Intermediate Accounting 2
a QuickStudy Digital Reference Guide
Michael P Griffin
- 44 pages
- English
- ePUB (mobile friendly)
- Available on iOS & Android
Intermediate Accounting 2
a QuickStudy Digital Reference Guide
Michael P Griffin
About This Book
Essentials of the college level Intermediate Accounting 2 course expertly written in our time-tested condensed format that is proven to support students, their studies, grades and even their professional life after graduation. Our experienced author, professor and consultantMichael Griffin, MBA, CMA, CFM, ChFC has outdone himself providing the clearest organization of concepts streamlined to offer facts, equations, examples and explanations in this digital guide offering incredible value for quality course and professional support that you will not find anywhere else. Any business professional that deals with top-level management of multifaceted companies would also find this to be a great reference for facets they may not deal with on a daily basis, but that they are expected to understand regarding operations and strategy, again at an unbeatable value.
Digital guide includes:
- Investments
- Current Payables
- Income Tax Accounting
- Long-Term Liabilities
- Asset Retirement Obligations
- Leases
- Pensions
- Contingencies
- Equity
- Statement of Cash Flows
Frequently asked questions
Information
- Debt securities: Debt instrument that can be bought or sold between two parties and has basic terms defined, such as the amount borrowed (principal), interest rate, and maturity date.
- Equity securities: An ownership interest in an entity or a right to acquire such an interest.
- These are recorded at cost and measured at fair values when quoted market prices are available.
- If quoted market prices do not exist, equity securities are reported at cost until sold.
- When the investing company lacks significant influence over the operating and financial policies of the investee, the investments are recorded using three categories:
Category | Criteria | Reporting Method Used | Treatment of Unrealized Gains and Losses |
Held to maturity | Debt securities that the company has the intent to hold until maturity | Investment is reported at amortized cost with disclosure of fair value in the financial statement notes. | Not recognized |
Trading | Debt or equity securities that the company intends to sell in the near future | Investment is reported at fair value. | Recognized in net income |
Available for sale | Debt or equity securities not classified as held to maturity or trading | Investment is reported at fair value. | Recognized in other comprehensive income |
- These securities have a specified date that they mature and on that date the principal (face value) is paid to investors.
- Usually, interest is paid to the investor periodically during the life of the security.
- Premium: If the interest rate (stated rate) paid by the debt security is higher than the prevailing market rate on similar risk debt securities, the debt instrument will be sold for a value greater than its face value. EX: A company buys a bond with a face value of $1,000,000 for $1,100,000. The premium is $100,000. The bond would be recorded upon purchase as follows:
Debit Credit Investment in bonds $1,000,000 Premium on bonds $100,000 Cash $1,100,000 - Discount: If the interest rate (stated rate) paid by the debt security is lower than the prevailing market rate on similar risk debt securities, the debt instrument will be sold for a value less than its face value. EX: A company buys a bond with a face value of $1,000,000 for $750,000. The discount is $250,000. The bond would be recorded upon purchase as follows:
Debit Credit Investment in bonds $1,000,000 Discount on bonds $250,000 Cash $750,000
- The effective interest method is used to calculate the interest revenue.
- Effective interest rate: The prevailing market rate of interest on debt securities with risk similar to the investmentās risk. EX: A company buys a bond with a face value of $1,000,000 for $1,100,000. The stated rate of interest is 6%, but the market rate on debt securities with similar risk is 8%. The 8% rate will be used to calculate the interest income.
- Effective interest rate: The prevailing market rate of interest on debt securities with risk similar to the investmentās risk.
- These are typically reported as a current asset.
- Cash flows from buying and selling trading securities are typically classified as operating activities if traded by financial institutions.
- If the company that is buying and selling trading securities is not a financial institution, then the cash flows from buying and selling the securities is classified as investing activity cash flows if the investment is not held for sale in the near term.
- It is recorded at cost but reported at fair value when the balance sheet is prepared.
- Investment is written up or down to its fair value; this process is called āmarking to market.ā
- A valuation allowance account (fair value adjustment) is used to record the fair value adjustment, and an account called ānet unrealized holding gains or lossesā is used to record the rise or fall in fair value.
- Fair value adjustment account is used to increase or decrease the carrying value of the trading securities asset value.
- Net unrealized holding gains or losses are reported on the income statement.
- Unrealized means that the gain or loss has not been realized because the investment has not yet been sold.
EX: Investment A is a trading security that was acquired for $100,000. Upon preparing a balance sheet, it is determined that investment A has lost $10,000 of value. The entry would be as follows to record the unrealized loss and to re-value the investment account:Debit Credit Net unrealized holding gains and losses $10,000 Fair value adjustment $10,000 EX: Investment B is a trading security that was acquired for $100,000. Upon preparing a balance sheet, it is determined that investment B has gained $20,000 of value. The entry would be as follows to record the unrealized gain and to re-value the investment account:Debit Credit Fair value adjustment $20,000 Net unrealized holding gains and losses $20,000
- These are neither held-to-maturity nor trading securities.
- Cash flow from buying and selling available-for-sale securities are classified as investing activities on the statement of cash flows.
- Like trading securities, they are recorded at cost when acquired and reported at fair value on t...