Chapter 10 Investments LEARNING OBJECTIVES After studying this chapter, you should be able to Describe debt investments and equity investments Understand the accounting for debt investments Unde[.]
Chapter 10: Investments LEARNING OBJECTIVES After studying this chapter, you should be able to: Describe debt investments and equity investments Understand the accounting for debt investments Understand the accounting for equity investments Understand how to presentation and Disclosure 10.1 Overview of investments 10.1.1 Introduction to investments 10.1.2 Types of investments 10.2 Investments in Debt Securities 10.2.1 Debt investment classifications 10.2.2 Accounting for Debt Securities 10.3 Investments in Equity Securities 10.3.1 Investment in Subsidiary 10.3.2 Investment in Assosiation 10.2.3 Other investment 10.4 Presentation and Disclosure 10.1 Overview of investments 10.1.1 Introduction to investments Investments are assets which represent a company’s right to receive cash from its stake in another company, government, etc Investments are made through purchase of bonds or shares or other financial instruments of the investee The intent behind making such investments is to generate investment income (interest and dividend) and to benefit from expected capital gain 10.1 Overview of investments 10.1.2 Types of investments Investments are reported by the investing company on its SOFP, classified into current and non-current portion Investments which are expected to be sold within next 12 months are called short-term investments while investments other than short-term investments are called long-term investments Some investments, which are can be easily converted to cash with negligible fluctuation in its value, are classified as cash equivalents 10.1 Overview of investments 10.1.2 Types of investments Investments can be made in debt securities, equity securities Debt securities are financial instruments that represent right to a determined stream of cash flows for a definite period of time For example, government bonds, corporate bonds, municipal bonds, notes receivable, etc all have a pre-determined payout for a specific period Equity instruments are securities that represent residual (ownership) interest in a company, for example, shares of common stock, etc 10.2 Investments in Debt Securities 10.2.1 Debt investment classifications Companies group investments in debt securities into three separate categories for accounting and reporting purposes: Held-to-maturity: Debt securities that the company has the positive intent and ability to hold to maturity Trading: Debt securities bought and held primarily for sale in the near term to generate income on short-term price differences Available-for-sale: Debt securities not classified as held-to-maturity or trading securities 10.2.2 Accounting for Debt Securities 102 DOUBLE ENTRY FOR DEBT SECURITIES • PRINCIPLE: DEBT SECURITIES ACCOUNT • An increase of Debt Securities is a debit entry in the Debt Securities account • An decrease of Debt Securities is a credit entry in the Debt Securities account 10.2 Investments in Debt Securities Accounting entries for several major transactions (1) Purchased Debt Investments Dr Debt Investments Cr Cash; payables, … ... Disclosure 10. 1 Overview of investments 10. 1.1 Introduction to investments 10. 1 .2 Types of investments 10 .2 Investments in Debt Securities 10 .2. 1 Debt investment classifications 10 .2. 2 Accounting. .. Securities 10. 3 Investments in Equity Securities 10. 3.1 Investment in Subsidiary 10. 3 .2 Investment in Assosiation 10 .2. 3 Other investment 10. 4 Presentation and Disclosure 10. 1 Overview of investments 10. 1.1... Available-for-sale: Debt securities not classified as held-to-maturity or trading securities 10 .2. 2 Accounting for Debt Securities 1 02 DOUBLE ENTRY FOR DEBT SECURITIES • PRINCIPLE: DEBT SECURITIES ACCOUNT • An