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10 Cards in this Set
- Front
- Back
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Why do companies invest in stocks and bonds?
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-i. Corporations may have excess cash that are not needed for the immediate purchase of operating assets
-ii. In order to generate earnings from investment Income -iii. Strategic reasons 1. A company may purchase a noncontrolling interest in another company in a related industry in which it whishes to establish a presence 2. Exercise some influence over one of its customers or suppliers by purchasing a significant, but not controlling, interest in that company 3. Or purchase a controlling interest to make a presence in another industry |
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Debt Investments
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-investments in government and corporation bonds.
-Recording the Acquisition of Bonds Dr. Debt investments Cr. Cash -Recording Bond Interest Dr. Cash Cr. Interest Revenue (Accrued) Dr. Interest Receivable Cr. Interest Revenue Dr. Cash Cr. Interest Receivable -Recording Sale of Bond Dr. Cash Cr. Debt Investments Cr. Gain on Sale of Debt Investments |
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Cost Method
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-Companies record the investment at cost, and recognize revenue only when cash dividends are received
- investments of less than 20% ownership |
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Equity Method
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-The company initially records the investment in common stock at cost. After that , it adjust the investment account annually to show the investor’s equity in the investee.
-Each year, the investor does the following: (1) It increase (debits) the investment account and increase (credits) revenue for its share of the investee’s net income. (2) The investor also decreases (credits) the investment account for the amount of dividends received. |
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Parent Company
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-Company that owns more than 50% of the common stock of another entity
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Subsidiary (affiliated) Company
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-The entity whose stock is owned by the parent company
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Trading Securities
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- are bought and held primarily for sale in the near term to generate income on short-term price differences
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Available for Sale Securities
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- are held with the intent of selling them sometime in the future
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Held-to-Maturity Securities
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- debt securities that the investor has the intent and ability to hold to maturity
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Mark-to-Market
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-A method of accounting for certain investments that requires that they be adjusted to their fair value at the end of each period
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