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Unformatted text preview: University of Rhode Island BUS 402 Advanced Accounting 2010 - 2011 Joseph M. DAdamo Course Outline #2: Equity Investments of Less than 20% Ownership Interest Page 1 of 31 I. Overview of Investments Equity Securities FASB ASC 320-10-20 Glossary Equity Security Any security representing an ownership interest in an entity (for example, common, preferred, or other capital stock) or the right to acquire (for example, warrants, rights, and call options) or dispose of (for example, put options) an ownership interest in an entity at fixed or determinable prices. A. Equity Securities Stocks 1. Nature of Relationship Creates an Owner Investor (stockholder) Investee (stock issuer) relationship evidence by a stock security (document) that can be traded on a stock market o Investor reports investment asset for its ownership interest in issuer Level of ownership interest based on % of issued shares owned by stockholder o Investee reports contributed equity equal to amount of capital received in exchange for shares issued Nature of Ownership Interest varies by Type of Stock o Preferred Stock Investors give up voting rights to receive dividends (if declared) and payment at liquidation before common stockholders o Common Stock Investors have the general ownership interest with voting rights that provide the means to participate in management Level of participation depends on level of ownership interest based on % of outstanding shares owned by stockholder Stockholder not legally-entitled but may receive two types of cash payments from stock issuer: Dividend payments as distributions of profits Amounts and timings of dividends, if any, @ discretion of board of directors Course Outline #2: Equity Investments of Less than 20% Ownership Interest Page 2 of 31 Payment in exchange for shares repurchased as treasury stock Shares never mature Treasury stock repurchases @ discretion of board of directors 2. General Accounting Treatment Investments in Common Stock Accounting treatment depends on investors % ownership interest and the resulting ability to influence or control the investee INVESTORS % OWNERSHIP INTEREST IN INVESTEES COMMON STOCK 0% 20% 50% 100% No Influence No Control Significant Influence Controlling Interest Passive Stockholder Active Long-Term Stockholder Parent Company Stockholder B. Equity Investments with No Influence and No Control (Less than 20% Ownership Interest) 1. Nature of Investments Investments using excess funds to generate returns Earn returns through dividends...
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