Prepared by Coby Harmon University of California, Santa Barbara



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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.
  • LEARNING OBJECTIVES
  • 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.
  • Investments
  • 17
  • 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.
  • LO 3

0 ------------------20% ---------------- 50% ---------------- 100%

  • 0 ------------------20% ---------------- 50% ---------------- 100%
  • Significant influence usually exists
  • Control 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
  • LO 3
  • Investments in Equity Securities
  • Illustration 17-13
  • LO 3
  • Accounting Subsequent to Acquisition
  • Market Price Unavailable
  • 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
  • Holding of Less Than 20%
  • LO 3
  • 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.
  • LO 3
  • Illustration: Republic records these investments on November 3, as follows.
  • Available-for-Sale Securities
  • Equity Investments 718,550
  • Cash 718,550
  • LO 3
  • 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
  • LO 3
  • Illustration: Republic’s available-for-sale equity security portfolio on December 31, 2014:
  • Illustration 17-14
  • Available-for-Sale Securities
  • LO 3
  • Unrealized Holding Gain or Loss—Equity 35,550
  • Fair Value Adjustment (AFS) 35,550
  • Available-for-Sale Securities
  • Illustration 17-14
  • Illustration: Prepare the entry Republic would make on December 31, 2014, to record the net unrealized gains and losses.
  • LO 3
  • 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
  • Illustration 17-15
  • Available-for-Sale Securities
  • LO 3
  • 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).
  • Illustration 17-16
  • Available-for-Sale Securities
  • LO 3
  • Illustration:
  • 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,
  • Illustration 17-16
  • LO 3
  • LO 3
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