Acct: Ch. 12 LO

Explain the accounting for stock investment:

Companies record investments in common stock when they purchase the stock, receive dividends, and sell the stock. When ownership is less than 20%, the cost method is used. When ownership is between 20% and 50%, the equity method should be used. When ownership is more than 50%, companies prepare consolidated financial statements.

Describe the use of consolidated financial statements:

When a company owns more than 50% of the common stock of another company, it usually prepares consolidated financial statements. These statements indicate the magnitude and scope of operations of the companies under common control.

Explain the accounting for debt investments:

Companies record investments in debt securities when they purchase bonds, receive or accrue interest, and sell the bonds. They report gains or losses on the sale of bonds in the "Other revenues and gains" or "Other expenses and losses" sections of the income statement.

Discuss why corporations invest in debt and stock securities:

Corporations invest for three primary reasons: (a) They have excess cash. (b) They view investments as a significant revenue source. (c) They have strategic goals such as gaining control of a competitor or moving into a new line of business.

Indicate how debt and stock investments are reported in financial statements:

Investments in debt securities are classified as trading or held-for-collection securities for valuation and reporting purposes. Stock investments are classified either as trading or non-trading. Stock investments have no maturity date and therefore are never classified as held-for-collection. Trading securities are reported as current assets at fair value, with changes from cost reported in net income. Non-trading securities are also reported at fair value, with the changes from cost reported in stockholders' equity. Non-trading securities are classified as short-term or long-term, depending on their expected future sale date.

Distinguish between short-term and long-term investments:

Short-term investments are securities that are (a) readily marketable and (b) intended to be converted to cash within the next year or operating cycle, whichever is longer. Investments that do not meet both criteria are classified as long-term investments.