Chapter Notes On Investments In Stock And Investment In Bonds

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Chapter 17 Notes Chapter is about Investments in stock and investment in bonds Two categories on bal. sheet -- current asset long-term

Primary accounting questions : 1. Valuation-- historical cost or market value 2. Recognition-- if market value is used, how should gain or loss be recorded

Types of securities---see diagram

Bonds--1. Held to maturity 2. Available for sale 3. Trading

Stocks--1. More than 50% ownership-- consolidated statements 2. 20-50%--use equity method 3. Less than 20%-- (a) Available for sale (b) Trading

Bonds--Held to maturity

Record at cost--do not set up separate acct. for premium or disc.

Amortize premium or discount

Do not adjust for market value

When sold, realized gain/loss = carry amt. - sale price. Realized g/loss is on inc. statement.

Bonds-Available for Sale

Record at cost--do not set up separate acct. for premium or disc.

Amortize premium or discount

At year end, adjust to market value--record unrealized gain/loss in stock. equity as part of comprehensive income

When sold, realized gain/loss = carry amt. - sale price Note: g/l is not affected by marking to market value. G/l is an income statement acct.

Bonds--Trading

Record at cost--do not set up separate acct. for premium or disc.

Do not amortize prem. or disc.

At year-end, adjust to market value . Record unrealized gai.n/loss to income statement

When sold record realized gain/loss as income statement acct.

Stock-less than 20%--Available for Sale

Record at cost--cost includes brokerage costs, commissions, etc.

At year end, adjust to market value. Unrealized gain/loss is reported in stock equity

When sold, realized gain/loss = original cost - sale price. Realized loss is on inc. statement.

Note: this should parallel the acctg. for available for sale bonds.

Stock-less than 20%--Trading Securities

Record at cost--cost includes brokerage costs, commissions, etc.

At year end, adjust to market value. Unrealized gain/loss is reported on inc. statement

When sold, realized gain/loss = original cost - sale price. Realized loss is on inc. statement.

Note: this should parallel the acctg. for bonds classified as trading securities.

Transfers between categories.

Will cover only briefly.

EQUITY METHOD

Equity Method should be used when there is significant influence--usually that is 20%
Investee reports its share of investee income as income
Dividends are not income under the equity method

Major Issues:
1.) Significant influence over investee's operating and financing policies
2.) Consistent with accrual accounting, investor reports its share of investee income (loss)
-- equity accrual for % of investee's income
-- dividends from investee are reduction of investment account!
3.) Concept of book value ( carrying amount) Investment in B
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