ch 12 - Chapter 12 Reporting and Interpreting Investments...

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1 (c) Mikhail Pevzner and George Mason University Chapter 12 Reporting and Interpreting Investments in Other Corporations (c) Mikhail Pevzner and George Mason University Investments in Other Entities • Firms buy investments in other companies for a variety of reasons. For example: – In the normal course of business (financial firms); – To invest excess cash; – To gain control or influence over a company; (c) Mikhail Pevzner and George Mason University Control and investments Control, i.e. whether a company, an investor, can affect control or significant influence as a result of its investment into investee determines how an investor will account for its investment. • We will distinguish between investments which do not result in significant control and/or influence, and investments that result in significant control and influence.
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2 (c) Mikhail Pevzner and George Mason University Investments that do not result in significant control and/or influence • Stock investments: –Trading securities; –Securities available for sale (SAS); • Debt held to maturity; –Accounting is done using amortized cost method-a mirror of the accounting done by the debtor. (c) Mikhail Pevzner and George Mason University Trading securities • If a firm engages in active trading in its investments, these investments become very similar to inventories in a manufacturing firm. Example: an investment company, a bank, an insurance company actively trading in its investments. (c) Mikhail Pevzner and George Mason University Securities Available for Sale • Stock investments which are not held for active trading. • Example: MBP has excess cash and buys a small share of IBM stock to get a return higher than a bank savings account. MBP expects to sell its IBM stock in a year.
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3 (c) Mikhail Pevzner and George Mason University Investments held to maturity • Investments in the other firms’ bonds; • Depending on whether investor actively trades in these bonds or expects to sell them soon, we could also classify these as trading securities or securities available for sale. • Use bond discount/premium amortization methods to record periodic interest income. (c) Mikhail Pevzner and George Mason University Accounting for investments at acquisition MBP acquires 1,000 IBM shares at $200 per share. Journal Entry: Dr. Investments 200,000 Cr. Cash 200,000 (c) Mikhail Pevzner and George Mason University Realized gains/losses When securities are sold, a realized gain/loss is generated. For example, MBP sells 1,000 shares of IBM stock for $200. The original cost of IBM stock that MBP had to pay was $100 per share. At acquisition, MBP made the following journal entry:
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This note was uploaded on 02/05/2011 for the course ACCT 301 taught by Professor Hasan during the Fall '09 term at George Mason.

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ch 12 - Chapter 12 Reporting and Interpreting Investments...

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