Chapter 11 Lecture

Chapter 11 Lecture - CHAPTER 11 CLASS NOTES INTERCORPORATE...

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CHAPTER 11 CLASS NOTES INTERCORPORATE INVESTMENTS AND CONSOLIDATION Another category of assets that we want to address are Investments and these investments can be current or non current assets depending on certain defined characteristics which are covered in the following paragraphs. The first step is to understand how to categorize investments into four “pots”, then determine whether to classify the investments as current or non current, and then how to value them at either their original cost or fair market value. This will enable us to determine how to show these on the balance sheet. Once we determine this information, we will know how to record the transactions as journal entries for both balance sheet and income statement accounts. The first step is to determine if the investment in securities is a debt investment or an equity investment. If the security has a maturity date it is a debt security, as equity securities have no maturity dates. Then the second step is to determine if the maturity date is within one year or after one year---if it is the former it must be shown as a current asset regardless of its designation and if it is the latter it could be either current or non current depending on the category it falls into. The actual category is determined by the intent of the company, which they have to justify based upon past experience with similar investments. Balance Sheet Investment Category Debt Equity Classification Valuation 1.Cash Equivalent X Current Fair Market Value These are highly liquid securities which have a maturity date of less than 90 days from the date of their original issuance. It is not a security whose maturity date was originally longer than 90 days but just happens to now be due in less than 90 days. This category can only have debt securities. 2. Trading Securities X X Current Fair Market Value These are both debt and equity securities that the company intends on selling within one year from the balance sheet date, except those items that are classified as cash equivalents. The actual maturity date is not relevant for the debt securities as the company is saying they will clearly sell these within one year. Therefore, everything in this category is shown as current and at their fair market value. -2-
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3, Available for Sale X X Non current Fair Market Value These are both debt and equity securities that the company is holding and does not intend on selling within the next year after the balance sheet date. Therefore, it is classified as a non current asset. If the maturity date is within one year, and it is to be sold before maturity it should be classified as a Trading Security. If the maturity date is within a year and being held to maturity it belongs in the Held to
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Chapter 11 Lecture - CHAPTER 11 CLASS NOTES INTERCORPORATE...

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