Ch 17.2 (Investments in Equity Securities)

Question 1

Equity Securities

Answer 1

Represent ownership interests such as common, preferred, or other capital stock.

Include rights to acquire or dispose of ownership interests at an agreed-upon or determinable price, such as in warrants, rights, and call or put options.

Convertible debt securities, Redeemable preferred stock are not equity securities.

Question 2

Accounting treatment/Classification of common stock investment

Answer 2

1. Holdings of less than 20 percent (fair value method)—investor has passive interest.
2. Holdings between 20 percent and 50 percent (equity method)—investor has significant influence.
3. Holdings of more than 50 percent (consolidated statements)—investor has controlling interest.

The accounting and reporting for equity securities therefore depend on the level of influence and the type of security involved.

Question 3

Holding less than 20% of equity investment

Answer 3

Valuation - Fair Value.

Unrealized Holding Gains of Losses - Recognized in net income

Other Income Effects - Dividends declared; Gains and losses from sale