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Unformatted text preview: 15-115INVESTMENTS CHAPTER OBJECTIVESAfter careful study of this chapter, students will be able to: 1. Explain the classification and valuation of investments. 2. Account for investments in debt and equity trading securities. 3. Account for investments in available-for-sale debt and equity securities. 4. Account for investments in held-to-maturity debt securities, including amortization of bond premiums and discounts. 5. Understand transfers and impairments. 6. Understand disclosures of investments. 7. Explain the conceptual issues regarding investments in marketable securities. 8. Account for investments using the equity method. 9. Describe additional issues for investments. 10. Account for derivatives of financial instruments (Appendix). 15-2SYNOPSIS Investments: Classification and Valuation1. A corporation acquires securities of other corporations or of the government for several different reasons: to obtain additional income in the case of the investment of excess cash from the time of peak inflows until the next period of cash outflows, to create long-term relationships with suppliers, or to obtain significant influence over related companies. Companies may invest in common stock, preferred stock, or bonds of other corporations as well as municipal, state, or federal bonds. Each group of such investment securities is often referred to as a portfolioof marketable securities. 2. GAAP has been established for all investments in debt securities and those equity securities that have readily determinable fair values. A security has a readily determinable fair value if a sales price is currently available on a securities exchange registered with the SEC or in an over-the-counter market whose prices are publicly reported. 3. Investments in debt and equity "marketable" securities are classified at acquisition, and on subsequent reporting dates, into one of the following three categories: (a) Trading Securities, debt and equity securities purchased and held principally to sell them in the near future. (b) Available-for-Sale Securities, debt securities not classified as held-to-maturity, and debt and equity securities not classified as trading securities. (c) Held-to-Maturity Debt Securities, those debt securities for which the company has the "positive intent and ability to hold the securities to maturity." 4. Debt securities, which involve a creditor relationship with another company, include U.S. treasury securities, municipal securities, corporate bonds, convertible debt, commercial paper, and preferred stocks that have a mandatory redemption feature or are redeemable at the option of the holder. Equity securities, which involve an ownership interest in another company, include common stocks, preferred stocks that are redeemable at the option of the company that issued the stock, stock warrants, stock rights, and put and call options. Fair valueis the price that would be received if the security was sold in an orderly transaction between market participants. was sold in an orderly transaction between market participants....
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This note was uploaded on 10/12/2011 for the course AC300 01 taught by Professor Smith during the Spring '11 term at Kaplan University.
- Spring '11