Hi I'm Dr. Sharon Levin welcome to the
video on investments part 1 equity
security investments welcome to the
lesson on equity investments the
syllabus provides the login credentials
to the FASB codification website
you'll find information on investments
both debt and equity securities in
accounting standard codification number
320 and investments - equity securities
under accounting standard codification 
number 321
why would investors want to buy an equity
or stock investment well there's a few
reasons they may want to earn dividend
income and they may want to earn a gain
on the sale of a stock if it's sold for
more than it was originally purchased
for another reason is that they would
buy stock to potentially influence the
decisions of the investee company of
course this depends on how much common
stock is purchased and the degree to
which the investor has influence over
the decisions of the investee company
and a third reason would be to secure a
relationship with another company that
is in the same supply chain as part of
their business strategy intent matters
when it comes to valuing investments
equity includes both common and
preferred stock and debt includes bonds
and promissory notes the valuation of
equity and debt investments depends on
management's intent if management
intends to sell the investments they
will be valued one way and if not, they
will be valued another way let's
consider equity or stock if management
intends to sell an investment they will
use the fair value method to value that
investment if management does not intend
to sell the investment and they maintain
and exercise some control over the
investee company then you will use the
equity method to value that investment
for the purpose of determining how to
measure investments in financial assets
they are classified into categories
trading securities available-for-sale
securities and held to maturity
securities investments in trading
securities include both debt and
marketable equity securities the
investor has no significant influence in
the investee company and the investor
intends to trade that is sell the
investment in the near future which is
usually less than three months these
investors are looking for short-term
gains by selling recently purchased
investments at a higher price than they
paid sometimes these types of
investments are sold immediately after
buying or within a few hours or days
trading securities are measured at fair
value all unrealized holding gains and
losses are reported in net income next
available for sale securities also
include debt and marketable equity
securities and the investor has no
significant influence in the investee
company they differ from trading
securities in that the investor is not
planning to sell the investment in the
near future to earn income from
short-term price changes in the security
also the investor does not plan to hold
the investment until maturity
another way of thinking about
available-for-sale investments is that
they include all investments other than
trading and held to maturity investments
they are measured at fair value with
unrealized holding gains reported in
other comprehensive income last held to
maturity investments imply there is a
maturity date therefore held to maturity
investments only applies to investments
in debt securities bonds and promissory
notes have a maturity date
shares of stock do not.  We will measure the
held to maturity investments at amortized
cost using the effective interest method
which we will cover in part two the way
equity investments are classified
depends on the level of influence an
investor has over the investing company
which can generally be determined by the amount of ownership investors have a low
level of influence in the investee 
company when they own less than 20% of
the investee company stock these types of
equity investments should be measured at
fair value with gains and losses
reported in net income the investor will
recognize dividend income when dividends
are declared and recognize gains and
losses received from the sale of the
investment in net income when the
investors level of influence is moderate
and investor owns between 20% and 50% of
the investee company 's stock measure these
types of equity investments using the
equity method whereby the investor
recognizes his or her proportionate
share of income when the investee company
reports income conversely the investor
reduces his or her investment account
when the investi company declares
dividends it may help to think of the
equity method from the perspective of
the investee company when the investee
company reports income the investor
records income when the investee company
declares dividends which reduces its
equity the investors investment account
is also reduced when an investor owns
more than 50% of an investor's capital
stock their influence is high these
types of equity investments should be
consolidated with the investors
financial statements when ownership
interest is greater than 50% the
investor has enough influence to be in
control of the investee company which
would also be known as the subsidiary
this type of investment is accounted for
by consolidating the subsidiary and
parent company consolidation is not
covered in this lesson but to give you
some of the idea of how it works the
subsidiary's financial statements are
consolidated with the parent's financial
statements the investment account is
eliminated in consolidation because the
investor has control over the investee
and therefore influence is high the
subsidiary is valued on the parent
company's books typically using the
equity method on January 1st 20X1
Chuck's climbing company buys 40% of the
common shares of manck company for
$200,000 resulting in significant
influence at December 31st 20X1 Chuck's
share of the post acquisition earnings
is $30,000 the fair value of the
investment at year-end was $240,000
the Board of Directors did not declare
dividends in 20X1 explain the
choices that Chuck has when determining
how to account for the investment we
will consider US GAAP and prepare
journal entries under US GAAP the entity
may elect to use the fair value option
or the equity method note the initial
journal entry to record the purchase of
the investment is the same using both
the fair value option and the equity
method in other words you would debit
the investment account at cost and
credit cash at year-end the journal
entries differ under the fair value
option the investor increases the
investment account by the amount its
fair value has increased which was given
as $40,000 therefore
the journal entry would be debit the
investment account and credit unrealized
gain on investment for $40,000
alternatively if the investor had chosen
the equity method for this investment at
year-end the investor would recognize
his or her proportionate share of the
investee's net income which was given as
$30,000 the journal entry would be debit
the investment account and credit
investment income please note that all
videos in this course are optional
resources that are not required to learn
the course content or meet the course
objectives and competencies please
complete and submit all assignments by
the due date that is stated in the
syllabus after completing the activities
please ask questions in class if you
need further clarification we are here
to help you if you don't ask questions
we won't be able to help so please ask
as many questions as you feel you need
to ask in order to thoroughly understand
the course content thank you for
completing part 1 of this investment
lesson I look forward to seeing you in
the next video lesson
