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HANDOUT CLASS #4 UNIVERSITY OF PHOENIX FINANCIAL ACCOUNTING ACC363 ACCOUNTING FOR STOCK INVESTMENTS Stock investments are investments in the capital stock of corporations. When a company holds stock (and/or debt) of several different corporations, the group of securities is identified as an investment portfoli o. The accounting for investments in common stock is based on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation (commonly called the investee ). HOLDINGS OF LESS THAN 20% In accounting for stock investments of less than 20%, the cost method is used. Under the cost metho d, the investment is recorded at cost, and revenue is recognized only when cash dividends are received. HOLDINGS BETWEEN 20% AND 50% When an investor company owns only a small portion of the shares of stock of another company, the investor cannot exercise control over the investee. But, when an investor owns between 20% and 50% of the common stock of a corporation, it is presumed that the investor has significant influence over the financial and operating activities of the investee. HOLDINGS OF MORE THAN 50% A company that owns more than 50% of the common stock of another entity is known as the parent compan y. The entity whose stock is owned by the parent company is called the subsidiary (affiliated) compan y. Because of its stock own-ership, the parent company has a controlling interest in the subsidiary. CATEGORIES OF SECURITIES For purposes of valuation and reporting at a financial statement date, debt and stock investments are classified into three categories of securities: 1. Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences. Trading securities are held with the intention of selling them in a short period (generally less than a month). Trading means frequent buying and selling. Trading securities are reported at fair value, and changes from cost are reported as part of net income. The changes are reported as unrealized gains or losses because the securities have not been sold. The unrealized gain or loss is the difference between the total cost of trading securities and their total fair valu e. An unrealized gain or loss is reported in the income statement because of the likelihood that the securities will be sold at fair value since they are short-term investments. The fair value of the securities is the amount reported on the balance sheet. The unrealized gain is reported in the income statement in the “other revenues and gains” section. 2. Available-for-sale securities are securities that may be sold in the future. Available-for-sale securities are held with the intent of selling them sometime in the future. If the intent is to sell the securities within the next year or operating cycle, the securities are classified as current assets in the balance sheet. Otherwise, they are classified as long-term assets in the investments section of the
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This note was uploaded on 03/29/2010 for the course ACCT 349 349 taught by Professor Fortune during the Spring '09 term at University of Phoenix.

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