3. Investments Equity method & Consolidations

3. Investments Equity method & Consolidations -...

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Investments, Equity Method Types of Investments The Accounting for Investments Depends on: (1) The Purpose of the Investment and the (2) The Percentage of Voting Stock Held Investor Corporation Minority, Active Investments ( typically ownership ) B Majority, Active Investments ( greater than 50% ownership ) C Minority, Passive Investments ( less than 20% ownership ) A Held as Current Assets, “Marketable Securities” Held as “Long-term Investments” The Accounting for Investments Depends on (1) The Purpose of the Investment and the (2) The Percentage of Voting Stock Held
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Minority, Passive Investments Less than 20% of Voting Stock Assumed Held for Returns (dividends & growth) Minority, Active Investments Between 20% and 50% of Voting Stock Assumed held to Exert Influence over other firm Majority, Active Investments Greater than 50% of voting stock Assume held for Full Control over other firm Classification Securities are properly classified as “Marketable Securities” when 1. The Firm CAN Readily Convert Them into Cash & 2. INTENDS to do so When It Needs Cash Classification Marketable Securities Held as a Temporary Investment Are Classified as Current Assets If either of the 2 tests for marketable securities do not apply, then Classify the securities as an Investment in Securities (Long-term Assets)
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A: Minority, Passive Investments in Securities when acquired are Recorded at Cost After Acquisition, many investments Are Required to be Valued & Reported at Fair Value A: Minority, Passive Investments in When you adjust them to Fair Value (Which is Called “Marking-to-Market” ), the Firm can have Unrealized Holding Gain and Losses, which make the Balance Sheet more Volatile Say the Value of a stock that a firm owns Increases from $500 to $600 over the Quarter. At the end of the quarter, the firm would: Increase the Investment (an asset) by $100 & therefore Equity Increases by $100 Either as an Increase in Earnings or an Increase in Equity Directly
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Three Investment Categories Under SFAS 115 SFAS No. 115 Debt Securities Equity Securities Trading Available for Sale Held to Maturity Trading Available for Sale First Category: Held-to-Maturity Securities The Operating Entity has Both : A Positive Intent to hold the Securities & The Ability to hold them to Maturity First Category: Held-to-Maturity Securities These Securities Are Accounted for At Cost , Not Fair Value Only Debt can be Held-to-Maturity, Because there is No Known Maturity for Equity
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Second Category: Trading Securities Trading Securities are used to Generate Profits from Short Term Differences in Prices The Holding Period is usually
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This note was uploaded on 04/27/2010 for the course FIN 320f taught by Professor Toprac during the Spring '08 term at University of Texas.

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3. Investments Equity method & Consolidations -...

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