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43 Cards in this Set

  • Front
  • Back
Two motivations for company to invest i.e. management intent
(1) Return
(2) Strategy
What is the return motivation for investment?
gain through interest, dividends, capital gain i.e. price increase.
What is strategy motivation for inventment?
gain influence or control in other companies by investing in common shares.
e.g. maintain supplies of raw materials
Why is it necessary to know the types and motivation of investment as an accountant?
- By knowing the types of investment [short term, long term, debt, equity], we can use correct treatment to report the investment appropriately.
- Also, by knowing the motivation, we can reflect economic substance of the investment appropriately in the report.
is a share, debt agreement (bond) or right to own (derivatives)
Any asset that are considered as financial instrument and its value can be held, transferred, or accomplished
contract btw two parties and its value depends on the fluctuation of underlying assets include bonds, stocks, interests rate, market index etc.
Security can be issued in 2 forms
- bearer form: ownership is not recorder. the physical form of the security proved the ownership.
- registered form: ownership is recorded in the firm and the firm will mail out interest to owners
Debt security
instrument of lending that will be repaid by the borrowing company with a specific amount, on a specific maturity date, with(out) specific interest rate.
Examples of debt security
e.g. notes, bonds [government, corporate], convertible debt, commerial paper, and all debt instruments,
special: trade receivables, and loan receivables
Examples of debt instruments
e.g. notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower
4 types of debt security
1. loan and receivables (ls)
& 3 securities
2. held to maturity (htm)
3. held to trading (htt)
4. available for sale (afs) security
what is loan & receivables?
is a promise that borrow will repay lender on specific date (with interest) after receiving lender's money or goods
what is held to maturity security?
a security that company will held till maturity date.
what is held to trading security?
a security that company is intended for short term trading.
what is available for sale security?
a security that is not htm and htt.
How to valuate ls, htm, htt, and afs?
ls - amortized cost
htm - amortized cost
htt - fair value
afs - fair value
what is amortized cost?
total amount that is calculated from present value all cash payments received in the subsequent periods and reduced by the uncollectible & impairement.
what is fair value?
amount that is agreed by 2 parties in armlength's tranaction [i.e. unrelated, no conflict interest] who are under no compulsion to act.
what are the income effect for ls, htm, htt, and afs?
1) ls, htm, htt, and afs: interest revenue, gain/loss at sales
2) extra for afs: unrealized gain/loss in previous periods.
any unrealized gain/loss for ls, htm, htt, afs?
1) ls, htm: has none.
2) htt: recognized unrealized "holding" gain/loss at each year end [I/S]
3) **afs: recognized unrealized gain/loss at each year end [other comprehensive income]
formal notes is also called ______
promissory note
borrower of the notes is called _______
lender of the notes is called _______
what are two types of notes?
1) interest bearing
2) non-interest bearing
what is interest bearing notes?
pay interest at an interest rate on the face value of the notes
what is non-interest bearing notes?
pay interest at the difference of face value and the proceed (i.e. the borrowed amount)
All the notes contain interest? T or F?
Notes are usually in where?
over due A/R, high risk new customers, borrowing to employees, and subsidiaries, or sales of PP&E
What is stated rate, face rate, or coupon rate?
all equal to the interest rate paid by the borrower
what is effective interest rate, market rate, or yield rate?
all equal to the market rate
What will affect the proceed (borrow amount) of the notes receivables?
interest rate >, = , or < coupon rate
How does i=r, i<r, i>r affect to the borrowed amount?
i=market rate, r=coupon rate
(i) i=r, proceed = face value
(2) i<r, proceed > face value
(3) i>r, proceed < face value

=> (2) at premium,
=> (3) at discount
How to calculate proceed?
proceed = interest at original annuity [@i] + PV of Face value
How to calculate interest payment?
face value * r
How to calculate interest revenue?
Present value at each period * i
Discount = ___________

where to put discount on F/S
Face value - proceed

=> contra acc't of notes receivable
Premium = _____________

where to put premium on F/S
Proceed - Face value

=> adjunct acc't of notes receivables
If procced at discount, how to affect interest revenue & interest received?
interest rev = interest payment + discount

interest received = interest payments
If procced at premium, how to affect interest revenue & interest received?
interest revenue = interest payment - premium

interest received = interest payments
When to receive Interest for interest bearing and non-interest bearing notes?
=> interest bearing = at each period
=> non-interest bearing = at the end
Journal entry for notes receivables at Discount/Premium:
Dr Notes receivables
Cr/Dr Dis.[Pre.]on notes rec.
Cr Cash
In the amortization schedule for discount/premium notes receivables, the discount/ premium amortized will be at the increasing rate at ____
at the rate of market rate i.e. the next one/the previous one = i