Sale of Securities

1
Sale of Securities
On April 1, 2006, the investment in Silmarils
debt securities is sold for 103,000, which
includes accrued interest of 2,500. On January
1, the debt securities had a carrying value of
105,240, therefore interest revenue of 2,105
(105,240 x .08 x 3/12) would be recorded The
required amortization for the three-months
premium between January 1 and April 1 would be
395.
2
Sale of Debt Securities
Entry to record accrued revenue and to amortize
premium
Apr. 1 Interest Receivable 2,500 Investment in
Held-to Maturity Securities 395 Interest
Revenue 2,105
Entry to record sale
Apr. 1 Cash 103,000 Realized Loss on Sale of
Securities 4,345 Interest Receivable 2,500 Inv
estment in Held-to Maturity
Securities 104,845
3
Sale of Equity Securities
4
Sale of Equity Securities
Jan. 1, 2003 Investment in Trading Securities
10,000 Cash
10,000
Dec 31, 2003 Market Adjustment Trading
2,000 Unrealized gain - Trading
2,000
Dec 31, 2004 Unrealized loss Trading
2,000 Market Adjustment
Trading 2,000
Dec 31, 2004 Cash
9,000 Realized loss
Trading 1,000
Investment in Trading Securities 10,000
5
Transferring SecuritiesBetween Categories
Treatment of
Change in Value
Transferred
From trading
Any unrealized change in value not previously
recognized will be recognized in net income in
the current period.
To trading
Any unrealized change in value not previously
recognized will be recognized in net income in
the current period.
Recognize any unrealized change in value in a
stockholders equity account.
From held to maturity to available for sale
Continued
6
Transferring SecuritiesBetween Categories
Treatment of
Change in Value
Transferred
From available for sale to held to maturity
Any unrealized change in value recorded in a
stockholders equity account is to be amortized
over the securitys remaining life using the
effective-interest method.
Statement of Financial Standards No. 115, par. 15d
7
Transfer from the trading to available-for-sale
category

• Assume
• Cost of trading security 3,000
• Fair market value, end of 2006 3,600
• Fair market value at transfer date (in
  2007) 3,800

Continued
8
Transfer from the trading to available-for-sale
category
Investment in Available-for-Sale
Securities 3,800 Market Adjustment--Trading
Securities 600 Unrealized Gain on
Transfer of Securities 200 Investment
in Trading Securities 3,000
9
Transfer from the available-for-sale category to
the trading security category
Assume Cost of available-for-sale
security 12,000 Fair market value, end of
2006 10,700
Continued
10
Transfer from the available-for-sale category to
the trading security category

• Investment in Trading Securities 10,300
• Market Adjustment--Trading
• Securities 1,300
• Unrealized Loss on Transfer
• of Securities 1,700
• Unrealized Increase/Decrease
• in Value of Available-for-
• Sale Securities 1,300
• Investment in Available-for-
• Sale Securities 12,000

11
Transfer from held-to-maturity to the
available-for-sale category.

• Assume
• Cost of held-to-maturity
• security 20,000
• Fair market value, Dec. 31,
• 2006 20,700

Continued
12
Transfer from held-to-maturity to the
available-for-sale category.

• Investment in Available-for-
• Sale Securities 20,400
• Unrealized Increase/
• Decrease in Value of
• Available-for-Sale
• Securities 400 Investment in Held-to-
• Maturity Securities
  20,000

13
Transfer from available-for-sale to
held-to-maturity.

• Assume
• Cost of available-for-sale
• securities 5,000
• Fair market value, end of 2006 6,500
• Fair market value at transfer date 5,900

Continued
14
Transfer from available-for-sale to
held-to-maturity.

• Investment in Held-to-Maturity Securities
  5,900
• Unrealized Increase/Decrease
• in Value of Available-for-Sale Securities 6
  00
• Investment in Available-for-
• Sale Securities 5,000
• Market Adjustment
• Available-for-Sale
• Securities 1,500

15
Investment securities and the cash flow statement
The purchase and sale of available-for-sale,
held-to-maturity, and equity method securities
are reported in the Investing Activities section
of the statement of cash flows. In contrast, the
cash flows associated with the purchase and sale
of trading securities are shown in the Operating
Activities section. This difference stems from
the fact that, by definition, a company that
maintains a trading securities portfolio
considers as part of its normal business
operations the attempt to make money through the
correct timing of purchases and sales of
(trading) securities.
16
Cash Flows from Gains and Losses on
Available-for-Sale
Cash Company began with a 1,000 investment on
January 1, 2005.
Cash sales 1,700 Cash expenses (1,400) Purchases
of investment securities (600) Sale of investment
securities (costing 200) 170
Continued
17
Cash Flows from Gains and Losses on
Available-for-Sale
The market value of the remaining securities was
500 on December 31, 2005.
Continued
18
Cash Flows from Gains and Losses on
Available-for-Sale
Cash Company will report a 100 unrealized
increase in the value of it available-for-sale
portfolio.
However, if it were a Trading security, Cash
Company would report the 100 unrealized increase
in the income statement
19
Cash Flows from Gains and Losses on
Available-for-Sale
The statement of cash flows for Caesh Company for
2005 appear as follows
20
Classification and Disclosure

• Trading securities
• The change in net unrealized holding gain or loss
  that is included in the income statement.

• Available-for-sale securities
• Aggregate fair value, gross unrealized holding
  gains and gross unrealized holding losses, and
  amortized cost basis by major security type.
• The proceeds from sales of available-for-sale
  securities and the gross realized gains and
  losses on those sales and the basis on which cost
  was determined in computing realized gains and
  losses.

21
Classification and Disclosure

• Available-for-sale securities (continued)
• The change in net unrealized holding gain or loss
  on available-for-sale securities that has been
  included in stockholders equity during the
  period.

• Held-to-maturity securities
• Aggregate fair value, gross unrealized holding
  gains and gross unrealized holding losses, and
  amortized cost basis by major security type.
• The company should disclose information about
  contractual maturities.

Continued
22
Classification and Disclosure

• Transfers of securities between categories
• Gross gains and losses included in earnings from
  transfers of securities from available-for-sale
  into the trading category.
• For securities transferred from held-to-maturity,
  the company should disclose the amortized cost
  amount transferred, the related realized or
  unrealized gain or loss, and the reason for
  transferring the securities.

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chapter 14
The End