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43 Cards in this Set
- Front
- Back
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Two motivations for company to invest i.e. management intent
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(1) Return
(2) Strategy |
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What is the return motivation for investment?
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gain through interest, dividends, capital gain i.e. price increase.
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What is strategy motivation for inventment?
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gain influence or control in other companies by investing in common shares.
e.g. maintain supplies of raw materials |
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Why is it necessary to know the types and motivation of investment as an accountant?
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- 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. |
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Security?
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is a share, debt agreement (bond) or right to own (derivatives)
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Instrument?
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Any asset that are considered as financial instrument and its value can be held, transferred, or accomplished
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Derivatives?
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contract btw two parties and its value depends on the fluctuation of underlying assets include bonds, stocks, interests rate, market index etc.
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Security can be issued in 2 forms
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- 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 |
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Debt security
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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.
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Examples of debt security
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e.g. notes, bonds [government, corporate], convertible debt, commerial paper, and all debt instruments,
special: trade receivables, and loan receivables |
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Examples of debt instruments
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e.g. notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower
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4 types of debt security
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1. loan and receivables (ls)
& 3 securities 2. held to maturity (htm) 3. held to trading (htt) 4. available for sale (afs) security |
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what is loan & receivables?
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is a promise that borrow will repay lender on specific date (with interest) after receiving lender's money or goods
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what is held to maturity security?
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a security that company will held till maturity date.
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what is held to trading security?
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a security that company is intended for short term trading.
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what is available for sale security?
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a security that is not htm and htt.
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How to valuate ls, htm, htt, and afs?
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ls - amortized cost
htm - amortized cost htt - fair value afs - fair value |
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what is amortized cost?
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total amount that is calculated from present value all cash payments received in the subsequent periods and reduced by the uncollectible & impairement.
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what is fair value?
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amount that is agreed by 2 parties in armlength's tranaction [i.e. unrelated, no conflict interest] who are under no compulsion to act.
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what are the income effect for ls, htm, htt, and afs?
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1) ls, htm, htt, and afs: interest revenue, gain/loss at sales
2) extra for afs: unrealized gain/loss in previous periods. |
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any unrealized gain/loss for ls, htm, htt, afs?
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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] |
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formal notes is also called ______
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promissory note
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borrower of the notes is called _______
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maker
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lender of the notes is called _______
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payee
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what are two types of notes?
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1) interest bearing
2) non-interest bearing |
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what is interest bearing notes?
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pay interest at an interest rate on the face value of the notes
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what is non-interest bearing notes?
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pay interest at the difference of face value and the proceed (i.e. the borrowed amount)
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All the notes contain interest? T or F?
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True.
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Notes are usually in where?
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over due A/R, high risk new customers, borrowing to employees, and subsidiaries, or sales of PP&E
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What is stated rate, face rate, or coupon rate?
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all equal to the interest rate paid by the borrower
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what is effective interest rate, market rate, or yield rate?
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all equal to the market rate
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What will affect the proceed (borrow amount) of the notes receivables?
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interest rate >, = , or < coupon rate
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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 |
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How to calculate proceed?
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proceed = interest at original annuity [@i] + PV of Face value
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How to calculate interest payment?
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face value * r
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How to calculate interest revenue?
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Present value at each period * i
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Discount = ___________
where to put discount on F/S |
Face value - proceed
=> contra acc't of notes receivable |
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Premium = _____________
where to put premium on F/S |
Proceed - Face value
=> adjunct acc't of notes receivables |
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If procced at discount, how to affect interest revenue & interest received?
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interest rev = interest payment + discount
interest received = interest payments |
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If procced at premium, how to affect interest revenue & interest received?
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interest revenue = interest payment - premium
interest received = interest payments |
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When to receive Interest for interest bearing and non-interest bearing notes?
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=> interest bearing = at each period
=> non-interest bearing = at the end |
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Journal entry for notes receivables at Discount/Premium:
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Dr Notes receivables
Cr/Dr Dis.[Pre.]on notes rec. Cr Cash |
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In the amortization schedule for discount/premium notes receivables, the discount/ premium amortized will be at the increasing rate at ____
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at the rate of market rate i.e. the next one/the previous one = i
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