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Assignment CHPT 12

This document provides information about accounting for investments. It discusses why corporations invest, how to account for debt and share investments, including holdings of less than 20%, 20-50%, and more than 50%. It also covers valuing and reporting investments, including categories of securities, statement of financial position presentation, and presentation of realized and unrealized gains/losses. The document concludes with information on classified and consolidated statements of financial position and income statements for affiliated companies.

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34 views

Assignment CHPT 12

This document provides information about accounting for investments. It discusses why corporations invest, how to account for debt and share investments, including holdings of less than 20%, 20-50%, and more than 50%. It also covers valuing and reporting investments, including categories of securities, statement of financial position presentation, and presentation of realized and unrealized gains/losses. The document concludes with information on classified and consolidated statements of financial position and income statements for affiliated companies.

Uploaded by

Sultan Limit
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Name : Alexander Steven Themas

Student ID : 008201800046

Subject : Principles of Accounting 2

INVESTMENTS

Why Corporations Invest?

1. There are Cash Management


2. Get Investment Income
3. Reason for its own strategy

Accounting for Debt Investments

Debt investments are investments in government and corporation bonds. In accounting for debt
investments, companies make entries to record (1) the acquisition, (2) the interest revenue, and
(3) the sale.

Accounting for Share Investments

Share investments are investments in the shares of other corporations. When a company holds
shares (and/or debt) of several different corporations, the group of securities is identified as an
investment portfolio.

 Holdings of Less than 20%

In accounting for share investments of less than 20%, companies use the cost method. Under the
cost method, companies record the investment at cost, and recognize revenue only when cash
dividends are received.

 Holdings Between 20% and 50%

When an investor company owns only a small portion of the ordinary shares of another
company, the investor cannot exercise control over the investee. But, when an investor owns
between 20% and 50% of the ordinary shares of a corporation, it is presumed that the investor
has signifi cant infl uence over the fi nancial and operating activities of the investee.
 Holdings of More than 50%

A company that owns more than 50% of the ordinary shares of another entity is known as the
parent company. The entity whose shares the parent company owns is called the subsidiary (affi
liated) company.

Valuing and Reporting Investments

The value of debt and share investments may fluctuate greatly during the time they are held.

Categories of Securities :

For purposes of valuation and reporting at a financial statement date, companies classify debt
investments into two categories:

1. Trading Securities
2. Held-for-collection securities

Share investments are also classifi ed into two categories:

1. Trading securities (as defined above).


2. Non-trading securities

Statement of Financial Position Presentation

In the statement of financial position, companies classify investments as either short-term or


long-term. Short-term investments (also called marketable securities) are securities held by a
company that are (1) readily marketable and (2) intended to be converted into cash within the
next year or operating cycle, whichever is longer. Long-term investments in non-trading
securities are reported at fair value. Investments in ordinary shares accounted for under the
equity method are reported at equity

Presentation of Realized and Unrealized Gain or Loss

Companies must present in the financial statements gains and losses on investments, whether
realized or unrealized. In the income statement, companies report gains and losses in the non-
operating activities section under the categories.

Classified Statement of Financial Position


The statement includes (highlighted in red) short-term and long-term investments. The
investments in short-term securities are considered trading securities. The long-term investments
in shares of less than 20% owned companies are considered non-trading securities.

Consolidated Statement of Financial Position

Companies prepare consolidated statements of fi nancial position from the individual statements
of their affi liated companies. Transactions between the affi liated companies are identified as
intercompany transactions. The process of excluding these transactions in preparing consolidated
statements is referred to as intercompany eliminations.

Consolidated Income Statement

Affiliated companies also prepare a consolidated income statement. This statement shows the
results of operations of affiliated companies as though they are one economic unit. This means
that the statement shows only revenue and expense transactions between the consolidated entity
and companies and individuals who are outside the affiliated group.

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