Accounting 2 Chapter 15 Reading Notes and Definitions
Accounting 2 Chapter 15 Reading Notes and Definitions ACCT 2013
Arkansas Tech University
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This 3 page Class Notes was uploaded by Riley Lassiter on Tuesday January 26, 2016. The Class Notes belongs to ACCT 2013 at Arkansas Tech University taught by Mrs. Laura Griffin in Spring 2016. Since its upload, it has received 83 views. For similar materials see Principles of Accounting II in Accounting at Arkansas Tech University.
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Date Created: 01/26/16
Ch. 15 Accounting Notes: Investments Why Would a Company Invest? o Debt Securities v. Equity Securities Investor: the owner of a bond or stock of a corporation. Investee: the corporation that issued the bond or stock to the investor. Security: a share or interest representing financial value. Represented by a certificate and traded on exchange. Debt Security: represents a credit relationship with another company or governmental entity that typically pays interest for a fixed period. U.S. Gov. Securities, municipal bonds, and corporate bonds. Equity Security: represents stock ownership in another company that sometimes pay dividends. o Reasons to Invest The company has excess cash it wishes to turn into investment income. To pursue a business strategy. o Classification and Reporting of Investments Shortterm Investments: investments in debt and equity securities that are highly liquid and that the investor intends to sell in one year or less. Longterm Investments: investments in bonds (debt securities) or stocks (equity securities) in which the company intends to hold the investment for longer than one year. Trading Investments: a debt security or an equity security in which the investor holds less than 20% of the voting stock and that the investor plans to sell in the very near future. Heldtomaturity investments: a debt security the investor intends to hold until it matures. Availableforsale investments: a debt security or an equity security in which the investor holds less than 20% of the voting stock and that isn’t a trading or investment or a heldtomaturity. Significant interest investment: an equity security in which the investor owns from 20%50% of the investee’s voting stock. Controlling Interest Investments: an equity security in which the investor owns more than 50% of the investee’s voting stock. How are investments in debt securities accounted for? o Purchase of debt securities Record the investment in debt securities at cost by the time account and what kind of investment. o Interest Revenue Record every interest payment. o Disposition at Maturity Receive face value of bond. How are investments in equity securities accounted for? o Equity securities with less than 20% ownership (Cost Method) Equity securities in which the investor owns less than 20% ownership in the voting stock of the investee can be either trading investments or availableforsale investments. Can earn dividend revenue. Purchase of equity securities Record the time followed by type of investment. Disposition Compare the cash received with the cost of the stock disposed of and determines the amount of gain or loss. Gain is a credit, loss a debit. o Equity Securities with 20%50% Ownership (Equity Method) The investor can significantly influence the investee’s decision. Purchase Recorded at cost at the time of purchase. Dividends received and share of net income Record proportionately The longterm investments account is credited for the receipt of a dividend because it decreases the investor’s investment. Disposition Record gain or loss o Equity Securities with more than 50% ownership (Consolidation) Controlling interests Parent company: a company that owns a controlling interest in a company. Subsidiary company: a company that is controlled by another corporation. Consolidation accounting: the way to combine the financial statements of two or more companies that have the same owners. Consolidated statement: financial statements that combine the balance sheets, income statements, and statements of cash flow of the parent company with those of its controlling interest affiliates. How are debt securities and equity reported? o Balance sheet – current or long term section of assets. o Trading investments Initially recorded at cost, but at end of each period adjusted to fair value. o Fair value: the price that would be used if the investments were sold on the market. o Yearend adjustment to market value is unrealized gain or loss. o Availableforsale investments Reported as current assets if selling within one year. Held longer than a year = longterm assets. Comprehensive income: a company’s change in total stockholder’s equity from all sources other than owner’s investments and dividends. Includes: net income, unrealized holding gains or losses on availableforsale investments, foreign currency translation adjustments, gains or losses from postretirement benefit plans, deferred gains or losses from derivatives. Reported as other comprehensive income. o HeldtoMaturity investments Reported at amortized cost How do we use the rate of return on total assets to evaluate business performance? o Rate of return on total assets: a ratio that measures the success a company has in using its assets to earn income (net income + interest expense) / Average total assets.
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