Chapter 15: Investments and Fair Value Accounting T/F – Flashcards
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Although marketable securities may be retained for several years, they continue to be classified as temporary, provided they are readily marketable and can be sold for cash at any time.
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Any gains or losses on the sale of bonds normally would be reported in the Other Income (Loss) section of the income statement.
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As with other assets, the cost of a bond investment includes all costs related to the purchase.
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Ordinarily, a corporation owning a significant portion of the voting stock of another corporation accounts for the investment using the equity method.
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Under the equity method, a stock purchase is recorded at its original cost and is not adjusted to fair market value each accounting period.
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The equity method causes the investment account to mirror the proportional changes in book value of the investee.
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The corporation owning all or a majority of the voting stock of another corporation is known as the parent company.
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Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for investments.
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The financial statements resulting from combining parent and subsidiary statements are called consolidated statements.
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If the proceeds from the sale of bond investments exceeds the carrying amount of the bonds, a gain is realized.
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An equity investment in less than 20% of another company's stock is accounted for using the cost method.
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Held-to-maturity securities maturing beyond a year are reported as noncurrent assets.
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When bonds held as long-term investments are purchased at a price other than the face value, the premium or discount should be amortized over the remaining life of the bonds.
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In order to maintain the original value of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments.
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Trading securities should be reported on the financial statements at fair market value.
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If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last interest payment.
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Available-for-sale securities are securities that management expects to sell in the future, but are not actively traded for profit.
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Temporary investments are recorded at their cost which would include broker's commissions.
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Unrealized gains and losses on trading securities are not included in the calculation of net income.
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The amortization of discounts or premiums are recorded as part of interest income on the income statement.
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Generally accepted accounting principles (GAAP) require the use of fair value accounting for all assets and liabilities.
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Fair value accounting is used more under Generally Accepted Accounting Principles (GAAP) than it is under International Financial Reporting Standards (IRFS).
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Growth firms generally pay regular dividends to stockholders.
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Comprehensive income must be reported on the income statement.
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The cumulative effects of other comprehensive income items is included in retained earnings, on the balance sheet.
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When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus any accrued interest is recorded.
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The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue.
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Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of the investment.
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To record a bond investment between interest payment periods, Investment in Bonds would be debited and Cash and Interest Revenue would be credited.
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When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued interest since the last interest payment date from the selling price.
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The investor carrying an investment by the equity method records cash dividends received as an increase in the carrying amount of the investment.
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When a corporation owns less than 20% of the stock of another company, dividends received are not treated as income.
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It is not possible for one company to influence the operating policies of another company unless it owns more than 50% interest in that company.
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The equity method is usually more appropriate for accounting for investments where the purchaser does not have significant influence over the investee.
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Held-to-maturity securities are reported on the balance sheet at fair market value.
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Investments in bonds that management intends to hold to maturity are called trading securities.
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Investment in Bonds are reported on the balance sheet at lower of cost or market.
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Investment in Bonds is listed on the balance sheet after Bonds Payable.
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Trading securities are reported on the balance sheet at cost.
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Any difference between the fair market values of the securities and their cost is a realized gain or loss.
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Investments in stocks that are expected to be held for the long term are listed in the stockholder's equity section of the balance sheet.
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