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Accounting for Securities & Investments Flashcards

Accounting for Securities & Investments Flashcards
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Held-to-Maturity (HTM) Securities: Determining Net Book Value

You can find this by adding the premium to the purchase price and subtracting any discount.

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Held-to-Maturity (HTM) Securities

Companies must continue to hold these until they become mature. They are considered debt securities and can be reported at fair market value. Corporate bonds are an example.

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Discount Bond

A bond that is bought for less than its face value. This usually happens because the bond's interest rate is lower than the market's. The money saved must be amortized over the bond's life.

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Premium Bond

This type of bond sells for more than its face value. These bonds generally have an interest rate that extends the market's current rate.

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You bought a bond with a face value of $10,000 for $9,000. It is a ten-year bond. What will be the bond's yearly amortization?

10,000 - 9,000 = 1,000. 1,000 / 10 = 100. Yearly amortization = 100.

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Finding Amortization for a Discount Bond: Formula

Discount Amount for the Bond / Total Years of the Bond = Amortization Per Year

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Your company has two trading securities. One has a fair value of $3,000 and a cost of $3,500. The other has a fair value of $10,000 and a cost of $9,000. What will your fair value adjustment be?

Fair value adjustment for Security One is -500; for Security Two it is 1,000. The fair value adjustment is 500.

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You purchased a trading security with a cost of $20,000 and a fair value of $22,000. What do you record on your balance sheet?

$22,000. You record the fair value price.

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Controlling Interest

One company can gain this if they own more than 50% of another company's voting shares. This results in consolidation accounting and consolidation of an investment.

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Trading Securities

These are securities that can be traded to earn a profit. They are always current assets and you have to record them at fair value. Adjustments are noted on the income statement.

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21 cards in set

Flashcard Content Overview

You can go over short-term investment options with these flashcards. You'll be able to consider the differences between trading securities, available-for-sale (AFS) securities, and held-to-maturity (HTM) securities. Premium bonds and discount bonds are also addressed by this set. Additionally, you can review the processes of consolidation and amortization.

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Trading Securities

These are securities that can be traded to earn a profit. They are always current assets and you have to record them at fair value. Adjustments are noted on the income statement.

Controlling Interest

One company can gain this if they own more than 50% of another company's voting shares. This results in consolidation accounting and consolidation of an investment.

You purchased a trading security with a cost of $20,000 and a fair value of $22,000. What do you record on your balance sheet?

$22,000. You record the fair value price.

Your company has two trading securities. One has a fair value of $3,000 and a cost of $3,500. The other has a fair value of $10,000 and a cost of $9,000. What will your fair value adjustment be?

Fair value adjustment for Security One is -500; for Security Two it is 1,000. The fair value adjustment is 500.

Finding Amortization for a Discount Bond: Formula

Discount Amount for the Bond / Total Years of the Bond = Amortization Per Year

You bought a bond with a face value of $10,000 for $9,000. It is a ten-year bond. What will be the bond's yearly amortization?

10,000 - 9,000 = 1,000. 1,000 / 10 = 100. Yearly amortization = 100.

Premium Bond

This type of bond sells for more than its face value. These bonds generally have an interest rate that extends the market's current rate.

Discount Bond

A bond that is bought for less than its face value. This usually happens because the bond's interest rate is lower than the market's. The money saved must be amortized over the bond's life.

Held-to-Maturity (HTM) Securities

Companies must continue to hold these until they become mature. They are considered debt securities and can be reported at fair market value. Corporate bonds are an example.

Held-to-Maturity (HTM) Securities: Determining Net Book Value

You can find this by adding the premium to the purchase price and subtracting any discount.

Available-for-Sale (AFS) Securities

Companies do not plan to keep these securities until they mature or to trade them actively. They may also be recorded at fair market value. Preferred stock is an example of this.

Equity Method

A standard of accounting used when a company owns at least 20% of another company's outstanding voting shares. Owning this portion of shares gives you influential securities.

You gained 30% ownership in Company A by investing $10,000. How will you record this in your accounting journal?

Debit $10,000 from the Investment in Company A account and credit $10,000 to the Cash account.

You gained 30% ownership in Company A by investing $10,000. Company A paid shareholders $2,000 in dividends in the year. How do you record your share of the dividends?

2,000 x 30% = 600 (your share of the dividends) Debit 600 from the Cash account and credit 600 to the Investment in Company A account.

You gained 30% ownership in Company A by investing $10,000. Company A made $5,000 in net yearly income. How will you record this income?

5,000 x 30% = 1,500. Debit 1,500 from the Investment in Company A account and Credit 1,500 to the Investment Income account.

Other Comprehensive Income (OCI) Account

This account is debited the fair value adjustment for securities available-for-sale (AFS).

Consolidation Accounting

The kind of accounting used when one company gains a controlling interest in another. It treats the companies as a single entity and requires you to eliminate any intercompany transactions.

Available-for-Sale (AFS) Securities: Benefits

Because these securities can be sold at any time, they increase fund availability and may increase a company's returns.

Short-Term Investment

These investments are seen as having high liquidity. They will reach maturity inside of a year and they can be turned to cash quickly, which leads many people to invest in these.

Certificate of Deposit (CDs)

Banks offer these promissory notes as a short-term investment. They have set maturity dates and are considered low-risk.

Treasury Bill (T-Bills)

These are short-term investments that the U.S. government issues. They vary in price from $1,000 to several million dollars.

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