Fall09-Investments

Fall09-Investments - INVESTMENTS WHAT TO TAKE AWAY FROM...

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INVESTMENTS
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WHAT TO TAKE AWAY FROM THIS LECTURE Difference between held-to-maturity, available- for-sale and trading securities Different accounting methods for equity investments How to account for changes in the market value of investments How to record dispositions of investments Presentation and disclosure in the financial statements
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INVESTMENT CLASSIFICATION Held-to-maturity securities – used for debt securities that the company intends to hold for the security’s entire life Trading securities – debt or equity securities that are held in an active trading account where the intent is to gain short-term trading profits Available-for-sale securities – any debt or equity securities that do not qualify as trading or held- to-maturity
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Investments FV changes  recorded as part  of  income FV changes recorded as part  of  equity   (OCI) FV changes not recognized Trading Securities Available for Sale  Held-to- Maturity Record at fair value Record at  Amortized cost Record at  fair value
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0 ------------------------20% -----------------------50% ------------------------------- 100% SFAS 115 APBO 18,  SFAS 142 SFAS 141,  SFAS 142 No significant  influence  usually exists (< 20%) Significant  influence  usually exists Control  usually exists (> 50%) Investment  valued using   Fair Value   Method Investment  valued using   Equity   Method Investment valued on  parent’s books using Cost  Method or Equity Method   (investment eliminated in  Consolidation ) Ownership Percentages INVESTMENT CLASSIFICATION
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HELD-TO-MATURITY SECURITIES This is the flip side of the bond problems we covered in the Long-Term Debt lecture Instead of recording a bond liability, the investor records an investment asset account (at the purchase price) and cash disbursement. The effective interest method is used to value these investments at their amortized cost. The investor records the Bond Investment at face value along with a Discount or Premium at the purchase date. Interest Revenue
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HTM EXAMPLE Citibank issues $700,000 of 12%, three-year bonds on July 1, 2009. Interest is paid semiannually on June 30 th and December 31 st . The market interest rate for bonds of similar risk and maturity is 14%. The entire bond issue was purchased by Sigg Inc.
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This note was uploaded on 05/08/2010 for the course ACCTG 322 taught by Professor Gill during the Spring '08 term at San Diego State.

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Fall09-Investments - INVESTMENTS WHAT TO TAKE AWAY FROM...

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