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Investments in Stocks and Bonds

Investments in Stocks and Bonds. Overview of FASB No. 115. Requires most investment securities to be valued at market Securities classified into three categories Held-to-maturity Only debt securities that will be held to maturity date. Overview of FASB No. 115. Trading securities

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Investments in Stocks and Bonds

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  1. Investments in Stocks and Bonds

  2. Overview of FASB No. 115 • Requires most investment securities to be valued at market • Securities classified into three categories • Held-to-maturity • Only debt securities that will be held to maturity date

  3. Overview of FASB No. 115 • Trading securities • Debt and equity securities that are purchased and sold for short-term profits • Available-for-sale • All debt and equity securities not classified as held-to-maturity or trading

  4. Short-term Investments • Readily saleable securities • Management intends to sell within one year • All three of FASB 115 categories apply

  5. Short-term Investments in Stocks (Trading) • Purchase • Record cost in Short-term Investment account • Cash dividends • Record revenue upon receipt of dividend • Stock dividends and splits • No entry and calculate new cost

  6. Short-term Investments in Stocks (Trading) • Sale • Increase Cash for proceeds • Decrease Investment account by cost • Record Realized Gain(Loss) on Investment for difference

  7. Unrealized Gain or Loss (Trading) • Valuation for financial statements • Adjust Investment account to market • Record Unrealized Gain(Loss) for change • Unrealized gain or loss shown on income statement

  8. Subsequent Sale (Trading) • When sold after adjustment to market • Realized gain or loss is difference between market at date of sale and amount security adjusted to at last financial statement date

  9. Short-term Investments in Bonds (Trading) • Purchase • Record cost in Short-term Investment account • Interest accruals and receipts • Interest revenue accrued at appropriate dates • No amortization of premium or discounts

  10. Short-term Investments in Bonds (Trading) • 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

  11. Unrealized Gain or Loss (Trading) • Valuation for financial statements • Adjust Investment account to market • Record Unrealized Gain(Loss) for change • Unrealized gain or loss shown on income statement

  12. Subsequent Sale (Trading) • When sold after adjustment to market • Realized gain or loss is difference between market at date of sale and amount security adjusted to at last financial statement date

  13. Investments in Available-For-Sale Securities • Acquired as short-term or long-term investment • When available-for-sale bonds held as long-term, premium or discount should be amortized as adjustment to interest revenue

  14. Investments in Available-For-Sale Securities • Accounting similar to trading except: • Unrealized gains or losses reported as a separate component of stockholders’ equity • When sold, realized gain or loss is difference between proceeds and original cost • Unrealized gain or loss closed

  15. Own less than 20% of voting stock Own 20-50% of voting stock Own more than 50% of voting stock Market value method Equity method Prepare consolidated statements Long-term Investments in Stocks

  16. Equity Method of Accounting • Investment initially recorded at cost • Receipt of dividends • Reduces investment account • No revenue

  17. Equity Method of Accounting • Investee reported income • Increase Investment by investor’s share • Report share of investee income as income • Investee reported loss • Decrease Investment by share • Report share as loss

  18. Investment in Bonds Held-to-Maturity • FASB 115 states must not be any foreseeable intent to sell bonds before maturity date • Accounting is mirror image of accounting for long-term debt • Reported in financial statements at amortized cost

  19. Analyzing Information • What is overall percent of total assets invested in current and noncurrent securities? • What is mix of trading, available-for-sale, and held-to-maturity investments?

  20. Analyzing Information • Has company been successful in generating additional income from investments? • How does current market value and cost compare? • Is there good range of maturity dates?

  21. Analyzing Information • 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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