6A: 001 – Fall
2010 – Ch 5 & 10
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MIDTERM 1 IS TUEDAY October 5, 2010 Chapters 1- 5 &10
Chapters 5 & 10 (pp. 537-546)
1. Investments in the Securities of Other Organizations
These securities, also called financial instruments, represent assets for the company
acquiring the securities, are of 2 types:
Ownership of promissory notes whereby one company (the
borrower) promises to repay the amount borrowed, plus interest, to the lending
company who acquires the note as an investment.
Some debt securities are actively
traded in debt markets and have a market price that might vary from day to day.
Ownership of stock of another company that is actively traded in
stock markets and has a market price that might vary from day to day.
securities may pay dividends to the owners of the securities.
Companies acquire debt and equity securities of other organizations for a variety of
reasons, e.g., to receive interest or dividends; to gain a degree of influence with
another corporation to ensure a steady supply of raw materials; to gain operating
control of another corporation, etc.
All investments (debt or equity) are recorded at their acquisition cost on the date
Following the acquisition date, how the investments are accounting for on
the company’s accounting records and disclosed in its financial statements depends
upon what management’s purpose was in acquiring the investment.
are reflected in the following 3 classifications for all investments in the debt or equity
securities of other organizations.
1. Held-to-maturity securities
Consist only of debt securities acquired for the
purpose of earning interest where the company intends to keep the security until it
matures (which may range from a few days to many years).
These securities are
initially recorded at there acquisition cost, but in subsequent periods are reported at
These securities can be classified as a current asset (if they
mature within 1 year of the balance sheet date) or as a long-term investment (if they
mature beyond 1 year from the balance sheet date).
is an example of a held-to-maturity security.
One of the largest
assets of banks are notes receivable.
To illustrate, on March 31, US Bank loaned
$1,500 to ABC Co., receiving a 2-month, 8%, $1,500 note receivable, with principal
(the amount loaned, $1,500) and interest due on May 31.
US Bank, which prepares
monthly financial statements, would make the following journal entries: