Review Notes Appendix H

Review Notes Appendix H - APPENDIX H REPORTING AND...

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APPENDIX H REPORTING AND ANALYZING INVESTMENTS Study Objectives Identify the reasons corporations invest in stocks and debt securities. Explain the accounting for debt investments. Explain the accounting for stock investments. Describe the purpose and usefulness of consolidated financial statements. Indicate how debt and stock investments are valued and reported in the financial statements. Distinguish between short-term and long-term investments.
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Kimmel Accounting, Third Edition Instructor Manual Chapter Outline Study Objective 1 - Identify the reasons corporations invest in stocks and debt securities. Corporations invest in debt or equity securities for one of three reasons: 1. They have excess cash that they do not need for immediate purposes. Excess cash may result from seasonal fluctuations in sales or from economic cycles. Excess cash is usually invested in low-risk, highly liquid securities, most often short-term government securities. 2. Some companies generate a significant portion of their earnings from investment income . Pension funds and mutual funds are corporations that also regularly invest to generate earnings. 3. There may be strategic reasons , such as a corporation's desire to establish a presence in another industry or to purchase a controlling interest in another company. Study Objective 2 - Explain the accounting for debt investments. Debt investments are investments in government and corporation bonds . Three entries are associated with debt investments: (1) recording the acquisition, (2) recording the interest revenue, and (3) recording the sale. Acquisition costs include all expenditures necessary to acquire the investment, such as the price paid plus brokerage fees (commissions) . If a company purchases bonds for $71,000 plus commissions of $2,000 , then the journal entry is: Debt Investments 73,000 Cash 73,000 (To record purchase of bonds) Note that there is no separate account for fees or commissions : The purchase price and the commissions are debited to the asset account. When bond interest is received , the debit is to Cash and the credit is to Interest Revenue (an Other Revenues and Gains item on the income statement). If interest is accrued, then the entry is a debit to Interest Receivable and a credit to Interest Revenue. When bonds are sold , any difference between net proceeds (sales price less fees) and the cost of the bonds is recorded as a gain or loss. If bonds with a cost of $23,000 are sold for a net amount of $19,000 , then the entry is as follows: Cash 19,000 Loss on Sale of Debt Investments 4,000 Debt Investments 23,000 (To record sale of bonds at a loss)
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Kimmel Accounting, Third Edition Instructor Manual The Loss account appears on the income statement as an Other Expenses and Losses item . A gain appears on the income statement as an Other Revenues and Gains item . Study Objective 3 - Explain the accounting for stock investments.
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Review Notes Appendix H - APPENDIX H REPORTING AND...

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