Textbook Notes (368,430)
Canada (161,877)
York University (12,845)
ADMS 3585 (22)
Liona Lai (6)
Chapter 9-1

ADMS 3585 Chapter 9-1 notes.docx

8 Pages
167 Views
Unlock Document

Department
Administrative Studies
Course
ADMS 3585
Professor
Liona Lai
Semester
Fall

Description
CHAPTER 9: INVESTMENTS Accounting models for investments in debt and equity securities: 1. cost/amortized cost 2. FV-PL (FV-NI) 3. FV-OCI cost/amortized cost FV-PL (FV-NI) FV-OCI Initial measurement FV + transaction costs FV FV + transaction costs Subsequent Cost or amortized cost FV FV measurement Reporting unrealized n/a Net income OCI holding gains/losses Reporting realized Net income Net income  w/ recycling: net income holding gains/losses  w/o recycling: retained earnings Cost/Amortized Cost Model Investments in Shares of Other Entities - total income = gain/loss on investment + interest/dividend return Assume that Kiwan Corp. (KC) purchases 1,000 shares of Hirj Co. at $4.25 per share on March 8, 2014. A 1.5% commission is charged on the transaction. On December 15, 2014, Hirj Co. directors declare a dividend of $0.10 per share to shareholders of record on December 31, 2014, payable on January 15, 2015. On July 11, 2015, KC sells 800 of the Hirj Co. shares for $5.08 per share and pays a 1.5% commission on the sale. KC has a December 31 year end. To record purchase of Hirj Co. shares on March 8, 2014 Other Investments 4,314 Cash [(1,000 x 4.25) + (1.5% x 1,000 x 4.25)] 4,314 To record dividend income declared on December 31, 2014 Dividend Receivable 100 Dividend Income (0.10 x 1,000) 100 To record receipt of dividend payment on January 15, 2015 Cash 100 Dividend Receivable 100 To record sale of 800 Hirj Co. shares on July 11, 2015 Cash [(5.08 x 800) – (1.5% x 5.08 x 800)] 4,003 Other Investments (4,314 x 800/1000) 3,451 Gain on Sale of Investment 552 Investments in Debt Securities of Other Entities Income under the Amortized Cost Model - sale of investment: first bring the accrued interest and discount or premium amortization up to date interest-bearing - party holding the investment on the interest payment date receives all the interest since the last interest payment date - purchaser to pay the seller an amount equal to the accrued interest since the last interest payment date non-interest-bearing - price of the bond or other instrument is equal to its present value at the date of the transaction Assume that on January 1, 2014, Robinson Limited pays $92,278 to purchase $100,000 of Chan Corporation 8% bonds. Robinson accounts for this investment at amortized cost. The bonds mature on January 1, 2019, and interest is payable each July 1 and January 1. The lower-than-face-value purchase price of $92,278 provides an effective interest rate of 10%. This is a combination of the 8% interest received in cash each year and the benefit of the $7,722 discount on the bond (100,000 – 92,278). Note that the bond is acquired on an interest payment date and there is therefore no accrued interest for Robinson to pay on January 1. Assume Robinson Limited has an August 31 year end. Date Cash rcvd Interest income Amortization of discount Amortized cost of bonds 1/1/14 $ 92278 7/1/14 $ 4000 $ 4614 $ 614 $ 92892 1/1/15 $ 4000 $ 4645 $ 645 $ 93537 7/1/15 $ 4000 $ 4677 $ 677 $ 94214 1/1/16 $ 4000 $ 4711 $ 711 $ 94925 7/1/16 $ 4000 $ 4746 $ 746 $ 95671 1/1/17 $ 4000 $ 4784 $ 784 $ 96455 7/1/17 $ 4000 $ 4823 $ 823 $ 97278 1/1/18 $ 4000 $ 4864 $ 864 $ 98142 7/1/18 $ 4000 $ 4907 $ 907 $ 99049 1/1/19 $ 4000 $ 4951 $ 951 $ 100000 $ 40000 $ 47722 $ 7722 Purchase of investment on January 1, 2014 Bond investment at amortized cost 92,278 Cash 92,278 Receipt of interest payment on July 1, 2014 Cash (100,000 x 8% x 6/12) 4,000 Bond investment at amortized cost 614 Interest income (92,278 x 10% x 6/12) 4,614 Recognition of interest receivable and interest income at year-end on August 31, 2014 Interest receivable (100,000 x 8% x 2/12) 1,333 Bond investment at amortized cost 215 Interest income [(92,278 + 614) x 10% x 2/12] 1,548 Receipt of interest payment on January 1, 2015 Cash 4,000 Bond investment at amortized cost 430 Interest receivable 1,333 Interest income (4,645 – 1,548) 3,097 Sale of Investments Assume that Robinson Limited sells its investment in the Chan Corporation bonds on November 1, 2018, at 99.75% plus accrued interest. Assume the effective interest method is used. Recognition of interest receivable and interest income at year-end on August 31, 2018 Interest receivable (4,000 x 2/12) 1,333 Bond investment at amortized cost 317 Interest income (4,951 x 2/6) 1,650 Accrued interest at November 1, 2018 Interest receivable (4,000 x 2/12) 1,333 Bond investment at amortized cost 317 Interest income (4,951 x 2/6) 1,650 Bringing bond balance up to date Carrying amount of bonds at Nov. 1, 2018 99,049 Add: Discount amortized on Aug. 31 317 Add: Discount amortized on Nov. 1 317 Bond Balance, Nov. 1, 2018 99,683 Calculating gain/loss on sale of bonds: Sale proceeds (100,000 x 99.75%) 99,750 Less: Bond Balance, Nov. 1, 2018 (99,683) Gain on sale of bonds 67 Sale of Investments on November 1, 2018 Cash [(100,000 x 99.75%) + 2,666] 102,416 Interest receivable 2,666 Bond investment at amortized cost 99,683 Gain on Sale of Investment 67 Problem 9-1: On January 1, 2014, Rustermann Corporation, a publicly traded company, purchased 8% bonds, having a maturity value of $400,000. The bonds provide the bondholders with a 6% yield. They are dated January 1, 2014, and mature January 1, 2019, with interest receivable December 31 of each year. Rustermann's business model is to hold these bonds to collect contractual cash flows. a. bond acquisition price present value of bond principal payments (400,000 x 0.74726) 298,904 present value of annual bond interest payments (400,000 x 8% x 4.21236) 134,796 bond acquisition price 433,700 b. purchase of bonds Jan 1/14 Bond Investment at Amortized Cost 433,700 Cash 433,700 c. bond amortization schedule Date Cash Received Interest Income Amort of Premium Bond Carrying Amt 1/1/14 433,700 12/31/14 32,000 26,022 5,978 427,722 12/31/15 32,000 25,663 6,337 421,385 12/31/16 32,000 25,283 6,717 414,668 12/31/17 32,000 24,880 7,120 407,548 12/31/18 32,000 24,452 7,548 400,000 d. interest received and amortization for 2014 Dec 31/14 Cash 32,000 Interest Income 26,022 Bond Investment at Amortized Cost 5,978 e. interest received and amortization for 2015 Dec 31/15 Cash 32,000 Interest Income 25,663 Bond Investment at Amortized Cost 6,337 FV-PL (FV-NI) - carrying amount of each FV-NI investment is adjusted to its fair value at each reporting date - all resulting gains and losses reported in net income along with any dividends or interest income earned Income from Investments Interest-Bearing Debt Investments Assume that a company purchases $100,000, 10%, five-year bonds of Graff Corporation on January 1, 2014, with interest payable on July 1 and January 1. The bond sells for $108,111, resulting in a bond premium of $8,111 and an effective interest rate of 8%. Purchase of investment on January 1, 2014 FVPL investment 108,111 Cash
More Less

Related notes for ADMS 3585

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit