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 long-term purposes. Accounting for both short-term (temporary) and long-term investments is discussed in this chapter.
1. Identify the three categories of debt securities and describe the accounting and reporting treatment for each category. (1) Held-to-maturity debt securities: Carry and report at amortized cost. (2) Trading debt securities: Value for reporting purposes at fair value, with unrealized holding gains or losses included in net income. (3) Available-for-sale debt securities: Value for reporting purposes at fair value, with unrealized holding gains or losses reported as other comprehensive income and as a separate component of stockholders’ equity.
2. Understand the procedures for discount and premium amortization on bond investments. Similar to bonds payable, companies should amortize discount or premium on bond investments using the effective-interest method. They apply the effective interest rate or yield to the beginning carrying value of the investment for each interest period in order to compute interest revenue.
3. Identify the categories of equity securities and describe the accounting and reporting treatment for each category. The degree ...