ch 14 LN Investments final version

ch 14 LN Investments final version - 14-1Ch 14...

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Unformatted text preview: 14-1Ch 14 InvestmentsLearning Objectives1.Determine why companies invest in other companies.2.Understand the varying classifications associated with investment securities.3.Account for the purchase of debt and equity securities.4.Account for the recognition of revenue from investment securities.5.Account for the change in fair value of investment securities.6.Account for the sale of investment securities.14-2Determine why companies invest in other companies.OBJECTIVE 1Safety cushionCyclical cash needsInvestment for a returnInvestment for influencePurchase for control14-3Understand the varying classifications associated with investment securities.OBJECTIVE 2Debt securities are financial instruments issued by a company that (1) have a maturity value, (2) have a fixed or variable interest rate that specifies the periodic interest payments, and (3) a maturity date.Equity securities represent ownership in a company.14-4ClassificationsTrading securities are debt and equity securities purchased with the intent of selling them in the near future for the purpose of generating profits on short-term differences in price.Held-to-maturity securities are debt securities purchased by a company with the intent to hold those securities until they mature.This category includes only debt securities because equity securities typically do not mature.(continues)14-5ClassificationsAvailable-for-sale securities Equity securities that are not considered trading securities and are not accounted for using the equity method. Debt securities that are neither being held until maturity nor classified as trading securities.Equity method securities Equity securities purchased with the intent of being able to control or significantly influence the operations of the investee. A large block of stock (presumably at least 20% of the outstanding stock) must be owned to be considered for classification as an equity method security.14-614-7Account for the purchase of debt and equity securities.OBJECTIVE 3On May 1, Douglas Company purchases $100,000 in U.S. Treasury notes at 104, including brokerage fees. Interest is 9% payable semiannually on January 1 and July 1. The debt securities are classified by the purchaser as trading securities.Accrued interest on May 1 is $3,000, calculated as follows: $100,000 .09 4/12 = $3,00014-8Purchase of Debt SecuritiesMay 1 Investment in Trading Securities104,250Interest Receivable3,000Cash 107,250July 1 Cash4,500Interest Receivable 3,000Interest Revenue1,50014-9Purchase of Equity SecuritiesGondor Enterprises purchased 300 shares of Boromir Co. stock at $75 per share plus brokerage fees of $80 (as...
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This note was uploaded on 12/07/2009 for the course ACCT ACCT 203 taught by Professor Kim during the Fall '09 term at HKUST.

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ch 14 LN Investments final version - 14-1Ch 14...

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