Different motivations for investing:

To earn a high rate of return

To secure certain operating or financing arrangements with another company

 Companies account for investments based

on:
the type of security (debt or equity),
their intent with respect to the

investment

Securities

Debt

Equity

1. Held-to-Maturity Securities
2. Available for Sale Securities 3. Trading Securities

1. Holding of less than 20%

2. Holding between 20%-50% 3. Holding of more than 50%

 Debt securities are instruments representing a creditor

relationship with an enterprise.

Investment in debt securities: U.S. treasury securities,

municipal securities, corporate bonds, commercial papers, stock with a mandatory redemption feature or redeemable at the option of the holder

 All investments must be classified into three

categories:
Held to Maturity Securities

Debt Securities
Available for Sale Securities Trading Securities

Amortized Cost

Fair Value

1. Held-to-maturity securities

investments in debt securities with positive intent and ability to hold these securities to maturity.

The account treatment:

Initial Recording: at cost End of Period Reporting: at amortized cost Unrealized Holding Gains or Losses : not recognized Interests and realized gains (Losses) on Sale : all included in income

 Assume that Green acquires an investment in bonds

that will be held to maturity with a face value of 100,000 for 102,458.71 on 1/1/x9. The stated interest rate is 13% and interests are paid on 6/30 and 12/31. The bonds mature on 12/31/11. The effective interest rate is 12%

Journal Entry 1/1/x9

Investment in Bonds held-to-maturity Cash
6/30/x9

102,458.71 102,458.71

Cash
Interest Revenue* Held-to-maturity

6,500
6,147.52 352.48

Interest Rev. = Present Value x Effective Rate

= 102,458.71 x 6% = 6,147.52
Amortization of Premiums(discounts) on investments

decreases (increases) interest revenue.

Date

Cash Received

Interest Revenue

Bond Premium Amortized

Carrying Amount of Bond 102,458.71

1/1/x9 6/30/x9 12/31/x9 6/30/10 12/31/10 6/30/11 12/31/11 6500 6500 6500 6500 6500 6500 6147.52 6126.37 6103.96 6080.19 6055.01 6028.31 352.48 373.63 396.04 419.81 444.99 471.76

102,106.23 101,732.60 101,336.56 100,916.75 100,471.76 100,000.00

 Lets assume that Green sells the investment to Brac on

10/31/11 at 101,250.00 plus accepted interest.

Held to maturity
Interest revenue

314.50
314.50*

* 471.76 x 4/6 = 314.50

 Entry to record the sale of the bond:

Cash
Interest Revenue Held-to-maturity Gain on sale of bond

105,583.33
4333.33* 100,786.26** 463.74***

* 6500 x 4/6 = 4333.33 ** 100,471.76 + 314.50 = 100786.26 *** 101,250 - 100786.26 = 463.74

2. Available-for-sale
securities: including debt and equity
securities that are not classified as trading securities and not classified as held-to maturity securities.

The accounting treatment

initial recording: at cost

end of period reported: at fair value

unrealized holding gains or losses: reported as a

separate component of stockholders equity on B/S

interests, dividends, realized gains or losses

reported on the I/S

Assume that Green acquires an

investment of $100,000,10%,5year bond, on 1/1/x9 with interest payable on 6/30 and 12/31. The bond sales for $108,111 & the effective interest rate is 8%

 Initial recording on 1/1/x9:

Available to sale securities

Cash
Recording on 6/30/x9

108,111
108,111

Cash

5,000

Available for sale securities

Interest Revenue

4,324
676

 Adjusting entry (for valuation):

Unrealized gain or loss-equity account Security fair value adjustment -available for sale

xxxx xxxx

3. Trading securities investments in debt and equity securities held for the purpose of selling them in the near future.

The accounting treatment

initial recording: at cost end of period reported: at fair value unrealized holding gains or losses: reported in the

income statement
interests, dividends, realized gains

or losses

reported in the income statement