Classified as held-to-maturity
       Positive intent and ability to hold to maturity


                                                          2
  Fact Pattern:
  Investment in Debt Securities
  Date                      Activity   Amount
 1/1/06 Purchase of bonds               $924,183
12/31/06 Fair value of bonds           1,000,000
12/31/07 Fair value of bonds             975,000

         Additional Information:
          Par value                    1,000,000
          Discount                        75,817
          Stated interest rate                8%
          Effective interest rate            10%



                                                   3
Debt Securities, Classified as Trading
   Valuation
       Fair value
   Unrealized holding gains or losses
       Recognized in net income
   Other income
       Interest earned
       Realized gains and losses from sale

                                              4
 Debt Security, Classified as trading
 Date                       Account                         Debit          Credit
1/1/06   Investment, trading debt security                 $924,183
           Cash                                                            $924,183
         To record the purchase of a debt security on January 1, 2006, classified as a
         trading debt investment.




                                                                                         5
  Debt Security, Classified as trading
                       Unrealized holding gain (loss)
         FMV, December 31, 2006                         $1,000,000
         Original cost                                     924,183
          Unrealized holding gain                                     $75,817

         T-Account: Fair value adjustment, trading debt securities
  Date                   Description                  Debit          Credit
 1/1/06 Beginning balance                                    $0
12/31/06 Required adjusting journal entry                75,817
12/31/06 Required ending balance                       $75,817




                                                                                6
   Debt Security, Classified as trading
  Date                     Account                        Debit         Credit
12/31/06 Fair value adjustment, trading debt securities   $75,817
          Unrealized holding gain, income                                $75,817
          To recognize unrealized holding gain at December 31, 2006 on debt
          security classified as trading.




                                                                                   7
  Debt Security, Classified as trading
                       Unrealized holding gain (loss)
         FMV, December 31, 2007                         $975,000
         Original cost                                   924,183
          Unrealized holding gain                                     $50,817

         T-Account: Fair value adjustment, trading debt securities
  Date                   Description                  Debit          Credit
 1/1/07 Beginning balance                              $75,817
12/31/07 Required adjusting journal entry                             $25,000
12/31/07 Required ending balance                       $50,817




                                                                                8
 Debt Security, Classified as trading
  Date                     Account                         Debit        Credit
12/31/07 Unrealized holding loss, income                   $25,000
          Fair value adjustment, trading debt securities                 $25,000
          To recognize unrealized holding loss at December 31, 2007 on debt
          security classified as trading.




                                                                                   9
            T-Account: Fair value adjustment, trading debt securities
  Date                    Description                    Debit          Credit
 1/1/06    Beginning balance                                   $0
12/31/06   Required AJE                                   $75,817
12/31/06   Ending balance                                 $75,817
12/31/07   Required AJE                                                  $25,000
12/31/07    Required ending balance                       $50,817




                                                                                 10
Debt Security, Classified as available-for-sale
   Valuation
       Fair value
   Unrealized holding gains or losses
       Recognized as other comprehensive income
       Recognized as separate component of stockholders’
        equity
   Other income
       Interest earned
       Realized gains and losses from sale

                                                            11
  Debt Security, Classified as available-for-sale
                        Amortization Schedule

           Interest    Interest    Amortization   Carrying Fair Value,
 Year      Received    Revenue      of Discount    Value    End of Year
 1/1/06                                            $924,183
12/31/06     $80,000     $92,418       $12,418      936,601 $1,000,000
12/31/07      80,000      93,660        13,660      950,261    975,000




                                                                          12
Debt Security, Classified as available-for-sale
 Date                      Account                          Debit          Credit
1/1/06   Investment, available-for-sale debt security     $1,000,000
          Discount on debt security                                          $75,817
          Cash                                                               924,183
         To record the purchase of a debt security at a discount and classified as
         available for sale.




                                                                                       13
   Debt Security, Classified as available-for-sale
                           Unrealized holding gain (loss)
         FMV, December 31, 2006                               $1,000,000
         Carrying value, December 31, 2006                       936,601
          Unrealized holding gain                                           $63,399

                T-Account: Fair value adjustment, AFS debt securities
  Date                        Description                       Debit      Credit
 1/1/06 Beginning balance                                             $0
12/31/06 Required adjusting journal entry                         63,399
12/31/06 Required ending balance                                $63,399

                  T-Account: Unrealized holding (gain) loss, equity
  Date                        Description                        Debit     Credit
 1/1/06 Beginning balance                                                        $0
12/31/06 Required adjusting journal entry                                    63,399
12/31/06 Required ending balance                                            $63,399


                                                                                      14
  Debt Security, Classified as available-for-sale
  Date                     Account                        Debit         Credit
12/31/06 Fair value adjustment, AFS debt securities       $63,399
          Unrealized holding gain, equity                                $63,399
          To recognize unrealized holding gain at December 31, 2006 on debt
          security classified as available-for-sale.




                                                                                   15
Debt Security, Classified as available-for-sale
                      Unrealized holding gain (loss)
         FMV, December 31, 2007                        $975,000
         Carrying value, December 31, 2007              950,261
          Unrealized holding gain                                   $24,739

          T-Account: Fair value adjustment, AFS debt securities
  Date                   Description                 Debit         Credit
 1/1/07 Beginning balance                             $63,399
12/31/07 Required adjusting journal entry                           $38,660
12/31/07 Required ending balance                      $24,739

             T-Account: Unrealized holding (gain) loss, equity
  Date                   Description                    Debit      Credit
 1/1/07 Beginning balance                                           $63,399
12/31/07 Required adjusting journal entry                $38,660
12/31/07 Required ending balance                                    $24,739

                                                                              16
  Debt Security, Classified as available-for-sale
  Date                     Account                        Debit         Credit
12/31/07 Unrealized holding loss, equity                  $38,660
          Fair value adjustment, AFS debt securities                     $38,660
          To recognize unrealized holding loss at December 31, 2007 on debt
          security classified as available-for-sale.




                                                                                   17
            T-Account: Fair value adjustment, AFS debt securities
  Date                    Description                  Debit         Credit
 1/1/06    Beginning balance                                 $0
12/31/06   Required AJE                                  63,399
12/31/06   Ending balance                                63,399
12/31/07   Required AJE                                               $38,660
12/31/07    Required ending balance                     $24,739

               T-Account: Unrealized holding (gain) loss, equity
  Date                    Description                     Debit      Credit
 1/1/06    Beginning balance                                               $0
12/31/06   Required AJE                                                63,399
12/31/06   Ending balance                                              63,399
12/31/07   Required AJE                                    $38,660
12/31/07    Required ending balance                                   $24,739




                                                                                18
Debt Securities, Classified as Held-to-Maturity
   Valuation
       Amortized cost
   Unrealized holding gains or losses
       Not recognized
   Other income
       Interest earned
       Realized gains and losses from sale

                                                  19
Equity Securities
   Ownership interests
   Include rights to buy or sell ownership
   Extent of ownership determines accounting
    treatment for equity securities




                                                20
Degrees of Control
                 Ownership Percentage
  0%             20%             50%              100%


Little or None         Significant      Control
                   Level of Influence




                                                         21
  Fact Pattern:
  Investment in Equity Securities
                                             Market Value
  Date         Security    Shares     FVM    of Investment
 9/1/06 Spencer Company       1,000      $27       $27,000
12/31/06 Spencer Company      1,000       31        31,000
12/31/07 Spencer Company      1,000       29        29,000




                                                         22
Equity Security, Classified as available-for-sale
   Less than 20% ownership interest
   Recorded at cost
   Valued and reported at fair value
   Dividends are recognized as income
   Unrealized holding gains and losses
       Part of comprehensive income
       A component of stockholders’ equity

                                                    23
Equity Security, Classified as available-for-sale
 Date                     Account                      Debit        Credit
9/1/06   Investment, AFS equity securities             $27,000
          Cash                                                       $27,000
         To record the purchase of 1,000 shares of Spencer Company common
         stock at $27 per share.




                                                                               24
Equity Security, Classified as available-for-sale
                       Unrealized holding gain (loss)
         FMV, December 31, 2006                         $31,000
         Original cost                                   27,000
          Unrealized holding gain                                     $4,000

          T-Account: Fair value adjustment, AFS equity securities
  Date                   Description                  Debit         Credit
 9/1/06 Beginning balance                                   $0
12/31/06 Required adjusting journal entry                4,000
12/31/06 Required ending balance                        $4,000

             T-Account: Unrealized holding (gain) loss, equity
  Date                   Description                    Debit       Credit
 9/1/06 Beginning balance                                                 $0
12/31/06 Required adjusting journal entry                              4,000
12/31/06 Required ending balance                                      $4,000

                                                                               25
Equity Security, Classified as available-for-sale
  Date                     Account                      Debit        Credit
12/31/06 Fair value adjustment, AFS equity securities    $4,000
          Unrealized holding gain, equity                               $4,000
          To record the unrealized holding gain on Spencer Company common stock
          on December 31, 2006.




                                                                                  26
 Equity Security, Classified as available-for-sale
                       Unrealized holding gain (loss)
         FMV, December 31, 2007                         $29,000
         Original cost                                   27,000
          Unrealized holding gain                                     $2,000

          T-Account: Fair value adjustment, AFS equity securities
  Date                   Description                  Debit         Credit
 9/1/07 Beginning balance                               $4,000
12/31/07 Required adjusting journal entry                             $2,000
12/31/07 Required ending balance                        $2,000

             T-Account: Unrealized holding (gain) loss, equity
  Date                   Description                    Debit       Credit
 9/1/07 Beginning balance                                             $4,000
12/31/07 Required adjusting journal entry                 $2,000
12/31/07 Required ending balance                                      $2,000

                                                                               27
  Equity Security, Classified as available-for-sale
  Date                     Account                         Debit        Credit
12/31/07 Unrealized holding loss, equity                    $2,000
          Fair value adjustment, AFS equity securities                     $2,000
          To record unrealized holding losses on AFS equity securities on December
          31, 2007.




                                                                                    28
  Equity Security, Classified as available-for-sale
            T-Account: Fair value adjustment, AFS equity securities
  Date                    Description                   Debit         Credit
 9/1/06    Beginning balance                                  $0
12/31/06   Required AJE                                    4,000
12/31/06   Ending balance                                  4,000
12/31/07   Required AJE                                                 $2,000
12/31/07    Required ending balance                       $2,000

               T-Account: Unrealized holding (gain) loss, equity
  Date                    Description                     Debit       Credit
 9/1/06    Beginning balance                                                $0
12/31/06   Required AJE                                                  4,000
12/31/06   Ending balance                                                4,000
12/31/07   Required AJE                                     $2,000
12/31/07    Required ending balance                                     $2,000


                                                                                 29
Trading
   Less than 20% ownership interest
   Recorded at cost
   Valued and reported at fair value
   Dividends are recognized as income
   Unrealized holding gains and losses
       Recognized in net income


                                          30
Equity Security, Classified as trading
           T-Account: Fair value adjustment, trading equity securities
  Date                    Description                    Debit         Credit
 9/1/06    Beginning balance                                    $0
12/31/06   Required AJE                                      4,000
12/31/06   Ending balance                                    4,000
12/31/07   Required AJE                                                  $2,000
12/31/07    Required ending balance                        $2,000




                                                                                  31
 Equity Security, Classified as trading
  Date                      Account                           Debit         Credit
12/31/06 Fair value adjustment, trading equity securities      $4,000
          Unrealized holding gain, income                                     $4,000
          To record the unrealized holding gain on Spencer Company common stock
          on December 31, 2006 which is classified as trading equity securities..

  Date                      Account                           Debit         Credit
12/31/07 Unrealized holding loss, income                       $2,000
          Fair value adjustment, trading equity securities                    $2,000
          To record unrealized holding losses on trading equity securities on December
          31, 2007.




                                                                                         32
Equity Method
   Between 20% and 50% ownership interest
   Substantive economic relationship
   Investor’s carrying value
       Increased by proportionate share of earnings
       Decreased by
         Dividends, and
         Proportionate share of losses




                                                       33
Consolidation
   More than 50% voting interest
   Investor is parent
   Investee is subsidiary
   Investor prepares consolidated financial
    statements
   Investor accounts for investment on its
    books using the equity method

                                               34
Investments In Equity Securities
                      Ownership in Capital Stock


      < 20% voting         20-50% voting           >50% voting


   Trading   Available      No                 Consolidation
             for Sale       Consolidation


    Fair      Fair             Equity               Equity
    Value     Value            Method               Method


                                                                 35
             Accounting by Category
                                      Unrealized Holding
     Category          Valuation       Gains and Losses      Other Income
< 20% ownership
                                                            Dividends; gain
       Trading         Fair value         Net income
                                                            or loss on sale
                                     Comprehensive income,
                                                            Dividends; gain
  Available-for-Sale   Fair value     separate component of
                                                            or loss on sale
                                       shareholders' equity
                                                             Proportionate
20% - 50% ownership Equity method        Not recognized     share of income
                                                                or loss
> 50% ownership        Consolidate       Not recognized      No applicable


                                                                              36
             Transfers of Classifications
                                          UNREALIZED GAIN OR LOSS ON
      FROM                 TO                           TRANSFER
Trading            Available-for-sale None, already recognized in income
Trading            Held-to-maturity None, already recognized in income
Available-for-sale Trading            Include in current income
Available-for-sale Held-to-maturity FV becomes amortized cost basis
Held-to-maturity Trading              Include in current income
Held-to-maturity Available-for-sale Include in equity, other comprehensive income




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