Chapter13Outline

Chapter13Outline - CHAPTER REVIEW Temporary and Long-Term...

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CHAPTER REVIEW Temporary and Long-Term Investments 1. (S.O. 1) Corporations purchase investments because (1) they may have excess cash, (2) they generate earnings from investment income, and (3) for strategic reasons. Accounting for Short-Term Debt Investments 2. (S.O. 2) Debt investments are investments in government and corporation bonds. At acquisition, the cost principle is applied and all expenditures necessary to acquire these investments are included in the cost (e.g., brokerage fees). At acquisition, Debt Investments is debited and Cash is credited for the cost of the investment. 3. Interest revenue must also be recorded on debt investments. Assume Buboo Company (fiscal year ends December 31) receives $2,000 interest every six months on a debt investment purchased April 1, 2003. The following entries are required: Oct. 1 Cash. ....................................................................... 2,000 Interest Revenue. ............................................ 2,000 Dec. 31 Interest Receivable. ................................................ 1,000 Interest Revenue. ............................................ 1,000 Apr. 1 Cash. ....................................................................... 2,000 Interest Receivable. ......................................... 1,000 Interest Revenue. ............................................ 1,000 4. When bonds are sold, it is necessary to credit the investment account for the cost of the bonds, debit Cash, and any difference between the sale price and cost of bonds is recorded as a gain or loss. The gain or loss on the sale of debt investments is reported under Other Revenues and Gains or Other Expenses and Losses, respectively, in the income statement. Accounting for Long-Term Debt Investments 5. The accounting for temporary debt investments and for long-term debt investments is similar except for when bonds are purchased at a premium or a discount. For temporary investments, the bond premium or discount is not amortized, and for long-term investments, the bond premium or discount is amortized. The investor can use either the straight-line or the effective-interest method of amortization. Accounting for Stock Investments
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6. (S.O. 3) Stock investments are investments in the capital stock of corporations. The accounting for stock investments differs depending on the degree of influence
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Chapter13Outline - CHAPTER REVIEW Temporary and Long-Term...

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