Session 21 - Class Notes - Investments I.pptVIP

* * * * * * * * * * * * * Session 21: Investments Professor Wei Li ACCY 303 Outline Describe the major reporting categories for investments and how to distinguish them? Explain how to identify and account for investments classified as held-to-maturity, trading, and available-for-sale securities? Describe the effects of SFAS 159 on the accounting of held-to-maturity, trading, and available-for-sale securities? Reporting Categories for Investments I. The investor controls the investee (the investor owns more than 50% of the voting stock of the investee). → consolidation. II. The investor has significantly influence on the investee (the investor owns between 20% to 50% of the voting stock of the investee). → equity method. III. The investor lacks significant influence on the investee.→ Held-to-maturity Trading securities Securities available-for-sale Reporting Categories for Investments Securities to Be Held to Maturity A bond or other debt security – unlike a share of stock, has a specified date on which it matures. Positive intent and ability to hold the securities to maturity. Changes in market value are irrelevant. Held-to-Maturity securities are reported at an amortized cost in the balance sheet. Securities to Be Held to Maturity On January 1, 2009, Matrix, Inc. purchased an investment $1,000,000, of 10%, 10-year bonds, interest paid semi-annually. The market rate for similar bonds is 12%. Let’s look at calculation of the present value of the bond issue. ? ? ? ? ? Present ? Amount ? PV Factor ? Value Interest $ 50,000 × 11.46992 = $573,496 Principal 1,000,000 × 0.31180 = 311,805 Present value of bonds ? ? $885,301 ? ? ? ? ? ? PV of ordinary annuity of $1, n = 20, i = 6% PV of $1, n = 20, i = 6% Securities to Be Held to Maturity Period Interest Payment Interest Revenue Discount Amortization Unamortized Discount Carrying Value ? 114,699 885,301 1 50,000 53,118 (3,118)