Ch17_Notes

Ch17_Notes - Ch.17 Notes Investments

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Ch.17 Notes – Investments Why would one company invest in another company? Remember: there are two ways for a company to raise additional funds outside the normal course of  operations: 1. Issue debt (debt capital) 2. Issue equity (equity capital) SFAS 115 issued to address the valuation of securities held as investments. Section 1 – Investment in Debt Securities Debt securities represent a creditor relationship w/ another entity.  There are 3 categories: 1. a. Valued at amortized cost (acq. Cost adjusted for any amortization of discount or  premium) b. Unrealized Holding G/L are not recognized c. Recognize interest when earned and G/L at sale 2. Available-for-sale: neither of the other two  a. Valued at fair value b. Unrealized Holding G/L are recognized as Other CI and as separate component of  SE c. Recognize interest when earned and G/L at sale 3. a. Valued at fair value (amt. at which company can exchange security in current  transaction) b. Unrealized Holding G/L are recognized in NI c. Recognize interest when earned and G/L at sale 4. See Illustration 17-2 on p.839 for summary. Held-to-Maturity Securities Chapter 17 Notes 1
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Why amortized cost? If you plan to hold something to maturity, then current fair value is irrelevant for measuring and  evaluating cash flows associated with securities. Like Ch.14, companies use the effective interest method to compute Int. Rev., dsct/prem amortization,  and CV. Chapter 17 Notes 2
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Example: assume that XYZ Company purchased $200,000 of 9 percent bonds of Evermaster  Corporation on January 1, 2006, at a discount, paying $184,925. The bonds mature January 1, 2011;  interest is payable each July 1 and January 1.  Assume at December 31, 2006 the fair value of the  bonds is $187,500.  Prepare all journal entries for 2006. Mkt. Rate: PMT: FV: PV: N: CPT I: Amortization Table: Date Cash Received Interest  Revenue __ x CV Disc. Amort. Unamort Disc. CV 1/1/06 7/1/06 1/1/07 7/1/07 1/1/08 Journal Entries: Chapter 17 Notes 3
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Now, assume they sell their investment on 11/1/2010, at 99 ¾ plus accrued interest. Chapter 17 Notes 4
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Available-For-Sale Securities Companies report these at fair value.  To reduce the volatility to NI of this method, companies report  them at FV on the B/S but do not report changes in FV in NI until after they are sold. Now, assume that the bonds in the previous example are classified as AFS securites.  Prepare all 
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This note was uploaded on 02/25/2011 for the course ACCT 3021 taught by Professor Delaune during the Fall '06 term at LSU.

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Ch17_Notes - Ch.17 Notes Investments

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