What different motivations does companies have for investing in securities issued by other companies?
Different motivations for investing:
*To earn a high rate of return.
*To secure certain operating or financing arrangements with another company.
Debt securities
represent a creditor relationship with another entity. debt securities include u.s. government securities, municipal securities, corporate bonds, convertible debt, and commercial paper.
What are the 3 categories of debt securities for accounting purposes?
*Held-to-maturity: Debt securities that the company has the positive intent and ability to hold to maturity.
*Trading: Debt securities brought and held primarily for sale in the near term to generate income on short-term price difference.
*Available-for-s
What is the accounting and reporting treatment for held-to-maturity debt securities?
*Valuation: Amoritzed cost
*Unrealized holding Gains or Losses: Not recognized
*Other income Effects: Interest when earned; gains and losses from sale
amoritized cost
the acquistion cost adjusted for the amortization of discount or premium, if appropriate.
fair value
The amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length legal transaction.
What is the accounting and reporting treatment for trading securities?
*Valuation: Fair value
*Unrealized holding Gains or Losses: Recognized in net income
*Other income Effects: Interest when earned; gains and losses from sale
<= 3 months
What is the accounting and reporting treatment for available-for-sale?
*Valuation: Fair value
*Unrealized holding Gains or Losses: Recognized as other comprehensive income and as separate component of stockholders' equity
*Other income Effects: Interest when earned; gains and losses from sale
>= 3 months
Held-to-Maturity Securities - DEBT
*Classify a debt security as held-to-maturity only if the firm holding it has both
(1) the positive intent and
(2) the ability to hold securities to maturity.
*Accounted for at amortized cost, not fair value.
*Amortize premium or discount using the effect
How do one record the journal entry for H-T-M security?
We debit H-T-M Securities for the face value + the Premium rather than having a separate Premium account. When amortizing the premium we will just reduce the H-T-M account instead.
Likewise, we debit H-T-M Securities for the face value - the Discount rath
Available-for-Sale Securities - DEBT
Companies report available-for-sale securities at:
*fair value, with
*unrealized holding gains and losses reported as part of comprehensive income (equity) at net of tax amounts.
*Any discount or premium is amortized.
*This is "Mark-to-Market" accounting!
How do companies report A-F-S securities for the balance sheet? Income statement?
Companies report available-for-sale securities at fair value on the balance sheet, but do not report changes in fair value as part of net income until after selling the security.
What occurs if a company sells its A-F-S securities before its maturity date?
If company sells bonds before maturity date:
* Must make entry to remove the,
>Cost in Available-for-Sale Securities and
>Securities Fair Value Adjustment accounts.
*Any realized gain or loss on sale is reported in the "Other expenses and losses or revenu
gain trading
selling the winners and holding the losers.
Trading Securities - DEBT
Companies report trading securities at
*fair value, with
*unrealized holding gains and losses reported as part of net income.
*Any discount or premium is amortized.
*INTEND TO HOLD <= 3 MONTHS
Equity Securities
a security representing an ownership interest such as common, preferred, or other capital stock. It also includes rights to acquire or dispose of an ownership interest at an agreed-upon or determinable price such as warrants, rights, and call options or p