Assignment_9_-_Lecture_Notes__1

The stocks are an asset for business a long term

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The stocks are an asset for business A. Long-term Investments: Classification % Ownership Accounting Method Available-for-sale Less than 20% Fair value (cost) Significant influence 20% to 50% Equity Controlling influence Over 50% Consolidation Short-term or long term available-for-sale : Purchase date: recorded at cost (same as market value on purchase date) balance sheet date: recorded at market value Dividends recorded as revenue when received. Short-term, less than one year: Marketable Security, current asset. Long-term, more than one year: Investment, investment asset. Available-for-sale Investments - Stocks Classify the following investments as a. marketable securities b. Long term investments – available for sale c. significant influence d. controlling influence A. Investment in 500 shares of Amazon to be sold within the next two years. B. Investment in 300 shares of American Airlines to be sold next week. C. Investment in 50,000 shares of Frost. Frost’s total shares outstanding are 75,000.
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D. Investment in 200 shares of Intel to be sold within the next 9 to 11 months. E. Investment in 35,000 shares of Brookstone. Brookstone’s total shares outstanding are 100,000. Solution A longter m - Availabl e for sale B marketa ble securitie s C controlli ng influenc e D marketa ble securitie s E significa nt influenc e Available-for-sale Investments – Debt Securities Bonds and notes These investments pay interest Principle * rate * time = interest Time is # of days/360 Journal Entries: 1. Purchased with interest accrued: Dr Investment Dr Interest Receivable Cr Cash 2. Receipt of first interest payment Dr Cash (total interest amount) Cr Interest Receivable (amount from #1) Cr Interest Revenue (difference between the amounts) 3. Receipt of subsequent interest payments Dr Cash Cr Interest Revenue 4. Adjusting entry: Dr Interest Receivable (interest from last receipt to year end) Cr Interest Revenue (same) 5. Receipt of interest after adjusting entry: Dr Cash (total interest amount) Cr Interest receivable (amount from #4) Cr Interest revenue (difference between the amounts)
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6. Sale A. At a loss: Dr Cash (actual cash received interest + % of par) Dr Loss (difference between % of par and investment) Cr Investment (amount from #1) Cr Interest Revenue (interest since last receipt) B. At a gain: Dr Cash (actual cash received interest + % of par) Cr Investment (amount from #1) Cr Interest Revenue (interest since last receipt) Cr Gain (difference = % of par - investment)
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