Chapter_13_Lecture_Notes

Chapter_13_Lecture_Notes - Chapter 13 Lecture Notes...

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Chapter 13 Lecture Notes Accounting for Investments I. Debt Investments - Are investments in corporate and government bonds. Bonds are recorded at cost, which includes any broker fees paid. Bonds will be reported on the balance sheet at fair market value (discussed later). Upon disposal, a gain or loss will be recognized for any difference between the selling price and the cost of the bond. Example: Accounting for Debt Securities On January 1, 2006, Simpson issues $1,000,000 of bonds that will mature in 10 years. Homer buys $200,000 of these bonds at face value plus brokerage fees of $3,000. The bonds pay 9% interest semiannually on June 30 and December 31. The entry for Homer to record the investment on 1/1/06 is: Account Debit Credit Debt Investments 203,000 Cash 203,000 On June 30 and on December 31, Homer must record the receipt of semiannual interest. The entry on these dates will be: Account Debit Credit Cash 9,000 Interest Revenue 9,000 Assume that on January 1, 2007 Homer sells all of the Simpson the Bonds at 99. The entry for Homer to record the sale is: Account Debit Credit Cash(200,000*99%) 198,000 Debt Investments(Original Cost) 203,000 Loss on Sale Investment 5000 II. Stock Investments - Are investments in the capital stock of corporations. Accounting 1
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for stock investments is based on the percentage of ownership in the company (investee). i. If the investor owns < 20% of the investee's voting stock, then he cannot "exercise significant influence" over the investee, and the cost method should be used. ii. If the investor owns > 20% of the voting stock of the investee, the investor can "exercise significant influence," and the equity method should be used. iii. If the investor owns more than 50% of the voting stock of the investee, then the investor (the parent company) can control the operations of the investee (the subsidiary), and consolidated financial statements must be prepared. A. Accounting for Stock Investments - Cost Method (Holdings of less than 20%) Initial investments in capital stock are recorded at cost, including broker fees. Dividends are treated as revenues. Stocks will be reported on the balance sheet at
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This note was uploaded on 04/29/2011 for the course ECON 101 taught by Professor Gottlieb during the Spring '08 term at Rutgers.

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Chapter_13_Lecture_Notes - Chapter 13 Lecture Notes...

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