CHAPTER 18 Investment

CHAPTER 18 Investment - Chapter 18 Investments LECTURE...

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Chapter 18 Investments LECTURE OUTLINE The material in this chapter can be covered in three class periods. Students will have some difficulty with the classifications of debt securities into trading, available-for-sale, and held-to-maturity. Also, the same problems will develop with equity securities as they are classified as trading or available-for-sale (assuming ownership interest less than 20%). Illustrations 18-1, 18-3, and 18-5 can be used to clarify the issues. When discussing investments in debt securities it is often useful to contrast the entries made for debt securities with the entries made for debt obligations on the issuers’ book (see Chapter 14). Illustration 18-2 provides an example of entries made for investments and issuances of debt securities. A. Accounting for Investments in Debt Securities. 1. Debt securities are instruments representing a creditor relationship with an enterprise. 2. Debt securities include U.S. government securities, municipal securities, corporate bonds, convertible debt, commercial paper, and all securitized debt instruments. 3. Trade accounts receivable and loans receivable are not debt securities because they do not meet the definition of a security. 4. 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.
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5. Accounting and reporting for debt securities. Teaching Tip Illustration 18-1 indicates the accounting for debt securities by category and provides an overview for subsequent discussion. 6. 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. b. Use of a separate discount or premium account as a valuation account is acceptable procedure for investments, but in practice not widely used. Teaching Tip Illustration 18-2 indicates the accounting for held-to-maturity securities. 7. 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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CHAPTER 18 Investment - Chapter 18 Investments LECTURE...

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