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
www.gmsisuccess.in
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 ‼️
🎯
www.gmsisuccess.in