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Understanding Company Investments: Accounting for Equity and Debt Securities

This guide explores the reasons companies invest in other entities and details the accounting methods for equity and debt securities. It covers various scenarios based on the level of influence an investor has, ranging from insignificant (less than 20% ownership) to controlling influence (more than 50% ownership). It explains the fair value method, equity method, and consolidation method of accounting. Additionally, it highlights the classification of debt securities and the processes involved in purchasing, selling, and adjusting these investments to fair value.

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Understanding Company Investments: Accounting for Equity and Debt Securities

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  1. Investments Appendix D

  2. App D-2 Learning Objectives • Explain why companies invest in other companies • Account for investments in equity securities when the investor has insignificant influence • Account for investments in equity securities when the investor has significant influence • Account for investments in equity securities when the investor has controlling influence • Account for investments in debt securities

  3. App D-3 Learning Objective 1 Explain why companies invest in other companies

  4. App D-4 Part A Equity Investments

  5. App D-5 Illustration D.2—Accounting for Equity Investments

  6. App D-6 Learning Objective 2 Account for investments in equity securities when the investor has insignificant influence

  7. App D-7 Equity Investments with Insignificant Influence • Ownership of less than 20% of the voting stock • Use fair value method • Classified as either: • Trading securities: securities that the investor expects to sell in the near future • Available-for-sale securities: securities held for reasons other than attempting to profit from trading in the near future

  8. App D-8 Purchase Equity Investments & Receive Cash Dividends

  9. App D-9 Sell Equity Investments

  10. App D-10 Adjust to Fair Value: Trading Securities

  11. App D-11 Adjust to Fair Value: Available-for-Sale Securities

  12. App D-12 Learning Objective 3 Account for investments in equity securities when the investor has significant influence

  13. App D-13 Equity Investments with Significant Influence • Investor owns between 20% and 50% of the common stock • Use the equity method

  14. App D-14 Purchase Equity Investments

  15. App D-15 Recognize Equity Income

  16. App D-16 Receive Cash Dividends

  17. App D-17 Learning Objective 4 Account for investments in equity securities when the investor has controlling influence

  18. App D-18 Equity Investments with Controlling Influence • More than 50% of the voting stock • Use the consolidation method • Parent company prepares consolidated financial statements

  19. App D-19 Part B Debt Investments

  20. App D-20 Learning Objective 5 Account for investments in debt securities

  21. App D-21 Purchase Debt Investments

  22. App D-22 Earn Interest Revenue

  23. App D-23 Sell Debt Investments

  24. App D-24 Adjust To Fair Value • Debt investments are classified as: • Held-to-maturity securities • Trading securities • Available-for-sale securities

  25. App D-25 End of Chapter Appendix D

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