accting 301 ch5 min shen

accting 301 ch5 min shen - Chapter 5 Short-Term Investments...

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1 Chapter 5 – Short-Term Investments & Receivables A company may make investments in the stock or bonds of another corporation. A common motivation to make investments is to receive a return on otherwise idle funds. Short-Term Investments and Accounting Methods I. Passive Investments in Debt Investments may be made in another corporation's debt. Debt securities are always considered passive investments. - Held-to-Maturity: debt investments may be held until they reach maturity date reported using the amortized cost method of reporting II. Passive Investments in Stock Investments may be made in another corporation's stocks. Investments in equity securities are presumed to be passive if the investment consists of less than 20% of the outstanding voting stock of another company. The market value method is used to measure and report these investments. a. Trading securities : Investments in trading securities are investments that are held primarily for the purpose of selling them in the near future. - Trading securities are always reported on the balance sheet as current assets valued at fair market value at the balance sheet date. - Unrealized holding gains and losses are reported on the income statement. They increase or decrease net income . Example: On August 11, 2009, Pratt Company purchased 10,000 shares of Harris Company common stock for $20 per share. This represents a 15% interest in Harris Company. Pratt Company classified these 10,000 shares as trading securities. 8/11/2009 Effect: A = L + SE NI = R - E
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2 On December 31, 2009, Harris Company's common stock was trading for $18 per share. 12/31/2009 Effect: A = L + SE NI = R - E On November 15, 2010, Pratt Company received dividends of $2 per share. 11/15/2010 Effect: A = L + SE NI = R - E On December 31, 2010, Harris Company's common stock was trading for $24 per share. 12/31/2010 Effect: A = L + SE NI = R - E
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b. Securities available-for- bond investments that are - Available-for-sale noncurrent asset - Unrealized holdin section of the bala They do not affec Example: Started January 1, 201 common stock as available-for-s common stock was trading for $3 12/31/2011 Effect: A = L + 3 sale : Investments in available-for-sale securities
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This note was uploaded on 02/16/2011 for the course ACCOUNTING 301 taught by Professor Chen during the Spring '10 term at George Mason.

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accting 301 ch5 min shen - Chapter 5 Short-Term Investments...

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