WRD_ch15

Accounting

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Unformatted text preview: 11-115-1Investments and Fair Value Accounting1511-215-2Learning Objective 13-1Describe the nature of the adjusting process.Learning Objective 13-1Describe the nature of the adjusting process.Insert Chapter ObjectivesInvestments and Fair Value Accounting1Describe why companies invest in debt and equity securities.2Describe and illustrate the accounting for debt investments.After studying this chapter, you should be able to:15-23Describe and illustrate the accounting for equity investments.11-315-35Describe fair value accounting and its implication for the future.15-3Investments and Fair Value Accounting (continued)4Describe and illustrate valuing and reporting investments in the financial statements.11-415-4Describe why companies invest in debt and equity securities.115-411-515-5Investing Cash in Current OperationsCash may be used to replace worn out equipment or to purchase new, more efficient, and productive equipment. Cash may be reinvested in the company to expand its current operations. Cash may be used to pay suppliers or other creditors.111-615-6Investing Cash in Temporary InvestmentsDebt securitiesare notes and bonds that pay interest and have a fixed maturity date. Equity securitiesare preferred and common stock that represent ownership in a company and do not have a fixed maturity date.111-715-7Investing Cash in Temporary InvestmentsThese debt securities and equity securities are termed Investments, or Temporary Investments, and are reported in the Current Assets section of the balance sheet. 111-815-8Investing Cash in Long-Term InvestmentsLong-term investments often involve the purchase of a significant portion of the stock of another company. Such investments have a strategic purpose:1.Reduction of costs1.Replacement of management1.Expansion1.Integration111-915-9Describe and illustrate the accounting for debt investments.215-911-1015-10Purchase of BondsHomer Company purchases $18,000 of U.S. Treasury bonds direct from a Federal Reserve Bank at their par value on March 17, 2010 (45 days after the last interest payment date). The bonds have an interest rate of 6%, payable on July 31 and January 31.$18,000 6% (45/360)211-1115-11Interest RevenueOn July 31, Homer Company receives a semiannual interest payment of $540 ($18,000 6% ).($540 $135) or [$18,000 6% (135/360)]211-1215-12Homer Companys accounting period ends on December 31. The following adjusted entry is required to record the accrued interest:Accrued InterestHomer Company would report Interest Revenueon its 2010 income statement at $855 ($405 + $450).211-1315-13Homer Company receives interest of $540 on January 31, 2011. Notice that Interest Receivableis credited for $450 to reflect this is a receivable from 2010. Interest Revenueof $90 is the interest earned from January 1 through January 31, 2011....
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WRD_ch15 - 11-115-1Investments and Fair Value...

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