FinAcct - Investments

  1. What are the classes of intercorporate investments?
    1. Short-term Investments

    2. Long-term Investments
  2. What is the definition of Short-term Investments?
    - Liquid investments in securities that the corporation intends to convert to cash when needed, usually in one year. They are sometimes called marketable securities and are listed as Current Assets on the balance sheet.
  3. What is the definition of Long-term Investments?
    - Investments in securities held for some long-term economic benefit that do not meet both requirements to be classified as short-term investments.
  4. What are the three most common types of Marketable Securities?
    1. Hold to maturity securities

    2. Trading Securities

    3. Available for Sale Securities
  5. What is the definition of a Hold to Maturity Securities?
    Debt securities that the firm can and intends to hold to maturity.

    • - Reported as current asset in Marketable securites on balance sheet.
    • - Valued at Historical Cost - because if the security is held to maturity no gain or loss will be recognized.
  6. What is the definition of Trading Securities?
    Debt or equity securities held as speculative investments that are actively traded.

    • - Reported in Current Assets on the Balance Sheet as Marketable Securities
    • - Value at Market Value
    • - Holding gain or loss is immediately reported on income statement...because gain or loss will likely be realized.
  7. What is the definition of Available for Sale Securities?
    Debt or equity securities held as a temporary repository of cash, not actively traded.

    • - Report in Current Assets section of the Balance Sheet as a marketable securities
    • - Value at Market Value
    • - Holding gain or loss is NOT reported on income statement, but is treated as item of Owner's Equity, not certain when gain or loss will be realized.
  8. What are the three classes of Long-term Investments?
    1. Passive Investments - Minority

    2. Active Investments - Minority

    3. Majority Investments - Majority
  9. How do you account for Passive Long Term Investments?
    Treat these investments as if they were available for Sale Securities, with gains or losses being reported in the Owners Equity section.

    • Debit Investment in X Corp XXXX
    • Credit Cash XXXX

    Dividends Accounting

    • Debit Dividend Receivalbe X
    • Credit Dividend Income X
  10. What is the definition of a Passive Long-term Investment?
    Investments in securities that do not permint the investor corporation to exercise significan influence over the investee are valued at Market Value if possible, otherwise at historical cost.
  11. What is the definition of a Active Long-term Investment?
    a miniority investment that is large enough to allow investor corporation to exercise significant influence over investee - Use Equity Method to accoutn for the investment.
  12. What is Rebuttable Presumption?
    When the investing company has a 20% or more interest in the investee which creates a significant influence.
  13. What is the Equity Method of accounting?
    Equity Method takes this control (20% or Rebuttable Presumption) from investor by requiring that the net income or loss from the investee be reflected in the income statement of the investor as earnings are reported, not when dividends are declared.
  14. How do you account for the Equity Method?
    • Debit Investment in X Corp XXX
    • Credit Cash XXX

    • Gain
    • Debit Investment in X Corp X
    • Credit Equity in Earnings of Sub X

    • Debit Equity in Loss of Subsidiary xxx
    • Credit Investment in x Corp
  15. What is One Line Consolidation?
    Found in the Equity Method - dividends are treated as a reduction in the investment account, NOT as income.

    • Debit Dividend Receivable XXX
    • Credit Investment in X Corp XXX
  16. What is the definition of a Majority Long-term Investment?
    an investement that is above 50% of voting stock and not transitory, the subsidiary and parent corporation are required to prepare consolidated financial statements.

    Consolidation recognizes that the entity being accounted for is a group of corporations with common control.
Card Set
FinAcct - Investments
The following card set will test your understanding of accounting for Intercorporate investments