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Identify the three categories of debt securities and describe the accounting and reporting treatment for each category. Explain the equity method of accounting and compare it to the fair value method for equity securities. Describe the accounting for the fair value option and for impairments of debt and equity investments. Describe the reporting of reclassification adjustments and the accounting for transfers between categories. Identify the three categories of debt securities and describe the accounting and reporting treatment for each category. Understand the procedures for discount and premium amortization on bond investments. Identify the categories of equity securities and describe the accounting and reporting treatment for each category. Represent ownership of capital stock. Cost includes: price of the security, plus broker’s commissions and fees related to purchase. The degree to which one corporation ( investor) acquires an interest in the common stock of another corporation ( investee) generally determines the accounting treatment for the investment subsequent to acquisition. 0 ------------------20% ---------------- 50% ---------------- 100% 0 ------------------20% ---------------- 50% ---------------- 100% Significant influence usually exists Investment valued using Equity Method Investment valued on parent’s books using Cost Method or Equity Method (investment eliminated in Consolidation) Investments in Equity Securities Investments in Equity Securities Accounting Subsequent to Acquisition Value and report the investment using the cost method.* * Securities are reported at cost. Dividends are recognized when received and gains or losses only recognized on sale of securities. Investments in Equity Securities Holdings of Less Than 20% Available-for-Sale Securities Upon acquisition, companies record available-for-sale securities at cost. Illustration: On November 3, 2014, Republic Corporation purchased common stock of three companies, each investment representing less than a 20 percent interest. Illustration: Republic records these investments on November 3, as follows. Available-for-Sale Securities Equity Investments 718,550 Cash 718,550 Illustration: On December 6, 2014, Republic receives a cash dividend of $4,200 from Campbell Soup Co. Available-for-Sale Securities Cash 4,200 Dividend revenue 4,200 Illustration: Republic’s available-for-sale equity security portfolio on December 31, 2014: Available-for-Sale Securities Unrealized Holding Gain or Loss—Equity 35,550 Fair Value Adjustment (AFS) 35,550 Available-for-Sale Securities Illustration: Prepare the entry Republic would make on December 31, 2014, to record the net unrealized gains and losses. Illustration: On January 23, 2015, Republic sold all of its Northwest Industries, Inc. common stock receiving net proceeds of $287,220. Prepare the entry to record the sale. Cash 287,220 Equity Investments 259,700 Gain on Sale of Investments 27,520 Available-for-Sale Securities Illustration: On February 10, 2015, Republic purchased 20,000 shares of Continental Trucking at a price of $12.75 per share plus brokerage commissions of $1,850 (total cost, $256,850). Available-for-Sale Securities Fair Value Adjustment (AFS) 99,800 Unrealized Holding Gain or Loss—Equity 99,800 Available-for-Sale Securities Prepare the entry that Republic would make at December 31, 2015, to adjust its available-for-sale portfolio to fair value,
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