Accounting 312- chapter 14 - Accounting 312 Chapter 14-...

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Accounting 312 Chapter 14- Investments Who’s in Control Here? Companies have different motivations for investing in securities issued by other companies 1. earn a high rate of return 2. secure certain operating or financing arrangements with another company (equity investing) Investments in Debt Securities Debt securities represent a creditor relationship with another entity Amortized cost- acquisition cost adjusted for the amortization of dsct or premium Fair Value- amt at which a co can exchange a financial instrument in a current transaction between willing parties, other than in a forced or liquidation sale I. Held-To-Maturity Securities A. only debt securities can be classified as held to maturity because equity securities have no maturity date B. classify if: 1. positive intent 2. the ability to hold those securities to maturity C. companies acct for these securities at amortized cost, not fair value 1. not intending to sell so fair value irrelevant 2. because co do not adjust held to maturity securities to fair value, these securities do not increase the volatility of either reported earnings or reported capital as do trading securities and available for sale securities D. debt securities that the co has the positive intent and ability to hold to maturity E. use effective-interest method 1. to compute interest revenue, co compute the effective interest rate or yield at the time of investment and apply that rate to the beginning carrying amt (book value) for each interest period 2. the investment carrying amt is increased by the amortized dsct or decreased by the amortized premium in each period F. journal Record investment: Held to maturity securities Cash Record receipt of the first semiannual interest payment Cash Held to maturity securities Interest Revenue Accrues interest and amortizes the dsct at yr end Interest Receivable Held to maturity securities Interest revenue Sells extremely close to maturity (entry for dsct amortization and sale of bond) Held to maturity securities Interest Revenue Cash Interest Revenue Held to maturity securities Gain on sale of securities II. Available for Sale Securities
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A. Debt securities that are not classified as held to maturity or trading B. companies like amazon.com report available for sale securities at fair value C. records unrealized gains and losses related to changes in the fair value of the avail for sale debt securities in an unrealized holding gain or loss account 1. company will add (subtract) this amt to OCI for the period, which is then added to (or subtracted) from accum OCI 2. thus, co report avail for sale securities at fair value on the BS, but do not report changes in fair value as part of NI until after selling the security D. Example: Single Security 1. a company purchases $100,000, 10%, five yr bonds on jan 1, 2008 with interest payable on July 1 and Jan. 1. The bond sells for $108,111 and interest rate of 8% 2. entries record purchase of bond: Avail for Sale Securities 108111 Cash
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This note was uploaded on 01/23/2011 for the course ACCOUNTING acc312 taught by Professor Halwhite during the Fall '10 term at University of Michigan.

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Accounting 312- chapter 14 - Accounting 312 Chapter 14-...

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