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ACFM 321 Exam 5
| Term | Definition |
|---|---|
| Discount | Arises when bonds are sold if interest rate paid by stated rate is lower than market rate, because investors are only willing to purchase bond for less than its maturity value |
| Premium | Arises when bonds are sold if stated rate is higher than market rate, because investors are willing to purchase bond for more than its maturity value |
| Key Events in the Life of Debt Investment | Purchasing debt investment, receiving periodic interest payments, holding bonds during periods in which bonds' fair value changes, and either selling bonds before maturity or receiving principal payment at maturity |
| Held-To-Maturity, Trading, Available-For-Sale | What are the 3 types of debt investments? |
| Debit Investment in Debt Investment (face amount), Credit Cash (price paid), Debit Premium on Debt Investment OR Credit Discount on Debt Investment | Journal Entry for the Purchase of Debt Investment |
| Effective Interest Method | Calculate interest revenue by multiplying outstanding balance of investment by relevant interest rate; for bonds, interest for a period equals market rate of interest when debt was purchased multiplied by outstanding balance of debt at beginning of period |
| Debit Cash (stated rate * face amount), Credit Interest Revenue (market rate * outstanding balance), Debit Discount on Debt Investment OR Credit Premium on Debt Investment | Journal Entry for Recording Interest Revenue for Debt Investment |
| Unrealized Holding Losses for Debt | Happen when market rate of interest rises after bond is purchased, fair value falls |
| Unrealized Holding Gains for Debt | Happen when market rate of interest falls after a bond is purchased, fair value rises |
| Held-To-Maturity | Investment classified if investor has "positive intent and ability" to hold investment to maturity |
| Debit Cash, Debit Discount on Debt Investment (balance), Credit Investment in Debt Investment (balance), & Credit Gain on Investments (NI) (to balance) OR Debit Loss on Investments (NI) (to balance) | Journal Entry for Selling HTM Before Maturity |
| Amortized Cost, Less any Allowance for Credit Losses | How are HTM carried on the balance sheet? |
| Not Recognized | What is the treatment of unrealized holding gains/losses for HTM? |
| Shown in Net Income in period in which it was sold | What is the treatment of realized gains/losses for HTM? |
| Investing Activities | What is the classification on the cash flow statement for the purchase and sales of HTM? |
| Trading Securities | Investments in debt that are acquired for purposes of earning profits on short-term price fluctuations |
| Fair Value | How are trading investments carried on the balance sheet? |
| Recognized in Net Income & in Retained Earnings as part of Shareholders' Equity | What is the treatment of unrealized or realized holding gains/losses for trading investments? |
| Debit Fair Value Adjustment & Credit Gain on Investments (Unrealized, NI) for gains OR Debit Loss on Investments (Unrealized, NI) & Credit Fair Value Adjustment | Journal Entry to Adjust Trading Security Investments to Fair Value |
| Adjust Trading Securities to Fair Value & Record Sale Transaction (Will not have any gains/losses) | What are the 2 steps to record sale of trading security investments? |
| Operating Activities | What is the classification on the cash flow statement for trading security investments? |
| Available-For-Sale Security | Debt investment where trade is not actively sought, but investment is available to sell if cash needs arise or market is particularly favorable |
| On Other Comprehensive Income | What is the treatment of unrealized gains/losses for AFS? |
| On Net Income for period in which investment is actually sold | What is the treatment of realized gains/losses for AFS? |
| Debit Fair Value Adjustment & Credit Gain on Investments (Unrealized, OCI) OR Debit Loss on Investments (Unrealized, OCI) & Credit Fair Value Adjustment | Journal Entry to Adjust AFS Investments to Fair Value |
| Adjust AFS Investments to Fair Value, Reverse Previous Fair Value Adjustments, and Record Sale Transaction | What are the 3 steps to record sale of AFS investments? |
| Debit Reclassification Adjustment (OCI) & Credit Fair Value Adjustment OR Debit Fair Value Adjustment & Credit Reclassification Adjustment (OCI) | Journal Entry to Reverse Previous Fair Value Adjustments |
| Intend to sell -- written down to fair value & impairment loss is recognized in NI Not intend to sell -- estimate & recognize credit losses & reduce carrying value of AFS with an allowance for credit losses | How is impairment handled when it comes to AFS? |
| Fair Value | How are AFS carried on the balance sheet? |
| Investing Activities | What is the classification on the cash flow statement for AFS? |
| Fair Value Option (for AFS) | Allows companies to report specified financial assets and liabilities at fair value |
| Aggregate Fair Value, Gross Realized/Unrealized Holding Gains/Losses, Change in Net Unrealized Holding Gains/Losses, Amortized Cost Basis by Major Security Type, & Level of Fair Value Hierarchy | Financial Statement Disclosures |
| On Net Income | What is the treatment of unrealized holding gains/losses for fair value option (for AFS)? |
| Fair Value | How are fair value option (for AFS) carried on balance sheet? |
| Bond | Right to receive a coupon payment (at a stated "coupon rate") each period (annually, semiannually, etc), and then principal at the end |
| Interest Revenue | I say "Discount", you say ? |
| Less Interest Revenue | I say "Premium", you say ? |
| Decrease | For any premium, the net note/bond will ________ to face amount |
| Increase | For any discount. the net note/bond will _________ to face amount |
| Face Value of Note in Main Investment Account, Any Unamortized Premium or Discount in a Contra Account, & Fair Value of Note in a Fair Value Adjustment Account | In the debt world you must track what 3 things? |
| Number of Coupon Payments | N |
| Market Interest Rate Per Coupon Period, NOT Coupon Rate | I |
| Price of Bond | PV |
| Coupon Payment = Face Value * (Coupon Rate / # Coupon Payments Per Year) | PMT |
| Face Value of Bond | FV |
| Finance Buffs Noticed Interesting Coupon Amortizations Each Night | What is the sentence to remember amortization table set up? |
| Face Value, Beginning Discount or Premium, Net Bond (Beginning), Interest Revenue, Cash Coupon Paid, Amortization of Discount or Premium, Ending Discount or Premium, Net Bond Carrying Value (Ending) | What does the sentence translate to in accounting terms? |
| Face Value | The amount printed on the face of the bond to be repaid at maturity, this figure is constant across all periods |
| Beginning Discount or Premium | The unamortized discount or premium at the start of the period, copy from ending discount / premium last period |
| Net Bond (Beginning) | Face Value minus Beginning Discount or Plus Beginning Premium, this is the amount upon which effective-interest will be calculated |
| Interest Revenue | Net Bond (Beginning) * Market Interest Rate * Portion of Year |
| Cash Coupon Paid | Face Value * Coupon Rate * Portion of Year, this is the actual cash payment received periodically by the investor |
| Amortization of Discount or Premium | Interest Revenue - Cash Coupon, discounts amortize up (carrying value rises) & premiums amortize down (the carrying value falls) |
| Ending Discount or Premium | Beginning Discount/Premium +/- Amortization for Period |
| Net Bond Carrying Value (Ending) | Face Value minus Ending Discount OR Plus Ending Premium, this becomes next period's beginning carrying value |
| Key Events in the Life of an Equity Investment | Purchasing equity security, Receiving dividends, Holding investment during periods in which investment's fair value changes, & Selling investment |
| Fair Value Through Net Income | How do you report an equity security when you do not have significant influence (< 20%)? |
| Equity Method | How do you report an equity security when you do have significant influence (20% - 50%)? |
| Consolidation | How do you report an equity security when you have control (> 50%)? |
| Fair Value | How are equity investments carried on balance sheet when investor does not have significant influence? |
| On Net Income in whatever period they occur | Where are unrealized holding gains/losses recognized when investor does not have significant influence? |
| Operating Activities (if current) & Investing Activities (if noncurrent) | How are equity investments classified on cash flow statement when investor does not have significant influence? |
| Debit Investment in Equity Securities & Credit Cash | Journal Entry to Purchase Investment Through FVNI |
| Debit Cash & Credit Dividend Revenue | Journal Entry to Recognize Dividends Through FVNI |
| Debit Loss on Investment (Unrealized, NI) & Credit Fair Value Adjustment OR Debit Fair Value Adjustment & Credit Gain on Investment (Unrealized, NI) | Journal Entry to Adjust Equity Investments to Fair Value Through FVNI |
| Adjust Securities to Fair Value & Record Sale | What are the 2 steps to sell equity investment through FVNI? |
| Debit Investment in Equity & Credit Cash | Journal Entry to Purchase Investment Through Equity Method |
| Debit Investment in Equity Affiliate & Credit Investment Revenue | Journal Entry to Record Investment Revenue Through Equity Method |
| Debit Investment Losses & Credit Investment in Equity Affiliate | Journal Entry to Record Investment Loss Through Equity Method |
| Debit Cash & Credit Investment in Equity Affiliate | Journal Entry to Recognize Dividends Through Equity Method |
| Debit Cash & Credit Investment in Equity Securities, Debit Loss on Investment OR Credit Gain on Investment | Journal Entry to Record Sale of Investment Through Equity Method |
| Debit Cash & Credit Investment in Equity Securities, Debit OR Credit Fair Value Adjustment | Journal Entry to Record Sale of Investment Through FVNI |
| Investment Account & Revenue | When investor's expenditure to acquire an equity-method investment exceeds book value of underlying net assets acquired, additional adjustments to both _________ _________ & __________ might be needed |
| Acquired company's assets at their fair values on date of acquisition & Goodwill for excess of acquisition price over fair value of identifiable net assets acquired | Consolidated financial statements report: |
| Revalued, usually upwards & there is no effect on the net income (because land has an indefinite useful life) | Revaluation of Land & Net Income Effect |
| Revalued, usually upwards & when there is extra depreciation, we need to adjust the investee's reported net income | Revaluation of Buildings & Equipment & Net Income Effect |
| Used to be recorded at LCM or LCNRV, now revalued to fair value & when there is extra COGS, we need to adjust the investee's reported net income | Revaluation of Inventory & Net Income Effect |
| Used to only have filing/defense costs; now recorded at the full fair value, usually revalued upwards & when there is extra amortization, we need to adjust the investee's reported net income | Revaluation of Patents/Copyrights |
| Did not appear on books at all; now recognized & when there is extra amortization, we need to adjust the investee's reported net income | Revaluation of Customer Lists |
| No effect on net income (because goodwill has an indefinite useful life) | Revaluation of Goodwill |
| Debit Investment Revenue & Credit Investment in Equity Affiliate | Journal Entry to Adjust Investee's Reported Net Income for Revaluation of Assets |
| Must use the appropriate fraction of each of those amounts, like partials | When the Investment is Acquired in Mid-Year |
| Impairment of Equity Method Investments | If decline is viewed as other than temporary, investor should recognize impairment loss in NI & reduce carrying value of investment to fair value in balance sheet |
| Debit Impairment Loss & Credit Investment in Equity Affiliate | Journal Entry to Record Impairment of Equity Method Investment |
| Debit Cash, Credit Investment in Equity Affiliate, & Debit Loss on Investment (NI) OR Credit Gain on Investment (NI) | Journal Entry to Record Sale of an Equity Method Investment |
| Fair Value Option when you have significant influence | Companies can choose this for "significant influence" investments that otherwise would be accounted for under equity method. |
| Accounted for just like the FVNI method | How is the fair value option accounted for? |
Created by:
MOWGaming04
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