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 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 are reported in the “Other revenues and gains” or “Other expenses and losses” sections of the income statement.
Explain the accounting for stock investments. 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.
Indicate how debt and stock investments are valued and reported on the financial statements. Investments in debt securities are classified as trading or held-for-collection ...
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