Investments ACCOUNTING FOR INVESTMENT SECURITIES There are two potential types of investments that a corporation might hold: investments in equity securities and investments in debt securities. The type of investment has an impact on the accounting treatment. In addition, management’s intent with respect to the holding of the investment affects how the investment is accounted for in the financial statements. The following is a schedule of the accounting treatment based on the type of investment and management’s intentions. ControlReporting CategoryManagement IntentType of Security< 20%Held-to-MaturityPositive intent and ability to holdDebt< 20%Available-for-SaleSale subject to market factors and company financial requirementsDebt or Equity< 20%Trading Subject to immediate saleDebt or Equity20% - 50%Equity MethodSignificant influenceEquity> 50%ConsolidationControlEquitySecurities to Be Held to Maturity Debt securitiesthat are classified as held-to-maturity indicate that the company has both the abilityand intentto hold the securities until maturity. The investor company does not have any influence over the operating or financial policies of the investee company. The investment in debt securities that are held-to-maturity are recorded at the market value (original cost) on the date of acquisition. Example: Spencer Company purchased $40,000 of the 8%, 5-year bonds of Alexander Company for $43,412, which provides a 6% return. The bonds pay interest semiannually. Spencer Company has both the ability and intent to hold the securities until the maturity date. The journal entry to record the investment would be as follows: DateAccountDebitCredit1/1/00Investment in bonds$40,000Premium on bonds3,412Cash$43,412To record the purchase of held-to-maturity bondsThe following amortization table has been prepared to assist in the discussion related to the recording of interim interest revenue and reporting the investment on the balance sheet at the end of the accounting period. F:\Teaching\3321\web\module3\c12\tnotes\c12a.doc 2/19/2007 1
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