Chapter 12

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INVESTMENTS
Chapter 12
©
2008 The McGraw-Hill Companies, Inc.
 
McGraw-Hill /Irwin 
Slide 2
Nature of Investments
Bonds andnotes(Debtsecurities)Common andpreferred stock(Equitysecurities)Investments can be accounted for in avariety of ways, depending on the natureof the investment relationship.
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McGraw-Hill /Irwin 
Slide 3
Reporting Categories for Investments
Control Characteristics of the InvestmentReporting Method Used by the Investor
 
The investor
lacks significant influence over 
theoperating and financial policies of the investee:
Investment in debt securities for which the investorhas the "positive intent and ability" to hold tomaturity.
Held-to-maturity (HTM)
- investment reported atamortized cost.*Investment held in an active trading account.
Trading securities (TS)
- investment reported at fairvalue with unrealized holding gains and losses includedin net income.Other.
Securities available-for-sale (AFS)
- investmentreported at fair value with unrealized holding gainsand losses excluded from net income and reported inOther Comprehensive income.*
The investor
has significant influence over 
theoperating and financial policies of the investee:
Typically the investor owns between 20% and 50%of the voting stock of the investee.
Equity method
- investment cost adjusted forsubsequent earnings and dividends of the investee.*
The investor
controls
the investee:
The investor owns more than 50% of the votingstock of the investee.
Consolidation
- the financial statements of theinvestor and investee are combined as if they are asingle company.
Reporting Categories for Investments
* If the investor elects the fair value option, this type of investment also can be accounted for using the same approach that's used fortrading securities, with the investment reported at fair value and unrealized holding gains and losses included in earnings.
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McGraw-Hill /Irwin 
Slide 4
Securities to Be Held to Maturity
© 2008 The McGraw-Hill Companies, Inc.
 
On January 1, 2009, Matrix, Inc. purchased as aninvestment $1,000,000, of 10%, 10-year bonds, interestpaid semi-annually. The market rate for similar bonds is
12%. Let’s look at calculation of the present value of the
bond issue.
PresentAmount PV Factor ValueInterest $ 50,000
×
11.46992 = $573,496Principal 1,000,000
×
0.31180 = 311,805Present value of bonds $885,301
PV of ordinary annuity of $1, n = 20, i = 6%PV of $1, n = 20, i = 6%
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