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© Copyright D Hillman 20001 Investments in Stocks and Bonds
© Copyright D Hillman 20002 Overview of FASB No. 115 n Requires most investment securities to be valued at market n Securities classified into three categories n Held-to-maturity –Only debt securities that will be held to maturity date
© Copyright D Hillman 20003 Overview of FASB No. 115 n Trading securities –Debt and equity securities that are purchased and sold for short-term profits n Available-for-sale –All debt and equity securities not classified as held-to-maturity or trading
© Copyright D Hillman 20004 Short-term Investments n Readily saleable securities n Management intends to sell within one year n All three of FASB 115 categories apply
© Copyright D Hillman 20005 Short-term Investments in Stocks (Trading) n Purchase –Record cost in Short-term Investment account n Cash dividends –Record revenue upon receipt of dividend n Stock dividends and splits –No entry and calculate new cost
© Copyright D Hillman 20006 Short-term Investments in Stocks (Trading) n Sale –Increase Cash for proceeds –Decrease Investment account by cost –Record Realized Gain(Loss) on Investment for difference
© Copyright D Hillman 20007 Unrealized Gain or Loss (Trading) n Valuation for financial statements –Adjust Investment account to market –Record Unrealized Gain(Loss) for change n Unrealized gain or loss shown on income statement
© Copyright D Hillman 20008 Subsequent Sale (Trading) n When sold after adjustment to market n Realized gain or loss is difference between market at date of sale and amount security adjusted to at last financial statement date
© Copyright D Hillman 20009 Short-term Investments in Bonds (Trading) n Purchase –Record cost in Short-term Investment account n Interest accruals and receipts –Interest revenue accrued at appropriate dates –No amortization of premium or discounts
© Copyright D Hillman 200010 Short-term Investments in Bonds (Trading) n Sale –Increase Cash for proceeds –Accrue interest revenue to date of sale –Decrease Investment account by cost –Record Realized Gain(Loss) on Investment for difference
© Copyright D Hillman 200011 Unrealized Gain or Loss (Trading) n Valuation for financial statements –Adjust Investment account to market –Record Unrealized Gain(Loss) for change n Unrealized gain or loss shown on income statement
© Copyright D Hillman 200012 Subsequent Sale (Trading) n When sold after adjustment to market n Realized gain or loss is difference between market at date of sale and amount security adjusted to at last financial statement date
© Copyright D Hillman 200013 Investments in Available-For-Sale Securities n Acquired as short-term or long-term investment n When available-for-sale bonds held as long-term, premium or discount should be amortized as adjustment to interest revenue
© Copyright D Hillman 200014 Investments in Available-For-Sale Securities n Accounting similar to trading except: n Unrealized gains or losses reported as a separate component of stockholders’ equity n When sold, realized gain or loss is difference between proceeds and original cost –Unrealized gain or loss closed
© Copyright D Hillman 200015 Long-term Investments in Stocks n Own less than 20% of voting stock n Own 20-50% of voting stock n Own more than 50% of voting stock n Market value method n Equity method n Prepare consolidated statements
© Copyright D Hillman 200016 Equity Method of Accounting n Investment initially recorded at cost n Receipt of dividends –Reduces investment account –No revenue
© Copyright D Hillman 200017 Equity Method of Accounting n Investee reported income –Increase Investment by investor’s share –Report share of investee income as income n Investee reported loss –Decrease Investment by share –Report share as loss
© Copyright D Hillman 200018 Investment in Bonds Held-to-Maturity n FASB 115 states must not be any foreseeable intent to sell bonds before maturity date n Accounting is mirror image of accounting for long-term debt n Reported in financial statements at amortized cost
© Copyright D Hillman 200019 Analyzing Information n What is overall percent of total assets invested in current and noncurrent securities? n What is mix of trading, available- for-sale, and held-to-maturity investments?
© Copyright D Hillman 200020 Analyzing Information n Has company been successful in generating additional income from investments? n How does current market value and cost compare? n Is there good range of maturity dates?
© Copyright D Hillman 200021 Analyzing Information n If equity securities accounted for using equity method –does significant influence exist? –how much of share of income has been received as dividends?
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