Ch 17 Summary - Ch 17 Key issues Valuation of short-term or...

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Ch. 17 Key issues: - Valuation of short-term or long-term investment assets - The effect of fair value adjustments on the financial statements (i.e., balance sheet and income statement) - Understanding of accounting treatment for different types of investment assets (e.g., debt- type and equity type) 1) Accounting for Investments in Debt Securities. 1. Investments in debt securities are classified into three separate categories: a. Held-to-maturity: Debt securities that the enterprise has the positive intent and ability to hold to maturity. b. Trading: Debt securities bought and held primarily for sale in the near term to generate income on short-term price differences. c. Available-for-sale: Debt securities not classified as held-to-maturity or trading securities. 2. Accounting and reporting for debt securities Held-to-maturity securities are accounted for at amortized cost, not fair value. Rationale: If management intends to hold certain investment securities to maturity and has no plans to sell them, fair values are not relevant for measuring and evaluating the cash flows associated with these activities. a. Effective interest method is applied to bond investments in a fashion similar to bonds payable. Purchase) Dr. Investment assets XXX Cr. Cash XXX Interest revenue) - Purchase with discount Dr. Cash XXX Investment assets XXX Cr. Interest Revenue XXX - Purchase with premium Dr. Cash XXX Cr. Investment assets XXX Interest Revenue XXX
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Available-for-sale debt securities are reported at fair value. a. The unrealized holding gains and losses related to changes in fair value of available-for-sale debt securities are recognized as other comprehensive income and reported as a separate component of stockholders’ equity. b.
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Ch 17 Summary - Ch 17 Key issues Valuation of short-term or...

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