Investment On Securities

Investment on
Securities
Financial Statement Items
Statement of Cash Flow
Balance Sheet Operating
● Cash paid/received for/from
Current/Non-current Assets purchase/sale of trading securities
● Investment securities Investing
(trading, available for sale, ● Cash paid/received for/from
held to maturity) purchase/sale of available-for-sale
Shareholder’s Equity and held-to-maturity securities
● Accumulated unrealized
gains/losses from changes
in value of available for sale Income Statement
securities ● Interest Revenue
● Accumulated unrealized ● Dividend Revenue
gains/losses from ● Realized gains/losses on sale of
derivatives securities
● Unrealized gains losses on changes
in market value of securities
Timeline of Business Issues Involved with
Investment Securities
Classify the Monitor

Determine the Purchase the Earn a return
investment for changes in the Sell the
purpose of the investment for the
accounting market value of securities
investment securities securities
purposes securities
Why Companies Invest in Other Companies?
Companies invest in debt and equity securities of other companies for a couple
of reasons.
1. Safety Cushion - Investments are made to give company a ready source of
funds on which it can draw when needed
2. Cyclical Cash Needs - Liquidity purposes that can maximize returns
3. Investment for a return - Earning money
4. Investment for Influence - Often made for business reasons in order to be
able to exercise influence over the conduct of company’s operations.
5. Purchase for Control
Classiﬁcation of Investment Securities
Two (2) General Types of Securities.
● Debt Securities - Securities which one company loans money to another.
Buying a debt security from company issuing the security is the same as
loaning the company money.
○ Common type of debt securities is bonds issued by corporations.
● Equity Securities - Represent ownership interest in a corporation and are
also traded on public exchanges.
● Trading Securities
○ Investment securities purchased with the intent to take advantage of
short-term price changes.
● Available-For-Sale Securities
○ Investment securities that are purchased as a store of wealth.
○ Held by companies with excessive cash and to earn normal long run return.
○ Passive investment compare to trading securities
● Held-to-Maturity Securities
○ Investment with the intent of holding the security until it matures.
● Equity Method Securities
○ Company invests in stock of another in order to be able to exercise ownership
influence.
Purchasing, Selling, and Earning a Return on
Trading and Available-for-Sale Securities
Investments in Securities
● Are recorded at cost when purchased whether the security being
purchased is debt or equity or whether it is being held with the intent to
sell it quickly or hold it for long term.
● Illustration: On January 1, 2019, KUF Inc. purchased the following
securities: Security A (Bond), B (Stock), C (Stock) are trading securities
amounting to 5,000, 27,500, and 10,000 respectively. Security D (Bond),
Security E (Stock) were also purchased but with the intent to earn a
return on excess cash amounting to 17,000 and 9,200
Interest and Dividends
● Cash received relating to interest and dividends is recorded as interest
revenue/income and dividend revenue/income respectively.
● Interest earned but not yet received or dividends that have been declared
but not paid are also recorded as revenue, with simultaneous recognition
of a corresponding receivable.
● Illustration: Assuming that during the year, security A and D gains interest
amounting to 225 and 850 respectively while the company received
dividends for Security B and E amounting to 825 and 644 respectively.
Interest and Dividends
Realized Gains and Losses on Sale of Securities
● Realized gains and losses is recorded when it is confirmed and verified
through the actual sale of the security.
● These are included in the income statement, sometimes grouped
together with interest and dividend revenue.
● Illustration: KUF Incorporated sells all of its investments in Security B for
28,450 on October 31, 2019. How much is the realized gain or loss for KUF
Incorporated?
● Realized gain from the sale of securities - 950.
Recognizing and Recording the Changing
Value of Securities
● Accounting controversy associated with investment securities is whether
reported at its market value or historical cost
● Trading and available for sale securities - changes in market values are
recorded on the books of the investor.
● Held to maturity and equity securities accounted using equity method,
changes in value are not recorded.
Recognizing and Recording the Changing
Value of Securities
Changes in the Value of Trading Securities
● At the end of 2019, KUF Inc. computes the market value of its trading
securities portfolio and compares it to the historical cost of the portfolio.
● Market value is 200 greater than the historical cost. To reflect this change
in market value, KUF Inc. reports the securities in its SOFP at 15,200 and
reports a 200 gain in the income statement.
Changes in the Value of Available-for-Sale Securities
● Changes in the value of available-for-sale securities are not reported in
the income statement but are instead reported as direct adjustments to
stockholders’ equity.
Computation of Overall Rate of Return
● How well did KUF’s Investment portfolios perform during 2019.
Subsequent Changes in Value
● Trading securities → 1,700.00 unrealized loss → Income Statement

● Available for Sale
○ Cumulative unrealized gain (loss), end of year 1,000.00
○ Plus: Cumulative unrealized loss, beginning of year 250.00
○ Unrealized gain (loss) for the year 1,250.00
Purchase of Held-to-Maturity Securities
● Held-to-maturity Securities are debt securities that the investing company
intends to hold until the formal maturity.
○ Fully intend to refrain from selling the securities until it matures.
○ Interest revenue will be collected
○ Maturity value of bonds will be collected at maturity date.
○ The investing company is certain of the future cash amounts that will flow
from the investment.
Purchase of Bonds
● Bonds can be purchased at amounts either above face value (premium), below
face value (discount) or at face value. The face, or maturity value is the amount
that will be received by the owner of the bonds when the bonds mature.
● Illustration: KUF Inc. purchased security F and classified it as held to maturity.

Security F consists of twenty 1,000 bonds of Company A. The bonds were issued
on January 1, 2019, and will mature five years from the date of issuance on
December 31, 2023. The bonds will pay interest at a stated annual rate of 12%,
with payments to be made annually on December 31. Assuming that the
market rate on bonds of similar risk is 16%, the purchase price of bond can be
shown to be 17,381.
Equity Method Securities
Acquiring Company may have the ability to influence the operating decisions
of the investee.
Accounting standards require the use of equity method in accounting for the
investment if the ability to influence is present.

Investment On Securities

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Investment on

Classify the Monitor

● Trading securities → 1,700.00 unrealized loss → Income Statement

● Illustration: KUF Inc. purchased security F and classified it as held to maturity.

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