ch13OutlinesandTransparencies

ch13OutlinesandTransparencies - 13-4 CHAPTER REVIEW Why...

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Unformatted text preview: 13-4 CHAPTER REVIEW Why Corporations Invest1. (S.O. 1) Corporations purchase investments because (1) they may have excess cash, (2) they generate earnings from investment income, and (3) for strategic reasons. Accounting for Short-Term Debt Investments2. (S.O. 2) Debt investmentsare investments in government and corporation bonds. At acquisition, the cost principle is applied and all expenditures necessary to acquire these investments are included in the cost (e.g., brokerage fees). At acquisition, Debt Investments is debited and Cash is credited for the cost of the investment. 3.Interest revenue must also be recorded on debt investments. Assume Bodhi Company (fiscal year ends December 31) receives $2,000 interest July 1 and January 1 on a debt investment purchased July 1, 2009. The following entries are required: Dec. 31 Interest Receivable ................................................ 2,000 Interest Revenue ............................................ 2,000 Jan. 1 Cash...................................................................... 2,000 Interest Receivable......................................... 2,000 Jul. 1 Cash...................................................................... 2,000 Interest Revenue ............................................ 2,000 4. When bonds are sold, it is necessary to credit the Investment account for the cost of the bonds, debit Cash, and any difference between the sale price and cost of bonds is recorded as a gain or loss. The gain or loss on the sale of debt investments is reported under Other Revenues and Gains or Other Expenses and Losses, respectively, in the income statement. Accounting for Stock Investments5. (S.O. 3) Stock investments are investments in the capital stock of corporations. The accounting for stock investments differs depending on the degree of influence the investor has over the issuing corporation. The presumed influences based on the investors ownership interest and the accounting guidelines that are to be used are as follows: Investors Ownership Interest Presumed Influence in Investees Common Stock on Investee Accounting GuidelinesLess than 20% Insignificant Cost Method Between 20% and 50% Significant Equity Method More than 50% Controlling Consolidated financial statements 13-5 13-6 Holdings Less than 20%6. In accounting for stock investments of less than 20%, the cost method is used. Under the cost method,the investment is recorded at cost and revenue is recognized only when cash dividends...
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ch13OutlinesandTransparencies - 13-4 CHAPTER REVIEW Why...

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