Oftentimes an entity has cash that is temporarily in excess of its immediate needs. That cash should be invested wisely so that it produces income while being a ready source of funds. Sometimes an entity invests in the stocks and bonds of other entities for investment purposes. Accounting for both short-term (temporary) and long-term investments is discussed in this chapter.
SUMMARY OF STUDY OBJECTIVES
- 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, or (c) they have strategic goals such as gaining control of a competitor or moving into a new line of business.
- Explain the accounting for debt investments. Companies record entries for investments in debt securities when they purchase bonds, receive or accrue interest, and when they 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.
- Explain the accounting for stock investments. Companies record entries for investments in common stock when they purchase stock, receive dividends, and when they 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 ...