WRD_ch15_SV - 11-115-1Investments and Fair Value Accounting15Student Version11-215-2Describe why companies invest in debt and equity

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Unformatted text preview: 11-115-1Investments and Fair Value Accounting15Student Version11-215-2Describe why companies invest in debt and equity securities.115-211-315-3Investing Cash in Temporary InvestmentsDebt securitiesare notes and bonds that pay interest and have a fixed maturity date. Equity securitiesare preferred and common stock that represent ownership in a company and do not have a fixed maturity date.111-415-4Investing Cash in Temporary InvestmentsThese debt securities and equity securities are termed Investments, or Temporary Investments, and are reported in the Current Assets section of the balance sheet. 111-515-5Investing Cash in Long-Term InvestmentsLong-term investments often involve the purchase of a significant portion of the stock of another company. Such investments have a strategic purpose:1.Reduction of costs1.Replacement of management1.Expansion1.Integration111-615-6Describe and illustrate the accounting for debt investments.215-611-715-7Purchase of BondsHomer Company purchases $18,000 of U.S. Treasury bonds direct from a Federal Reserve Bank at their par value on March 17, 2010 (45 days after the last interest payment date). The bonds have an interest rate of 6%, payable on July 31 and January 31.$18,000 × 6% × (45/360)211-815-8Interest RevenueOn July 31, Homer Company receives a semiannual interest payment of $540 ($18,000 × 6% × ½).($540 – $135) or [$18,000 × 6% × (135/360)]211-915-9Homer Company’s accounting period ends on December 31. The following adjusted entry is required to record the accrued interest:Accrued InterestHomer Company would report Interest Revenueon its 2010 income statement at $855 ($405 + $450).211-1015-10Homer Company receives interest of $540 on January 31, 2011. Notice that Interest Receivableis credited for $450 to reflect this is a receivable from 2010. Interest Revenueof $90 is the interest earned from January 1 through January 31, 2011....
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This note was uploaded on 04/13/2010 for the course ACTG 1A q taught by Professor T during the Fall '09 term at Foothill College.

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WRD_ch15_SV - 11-115-1Investments and Fair Value Accounting15Student Version11-215-2Describe why companies invest in debt and equity

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