Notes on Investments strictly aligned with the US CMA Part 1 (Financial Reporting, Planning, Performance & Analytics) syllabus.
These points are framed the way MCQs and tricky scenarios are tested in the CMA exam.
1. Short-Term Investments (Current Investments)
Meaning
- Investments intended to be held for ≤ 1 year or within the operating cycle (whichever is longer).
- Also called Marketable Securities.
Examples
Accounting Treatment (US GAAP)
- Reported as Current Assets
- Measured at Fair Value
- Unrealized gains/losses → Income Statement (if trading) or OCI (if AFS)
CMA Exam Traps
- Classification depends on management intent, not maturity alone.
- Fair value changes affect ratios (current ratio, ROA).
2. Long-Term Investments (Non-Current Investments)
Meaning
- Investments intended to be held for more than one year.
- Used for strategic, control, or income purposes.
Examples
- Bonds held to maturity
- Equity investments (non-trading)
- Investment in subsidiaries, associates
- Long-term debt securities
Accounting Treatment
- Reported as Non-current Assets
- Measurement depends on type of investment.
3. Investment in Debt Securities
Types under US GAAP
Debt investments are classified into three categories:
(A) Held to Maturity (HTM)
- Intent + Ability to hold till maturity
- Examples: Bonds, debentures
Accounting
- Recorded at Amortized Cost
- Interest income → Income Statement
- No fair value adjustment
CMA Focus
- If sold before maturity → taints HTM classification
- Only impairment losses recognized
(B) Trading Debt Securities
- Bought for short-term profit
- Actively traded
Accounting
- Fair Value
- Unrealized gains/losses → Income Statement
Exam Trick
- Increases earnings volatility
- Always classified as current assets
(C) Available for Sale (AFS) Debt Securities
Accounting
- Fair Value
- Unrealized gains/losses → OCI
- Realized gains/losses → Income Statement on sale
4. Investment in Equity Shares
(A) Less than 20% Ownership → Fair Value Method
- No significant influence
Accounting
- Fair Value
- Unrealized gains/losses → Net Income
- Dividends → Income
(B) 20%–50% Ownership → Equity Method
Accounting
- Initially at cost
- Investor recognizes share of investee’s profit
- Dividends reduce investment balance
CMA Exam Point
- Profit recognized even if dividends not received
(C) More than 50% Ownership → Consolidation
- Parent-subsidiary relationship
5. Trading Investments
Key Features
- Bought with intent to sell in short term
- Can be equity or debt
Accounting
- Fair Value
- Unrealized gains/losses → Income Statement
CMA Exam Emphasis
- Affects net income immediately
- Increases earnings volatility
- Always current asset
6. Held-to-Maturity Investments (HTM)
Key Points
- Applies only to debt securities
- Requires positive intent and ability
- Not allowed for equity shares
Accounting Summary
| Item | Treatment |
|---|---|
| Measurement | Amortized Cost |
| Interest | Income Statement |
| Fair Value Changes | Ignored |
| Impairment | Recognized |
7. Investment in Subsidiary Companies
Definition
- Ownership > 50%
- Parent controls financial & operating policies
Accounting
- Consolidated Financial Statements
- Intercompany balances eliminated
- Minority interest shown as Non-controlling Interest
CMA Exam Traps
- Parent does not record dividend income from subsidiary
- Instead, consolidates 100% revenue & expenses
8. Investment in Associate Companies
Ownership
- 20%–50%
- Significant influence
Accounting
- Equity Method
- Share of profit → Income Statement
- Dividends → Reduce investment account
9. Impairment of Investments
Debt Securities
- Credit loss recognized in Net Income
Equity Securities
- Decline in value → Recognized immediately in Net Income
10. Key CMA Exam Comparisons (Very Important)
| Investment Type | Measurement | Unrealized G/L |
|---|---|---|
| Trading | Fair Value | Income Statement |
| AFS Debt | Fair Value | OCI |
| HTM | Amortized Cost | Not recognized |
| Equity (<20%) | Fair Value | Income Statement |
| Equity (20–50%) | Equity Method | Share of Profit |
| Subsidiary | Consolidation | Full consolidation |
11. High-Probability CMA MCQ Areas
✔ Classification vs intention
✔ Impact on Net Income vs OCI
✔ Effect on ratios & EPS
✔ Difference between equity method & fair value
✔ Debt vs equity accounting differences
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Below are US CMA Part 1–level NUMERICAL questions with full working and exam logic on the exact areas you asked for.
These are framed to match actual CMA exam difficulty & traps.
1️⃣ Fair Value Measurement – Trading & AFS Securities
Question 1 (Trading Security – Unrealized Gain)
ABC Co. purchased equity shares for $100,000.
Fair value at year-end = $112,000.
Classified as Trading Security.
Required:
a) Carrying value at year-end
b) Impact on Income Statement
Solution
- Carrying value = $112,000
- Unrealized gain = $12,000
- Recognized in Income Statement
📌 CMA Trap: Trading → Always P&L
Question 2 (AFS Debt Security – OCI Treatment)
Bond purchased at $200,000
Fair value at year-end = $185,000
Classification: Available for Sale
Answer
- Carrying value = $185,000
- Unrealized loss = $15,000
- Recognized in OCI (Equity)
📌 CMA Focus: Does not affect Net Income
2️⃣ Amortized Cost – Held to Maturity (HTM)
Question 3 (Bond at Premium – Effective Interest Method)
Bond face value = $100,000
Coupon rate = 10%
Market rate = 8%
Price paid = $108,530
Interest annually.
Required:
Interest income for Year 1
Solution
- Interest income = 108,530 × 8% = $8,682
- Coupon received = 100,000 × 10% = $10,000
- Premium amortized = $1,318
📌 CMA Trick: Use market rate, not coupon rate
3️⃣ Equity Method – Investment in Associate (20–50%)
Question 4
Parent purchased 30% of Associate for $300,000
Associate profit for year = $120,000
Dividends declared = $40,000
Solution
Step 1: Share of profit
- 120,000 × 30% = $36,000 (Income)
Step 2: Dividends received
- 40,000 × 30% = $12,000 (Reduce investment)
Closing Investment Value
= 300,000 + 36,000 − 12,000
= $324,000
📌 CMA Trap: Dividends ≠ Income under equity method
4️⃣ Consolidated Financial Statements – Line by Line
Question 5
Parent acquired 80% of Subsidiary.
At acquisition:
| Item | Parent | Subsidiary |
|---|---|---|
| Assets | 800,000 | 400,000 |
| Liabilities | 300,000 | 150,000 |
Solution
Step 1: Net Assets of Subsidiary = 400,000 − 150,000 = 250,000
Step 2: Group Share (80%) = 200,000
Step 3: Non-Controlling Interest (20%) = 50,000
Consolidated Assets = 800,000 + 400,000 = 1,200,000
Consolidated Liabilities = 300,000 + 150,000 = 450,000
📌 CMA Focus: 100% line-by-line consolidation
5️⃣ Elimination of Intercompany Owing
Question 6
Parent sold goods to Subsidiary for $50,000.
Balance outstanding at year-end.
Solution (Elimination Entry)
- Dr Intercompany Payable 50,000
- Cr Intercompany Receivable 50,000
📌 CMA Exam Rule:
Intercompany balances must be eliminated fully
6️⃣ Goodwill on Acquisition
Question 7
Parent purchased 75% of Subsidiary for $360,000
Fair value of net identifiable assets = $420,000
Solution
Step 1: Implied Total Value = 360,000 ÷ 75% = 480,000
Step 2: Goodwill
= 480,000 − 420,000
= $60,000
📌 CMA Favorite: Partial vs full goodwill logic
7️⃣ Impairment of Investment
Question 8 (Equity Investment Impairment)
Investment cost = $150,000
Fair value dropped to $120,000 (permanent)
Solution
- Impairment loss = $30,000
- Recognized in Income Statement
- New carrying value = $120,000
📌 CMA Rule: Equity impairment → P&L immediately
Question 9 (HTM Debt – Credit Loss)
HTM bond carrying amount = $200,000
Expected credit loss = $18,000
Solution
- Loss recognized = $18,000
- Carrying value = $182,000
- Recognized in Net Income
🔑 Ultra-Important CMA Exam Reminders
✔ Trading → P&L
✔ AFS → OCI
✔ HTM → Amortized cost
✔ Equity method → Share of profit, not dividends
✔ Subsidiary → 100% consolidation
✔ Goodwill → Not amortized, tested for impairment
✔ Intercompany → Always eliminated
🔥 Feel free to discuss with me if you have any questions ‼️
🎯
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