The French Revolution
CHAPTER
17 Investments
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1
Identify the three categories of debt securities and describe the accounting and reporting treatment for each category. Understand the procedures for discount and premium amortization on bond investments. Identify the categories of equity securities and describe the accounting and reporting treatment for each category. Explain the equity method of accounting and compare it to the fair value method for equity securities.
5
Describe the accounting for the fair value option. Discuss the accounting for impairments of debt and equity investments. Explain why companies report reclassification adjustments. Describe the accounting for transfer of investment securities between categories.
6
2
7
3
8
4
What to Do?
Recently, a bank reported an $87.3 million write-down on its mortgage-backed securities for the third quarter of 2008; however, the bank stated that it expected its actual losses to be only $44,000. The loss of $44,000 was equal to a modest loss on a condo foreclosure. The bank’s regulator found “the accounting result absurd.” However, the rest of the story is that the bank, in the third quarter of 2009, raised its creditloss estimate by $263.1 million, quite a difference from its original loss estimate of $44,000. The discussion above highlights the challenge of valuing financial assets such as loans, derivatives, and other debt investments. The fundamental question that arose out of the example above and, more significantly, the recent financial crisis is: Should financial instruments be valued at amortized cost, fair value, or some other measure(s)? As one writer noted, the opinion that fair value accounting weakens financial and economic stability has persisted among many regulators and politicians, mostly in Europe but also in Asia. But some investors and others, particularly in the United States, believe that fair value is the
17 Investments
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1
Identify the three categories of debt securities and describe the accounting and reporting treatment for each category. Understand the procedures for discount and premium amortization on bond investments. Identify the categories of equity securities and describe the accounting and reporting treatment for each category. Explain the equity method of accounting and compare it to the fair value method for equity securities.
5
Describe the accounting for the fair value option. Discuss the accounting for impairments of debt and equity investments. Explain why companies report reclassification adjustments. Describe the accounting for transfer of investment securities between categories.
6
2
7
3
8
4
What to Do?
Recently, a bank reported an $87.3 million write-down on its mortgage-backed securities for the third quarter of 2008; however, the bank stated that it expected its actual losses to be only $44,000. The loss of $44,000 was equal to a modest loss on a condo foreclosure. The bank’s regulator found “the accounting result absurd.” However, the rest of the story is that the bank, in the third quarter of 2009, raised its creditloss estimate by $263.1 million, quite a difference from its original loss estimate of $44,000. The discussion above highlights the challenge of valuing financial assets such as loans, derivatives, and other debt investments. The fundamental question that arose out of the example above and, more significantly, the recent financial crisis is: Should financial instruments be valued at amortized cost, fair value, or some other measure(s)? As one writer noted, the opinion that fair value accounting weakens financial and economic stability has persisted among many regulators and politicians, mostly in Europe but also in Asia. But some investors and others, particularly in the United States, believe that fair value is the
References: 8. On July 1, 2012, Wheeler Company purchased $4,000,000 of Duggen Company’s 8% bonds, due on July 1, 2019 1028 Chapter 17 Investments report on its income statement for the year ended December 31, 2012. 9. If the bonds in question 8 are classified as available-forsale and they have a fair value at December 31, 2012, of $3,604,000, prepare the journal entry (if any) at December 31, 2012, to record this transaction.