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ACG2021 Chapter 12 Notes

ACG2021 Chapter 12 Notes - Chapter 12 Notes Companies(or...

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Chapter 12 Notes Companies (or other types of investors) can invest in other company’s stock or debt (bonds). Investments in other company’s debt are always considered passive because the investor does not gain any “voting rights” or “control” over the company’s operations. Investments in other company’s common stock; however, gives the investor voting rights, or some level of “control” of the company they invest in. Control is the ability to determine the operating and financing policies of another company through the ownership of voting stock (i.e., common stock, NOT preferred stock). Memorize this table: Investment in Debt Securities of Another Entity Investment in the Voting Common Stock of Another Entity Investment Category Passive Passive Significant Influence Control Level of Ownership Held-to- Maturity (HTM) Not Held-to- Maturity (HTM) < 20% of outstanding shares 20-50% of outstanding shares > 50% of outstanding shares Measuring and Reporting Method Amortized Cost Method Market Value Method Equity Method Consolidation Method The consolidation (>50%) method and equity (20-50%) method will NOT be covered in this course Debt Held to Maturity: Amortized Cost Method – this method works the exact same way that we accounted for bonds in Chapter 10; however, instead of ISSUING bonds, we are BUYING bonds of another company (we are the investors this time). Like in Chapter 10, these bonds can be purchased at par, at a discount, or a premium. The company then pays us cash interest payments that we recognize as revenue, and when the investment retires (reaches its maturity date), the company pays us the face value of the bond. Let’s look at an example: Suppose Company X buys $100,000 of Company Y’s bonds on 1/1/x1 at par that mature on 1/1/x5. Interest is paid semiannually at a rate of 4% (8% annually) on March 1 and September 1. Record the journal entries for the following dates: (1) The date of purchase, (2) The 9/1/x1 interest payment, (3) The 12/31/x1 adjusting entry, and (4) on 1/1/x5, the maturity date. © Scott Friend, 2007
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(1) Held-to-maturity investments (HTM) 100,000 Cash 100,000 (2) Cash 4,000 Interest Revenue 4,000 (3) Interest Receivable 2667* Interest Revenue 2667 *To accrue interest from 9/1/x1 – 12/31/x1: 4,000 x (4/6) (4) Cash 100,000 Held-to-Maturity (HTM) investments 100,000
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ACG2021 Chapter 12 Notes - Chapter 12 Notes Companies(or...

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