Appendix D notes - Appendix D Reporting and Analyzing...

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Appendix D: Reporting and Analyzing Investments Study Objective 1: Identify the reasons corporations invest in stocks and debt securities A corporation may have excess cash that it does not need for the immediate purchase of operating assets Generate earnings from investment income o Example: Banks purchase investment securities because loan demand varies seasonally and with changes in the economic climate. When loan demand is low, a bank must find other uses for its cash o Example: Pension funds and mutual funds invest for speculative reasons. They speculate that the investment will increase in value and thus result in positive returns Invest for Strategic Reasons Study Objective 2: Explain the accounting for debt investments Debt Investments: investments in government and corporation bonds Recording Acquisition of Bonds : cost principle applies For example: Kuhl Corporation acquires 50 Doan Inc. 12% 10-year $1,000 bonds on January 1, 2007 for $54,000, including brokerage fees of $1,000. Kuhl records the investment as: Jan 1. Debt Investments $54,000 Cash 54,000 Recording Bond Interest The Doan Inc bonds pay interest of $3,000 semiannual on July 1 and January 1. July 1 Cash 3,000 Interest Revenue 3,000 **Interest Revenue is reported under “Other Revenues and Gains”** Assume year end 12/31: Entry to Record Accrued Interest December 31 Interest Receivable 3,000 Interest Revenue 3,000 Jan. 1 Cash 3,000 Interest Receivable 3,000 Recording the Sale of Bonds : credit investment account for cost of the bonds, debits the
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