Investments

Question 1

Reasons for investemtents

Answer 1

• corporation may have excess cash
• to generate earnings from investment income
• for strategic reasons

Question 2

Recording acquisition of bonds

Answer 2

Cost includes all expenditures necessary to acquire these investments, such as the price paid plus brokerage fees (commissions), if any

Question 3

Bond interest

Answer 3

calculate and record interest revenue based upon the carrying value of the bond times the interest rate times the portion of the year the bond is outstanding

Question 4

Recording Sale of Bonds

Answer 4

credit the investment account for the cost of the bonds and record as a gain or loss any difference between the net proceeds from the sale (sales price less brokerage fees) and the cost of the bonds

Question 5

Accounting of share investments

Answer 5

depends on the extent of the investr’s influence over the operating and financial affairs of the issuing corporation

• no significant influence <20% ownership: valued using cost method
• significant influence 20-50% investment valued using equity method
• control usually exists >50% valued at parent’s books using method

Question 6

Equity method

Answer 6

Record the investment at cost and subsequently adjusts the investment account each period for the investor’s share of the associate’s net income and dividends received by the investor