Appendix E Flashcards
Three reasons why Corporations invest in debt or equity securities:
- To house excess cash until needed
- Earnings from investment income
- To meet strategic goals
Typical investment: to house excess cash until needed
Low-risk, high-liquidity, short-term securities such as government-issued securities
Typical investment: to generate earnings
Banks and financial institutions often purchase debt securities, while mutual funds and index funds purchase stock securities
Typical investment: to meet strategic goals
Stocks of companies in a related industry or in an unrelated industry that the company wishes to enter
Debt investments
Investments in government and corporation bonds
What is included in cost of investments?
All costs (price paid plus brokerage fees) - commissions
*Cost principle applies*
Journal entry to acquire investment
Dr. Debt investments XXX
Cr. Cash XXX
Journal entry: gain on sale of bond investments
Dr. Cash 58,000
Cr. Debt Investments 54,000
Cr. Gain on Sale of Debt Investments 4,000
Stock investments
Investments in the capital stock of corporations
Investment portfolio
When a company holds stock (and/or debt) of several different corporations, the group of securities is an investment portfolio
Investor’s Ownership Interest in Investee’s Common Stock: Less than 20%
Presumed influence on investee: insignificant
Accounting guidelines: Cost method
Investor’s Ownership Interest in Investee’s Common Stock: Between 20% and 50%
Presumed influence on investee: significant
Accounting guidelines: equity method
Investor’s Ownership Interest in Investee’s Common Stock: More than 50%
Presumed influence on Investee: controlling
Accounting guidelines: Consolidated financial statements
Cost method with stock investments
Companies record the investment at cost and recognize revenue only when cash dividends are received
Journal entry for purchase of stock
Dr. Stock Investments XXX
Cr. Cash XXX
Journal entry if dividends are received (less than 20% ownership)
Dr. Cash XXX
Cr. Dividend Revenue XXX
Journal entry for sale of stock with loss (less than 20% ownership)
Dr. Cash 39,500
Dr. Loss on Sale of Stock Investments 1,000
Cr. Stock Investments 40,500
Equity method
An accounting method in which the investment in common stock is initially recorded at cost, and the investment account is then adjusted annually to show the investor’s equity in the investee
Journal entry when a company (who owns 30%) has its invested company report net income of 100,000
Dr. Stock Investments 30,000
Cr. Revenue from Investment in Beck Company 30,000