Appendix E - Student

Appendix E - Student - Appendix e: reporting and analyzing...

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Appendix e : reporting and analyzing Investments AIS 100 – Introductory
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Study Objectives Identify the reasons corporations invest in stocks and debt securities. Explain the accounting for debt investments. Explain the accounting for stock investments. Describe the purpose and usefulness of consolidated financial statements. Indicate how debt and stock investments are valued and reported in financial statements. Distinguish between short-term and long-term
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Corporations generally invest in debt or stock securities for one of three reasons. Why Corporations Invest 1. Corporation may have excess cash . 2. To generate earnings from investment income . 3. For strategic reasons . Temporary investments and the operating cycle
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Pension funds and banks regularly invest in debt and stock securities to: a. house excess cash until needed. b. generate earnings. c. meet strategic goals. d. avoid a takeover by disgruntled investors. Question Why Corporations Invest
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Accounting for Debt Instruments Recording Acquisition of Bonds Cost includes all expenditures necessary to acquire these investments, such as the price paid plus brokerage fees (commissions), if any. Recording Bond Interest Calculate and record interest revenue based upon the carrying value of the bond times the interest rate times the portion of the year the bond is outstanding.
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Accounting for Debt Instruments Recording Sale of Bonds Credit the investment account for the cost of the bonds and record as a gain or loss any difference between the net proceeds from the sale (sales price less brokerage fees) and the cost of the bonds.
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Illustration: Kuhl Corporation acquires 50 Doan Inc. 12%, 10-year, $1,000 bonds on January 1, 2012, for $54,000, including brokerage fees of $1,000. The entry to record the investment is: Cash 54,000 Accounting for Debt Instruments Debt investments 54,000 Jan. 1
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Illustration: Kuhl Corporation acquires 50 Doan Inc. 12%, 10- year, $1,000 bonds on January 1, 2012, for $54,000, including brokerage fees of $1,000. The bonds pay interest semiannually on July 1 and January 1. The entry for the receipt of interest on July 1 is: Accounting for Debt Instruments Cash 3,000 Interest revenue 3,000 * * July 1
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If Kuhl Corporation’s fiscal year ends on December 31, prepare the entry to accrue interest since July 1. Accounting for Debt Instruments Interest receivable 3,000 Interest revenue 3,000 Kuhl reports receipt of the interest on January 1 as follows. Cash
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Appendix E - Student - Appendix e: reporting and analyzing...

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