Investment

LECTURE 3

INVESTMENTS

[KWW: Chapter 17]

Method of accounting for investments depends on the nature and purpose of the investment and the relationship between the investor and investee.

* FINANCIAL STATEMENT ACCOUNTS AFFECTED:

* Unrealized holding gain or loss (I/S—TR; S/E—AS)

* Investment in X (A)

* Allowance to Adjust to FV (FV adjustment) (XA)

* Investment Income (R)

Note: All investments are initially recorded at acquisition cost.

DEBT AND < 20% OWNED EQUITY INVESTMENTS

* HELD-TO-MATURITY SECURITIES--Debt securities that are intended to be held until maturity.

* May be short-term or long-term, depending on the time to maturity.

* Valued at cost.

* TRADING SECURITIES—Short-term investments in stocks and bonds.

* Reported as a current asset on the balance sheet.

* Accounted for by the fair value method

* Unrealized holding gains and losses are included in net income for the period.

* Allowance to Adjust to Fair Value—Trading recognized (contra-asset)

* For debt, discounts or premiums are not amortized

* AVAILABLE-FOR-SALE SECURITIES—All other

* May be held for other than short-term trading, but may also be sold before maturity

* May be classified as current or noncurrent depending on the length of time mgt. intends to hold the securities

* Accounted for by the fair value method

* Unrealized holding gains and losses are not included in net income, but are reported as a separate component of stockholders’ equity (other comprehensive income)

* Allowance to Adjust to Fair Value—Available-for-Sale recognized (contra-asset)

FAIR VALUE METHOD

* After acquisition, investment carried at FV. Although a departure from the cost principle, the FV method retains the desired characteristics of relevance and reliability.

* For equity investments, NI of investee not recognized on investor’s books

* Dividends...