May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part... May not be scanned, copied or duplicated, or posted to a publicly accessible
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Investments
(slide 1 of 5)
o This cash can be used for the following purposes:
Investing in current operations
Investing in temporary investments to earn additional revenue
Investing in long-term investments in stock of other companies for strategic reasons
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Investments
(slide 2 of 5)
o For example, cash may be used to replace worn-out equipment or to purchase new, more efficient, and productive equipment
operations
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Debt securities , which are notes and bonds that pay interest and have a fixed maturity date
Equity securities , which are preferred and common stock that represent ownership in a company and
do not have a fixed maturity date.
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Investments
(slide 4 of 5)
temporary investments, are reported in the current assets section of the balance
sheet.
o earn interest revenue.
o receive dividends.
o realize gains from increases in the market price of the securities.
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Investments
(slide 5 of 5)
stock of another company
o Such investments usually have a strategic purpose, such as reduction of costs or expansion into new markets.
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Debt Investments at Cost
• Debt securities include notes and bonds issued by corporations and governmental organizations
• Most companies invest excess cash in bonds as investments to earn interest revenue.
• Most bond investments are recorded at cost.
• Typical transactions for bond investments include the following:
o Purchase of bonds
o Interest revenue
o Sale of bonds
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Purchase of Bonds
• The purchase of bonds is recorded by debiting an investments account for the cost of acquiring the bonds.
o This cost includes any fees charged by a broker in acquiring the bonds.
• If the bonds are purchased between interest dates, the buyer must also pay the seller any
accrued interest since the last interest payment date.
o Any accrued interest is debited to an interest receivable account rather than to the investment account.
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Sale of Bonds
(slide 1 of 2)
o If the proceeds from the sale exceed the balance of the investment account, then a gain is recorded.
o If the proceeds are less than the balance of the investment account, a loss is recorded.
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Sale of Bonds
(slide 2 of 2)
revenue (loss) on the income statement.
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Equity Investments
(slide 1 of 2)
o The company investing in another company’s stock is the investor
o The company whose stock is purchased is the investee .
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Equity Investments
(slide 2 of 2)
determines the degree of control that the investor has over the investee This, in turn, determines the accounting method used to record the stock investment.
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Cost Method: Less Than 20% Ownership
(slide 1 of 2)
investor is considered to have no control over the investee.
o In this case, it is assumed that the investor purchased the stock primarily to earn dividends
or to realize gains on price increases of the stock.
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Cost Method: Less Than 20% Ownership
(slide 2 of 2)
o Purchase of stock
o Receipt of dividends
o Sale of stock
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Equity Method: Between 20%–50% Ownership
(slide 1 of 2)
of another company (investee), the investor is considered to have significant
influence over the investee.
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Equity Method: Between 20%–50% Ownership
(slide 2 of 2)
• Investment of between 20% and 50% are accounted for using the equity method
o Under the equity method, a stock investment is recorded at its initial cost However, the investor’s share of the
investee’s operating results and dividends are also recorded in the investment account as follows:
Net Income: The investor records its share of the net income of the investee as an increase (debit) in the investment
account Its share of any net loss is recorded as a decrease (credit) in the investment account
Dividends: The investor’s share of cash dividends received from the investee are recorded as decreases (credits) to
the investment account.
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Consolidation: More Than 50% Ownership
(slide 1 of 2)
the investor is considered to have control over the investee
business combination
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Consolidation: More Than 50% Ownership
(slide 2 of 2)
combined and reported as a single company These combined financial statements
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Reporting Investments
exchanges such as the New York Stock Exchange As a result, their market value can be observed and, thus, objectively determined.
o For this reason, generally accepted accounting principles (GAAP) allows the following securities to be reported at their fair market values:
Trading securities
Available-for-sale securities
Held-to-maturity securities
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Trading Securities
(slide 1 of 4)
• Trading securities are debt and equity securities that are purchased to earn term profits from changes in their market prices
as a current asset on the balance sheet.
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Trading Securities
(slide 2 of 4)
fair values
o Fair value is the market price that the company would receive for a security if it were sold.
A change in the fair value of the portfolio (group) of trading securities is recognized as an unrealized gain or loss for the period
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Trading Securities
(slide 3 of 4)
• An adjusting entry is made on December 31, 20Y1, to record the fair value of the portfolio of trading securities.
o Valuation Allowance for Trading Investments is created to maintain a record of the original cost of the securities.
o If the fair value of the portfolio of trading securities is more than the cost:
The adjustment debits Valuation Allowance for Trading Investments and credits Unrealized Gain on Trading Investments for the difference
– Unrealized Gain on Trading Investments is reported separately or as Other revenue on the income statement.
– Valuation Allowance for Trading Investments is shown on the balance sheet as an addition to Trading Investments (at cost).
o If the fair value of the portfolio of trading securities is less than the cost:
The adjustment debits Unrealized Loss on Trading Investments and credits Valuation Allowance for Trading Investments for the difference.
– Unrealized Loss on Trading Investments is reported on the income statement as Other expenses.
– Valuation Allowance for Trading Investments is shown on the balance sheet as a deduction from Trading Investments (at cost).
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Trading Securities
(slide 4 of 4)
between the cost and fair value of the portfolio.
o Thus, increases in the valuation allowance account from the beginning of the period will result in an adjustment to record an unrealized gain.
o Likewise, decreases in the valuation allowance account from the beginning of the period will result in an adjustment to record an unrealized loss.
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Available-for-Sale Securities
(slide 1 of 3)
• Available-for-sale securities are debt and equity securities that are recorded at fair value but are not classified as trading securities
income statement, but are reported directly in stockholders’ equity.
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Available-for-Sale Securities
(slide 2 of 3)
• An adjusting entry is made on December 31, 20Y1, to record the fair value of the available-for-sale securities.
o If the fair value of the portfolio of available-for-sale securities is more than the cost:
The adjustment debits Valuation Allowance for Available-for-Sale Investments and credits Unrealized Gain on Available-for-Sale Investments for the difference
– Unrealized Gain (Loss) on Available-for-Sale Investments is reported as an addition in the stockholders’ equity section on the balance sheet.
– Valuation Allowance for Available-for-Sale Investments is shown on the balance sheet as an addition to Available-for-Sale Investments (at cost).
o If the fair value of the portfolio of available-for-sale securities is less than the cost:
The adjustment debits Unrealized Gain (Loss) on Available-for-Sale Investments and credits Valuation Allowance for Available-for-Sale Investments for the difference.
– Unrealized Gain (Loss) on Available-for-Sale Investments is reported as a deduction in the stockholders’ equity section on the balance sheet.
– Valuation Allowance for Available-for-Sale Investments is shown on the balance sheet as a deduction from Available-for-Sale Investments (at cost).
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Available-for-Sale Securities
(slide 3 of 3)
between the cost and the fair value of the portfolio.
o Thus, increases in the valuation allowance from the beginning of the period will result in an adjustment to record an increase in the valuation and unrealized gain (loss) accounts.
o Likewise, decreases in the valuation allowance from the beginning of the period will result in
an adjustment to record decreases in the valuation and unrealized gain (loss) accounts.
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Held-To-Maturity Securities
(slide 2 of 3)
asset on the balance sheet Held-to-maturity securities maturing beyond a year are reported as noncurrent assets.
classified as held-to-maturity securities.
o Equity securities are not held-to-maturity securities because they have no maturity date.
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Held-To-Maturity Securities
(slide 3 of 3)
may be purchased at a premium or discount.
o In such cases, the premium or discount is amortized over the life of the bonds.
amortized cost.
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Summary of Valuing and
Reporting of Investments