Kế toán, kiểm toán - Chapter 12: Reporting and interpreting investments in other corporations

Reporting and InterpretingInvestments in OtherCorporationsChapter 12Passive Investments in Debt and Equity SecuritiesInvestments in debt securities are alwaysconsidered passive investments.Passive investments are made to earn a high rate of return on funds that may be needed for future purposes.Equity security investments are presumed passive if the investing company owns less than 20% of the outstanding voting shares.The investor is notinterested in controllingor influencing the othercompany.Investments made with the intent of exerting significant influence over another corporation.The ability of the investing company to have an important impact on the operating and financial policies of another company.SignificantInfluence 20% - 50%outstanding sharesInvestments in Stock for Significant InfluenceInvestments made with the intent to exertcontrol over another corporation.Control>50%outstanding sharesThe investing company has the ability to determine the operating and financial policies of another corporation.Investments in Stock for ControlTypes of Investments and AccountingMethodsThe accounting method depends on the type of security and the levelof ownership (influence). Debt Held To Maturity: Amortized CostMethodRecord at cost on acquisition date.Amortize discount or premium.Record interest received.Record principal received at maturity.Passive Stock Investments: The FairValue MethodDate of acquisitionInvestment is initially recorded at cost.Future measurement dateUnrealized holding gains and losses are recorded.Investment carrying amount is adjusted to current market value.Classifying Passive Investments at Fair ValueNOTE: Realized gains and losses go on the Income Statement.Comparing Trading and Available for Sale SecuritiesDate of acquisitionInvestment is initially recorded at cost.Future measurement dateUnrealized holding gains and losses are not recorded.Investment carrying amount is adjusted for dividends received, and a percentage share of the investee’s income.Investments For Significant Influence:Equity MethodInvestments For Significant Influence:Equity MethodReporting Investments under the Equity MethodReported on the balance sheet as a long-term asset,originally at cost.Account is increased by the proportional share of affiliate’s income.Account is decreased by proportional share of affiliate’s losses andby dividends received from the affiliate.No adjustment to fair value at the end of the accounting period.If sold, anygain or loss is reported in the income statement as other income.Focus on Cash FlowsInvesting activities: Purchase of investment (cash outflow) Sale of investment (cash inflow)Operating activities: Gain on sale of investment (subtract from net income) Loss on sale of investment (add to net income) Equity in earnings of investee (subtract from net income) Dividends from investee (add to net income) Unrealized holding gains trading securities (subtract from net income) Unrealized holding losses trading securities (add to net  income)What Are Consolidated Statements?The acquiring company is the parent.The company acquired is the subsidiary.Consolidated statements combine two or more companies into a single set of statements.Any transactions between the parent and subsidiary must be eliminated when preparing consolidated financial statements.Occurs when onecompany buysanother company.The amount by which thepurchase price exceeds the fairmarket value of net assets acquired.Only purchased goodwill is an intangible asset.GoodwillRecording a MergerNot amortized.Subject to assessment for impairment ofvalue and may bewritten down.GoodwillRecording a MergerEnd of Chapter 12