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Unformatted text preview: 15 INVESTMENTS CHAPTER OBJECTIVES After careful study of this chapter, students will be able to: 1. Explain the classification and valuation of investments. 2. Account for investments in debt and equity trading securities. 3. Account for investments in available-for-sale debt and equity securities. 4. Account for investments in held-to-maturity debt securities, including amortization of bond premiums and discounts. 5. Understand transfers and impairments. 6. Understand disclosures of investments. 7. Explain the conceptual issues regarding investments in marketable securities. 8. Account for investments using the equity method. 9. Describe additional issues for investments. 10. Account for derivatives of financial instruments (Appendix). 15-1 SYNOPSIS Investments: Classification and Valuation 1. A corporation acquires securities of other corporations or of the government for several different reasons: to obtain additional income in the case of the investment of excess cash from the time of peak inflows until the next period of cash outflows, to create long-term relationships with suppliers, or to obtain significant influence over related companies. Companies may invest in common stock, preferred stock, or bonds of other corporations as well as municipal, state, or federal bonds. Each group of such investment securities is often referred to as a portfolio of marketable securities. 2. FASB Statement No. 115 establishes generally accepted accounting principles for all investments in debt securities and those equity securities that have readily determinable fair values. A security has a readily determinable fair value if a sales price is currently available on a securities exchange registered with the SEC or in an over-the-counter market whose prices are publicly reported. 3. Investments in debt and equity "marketable" securities are classified at acquisition, and on subsequent reporting dates, into one of the following three categories: (a) Trading Securities , debt and equity securities purchased and held principally to sell them in the near future. (b) Available- for-Sale Securities , debt securities not classified as held-to-maturity, and debt and equity securities not classified as trading securities. (c) Held-to-Maturity Debt Securities , those debt securities for which the company has the "positive intent and ability to hold the securities to maturity." 4. Debt securities , which involve a creditor relationship with another company, include U.S. treasury securities, municipal securities, corporate bonds, convertible debt, commercial paper, and preferred stocks that have a mandatory redemption feature or are redeemable at the option of the...
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This note was uploaded on 06/11/2008 for the course ACCT 3023 taught by Professor Fasci during the Spring '08 term at The University of Texas at San Antonio- San Antonio.
- Spring '08