ADMN 2021H Lecture Notes - Lecture 10: Retained Earnings, Equity Method, Income Statement
28 Jun 2018
School
Department
Course
Professor
ADMN2021H: Financial Accounting II
Tuesday, March 20, 2018
Lecture Week 10
Classifying Investments
-Debit investments
oGuaranteed investment certificates or term deposits, bonds, commercial paper and other debt securities
oEarn interest over tine
oBorrower is usually obligated to return the original investment (principal)
-Equity investments
oPreferred and common shares of other corporations
oMay or may not earn any revenue
oNo obligation to return the investment
Non-Strategic Investments
-Reasons for purchasing non-strategic investments:
oEffective use of excess cash
oInvest in low risk and high liquidity
oTo earn capital gains – held for trading investment
Accounting for Non-Strategic Investments
-Four alternative valuation models
1. Fair value through profit or loss model
oInvestment is adjusted upward and downward to reflect fair value at the end of the accounting period
oDifference between carrying amount and fair value (unrealized gain or unrealized loss)
oIncome statement with interest and dividends revenue
oWhen it sold (realized gain and loss) (reported in the income statement)
oCritical for management evaluation
2. Fair value through other comprehensive income model
oSame as number one, but recorded in the other comprehensive income
oNot critical for management evaluation
oOnly applicable to equity
3. Amortized cost model (only for debt investment)
oThere is no need to adjust the value of the investment
oNo need to record unrealized gain and losses
oBonds (amortization) (only applicable to debt instrument)
4. Cost model (equity)
oSimilar to number three
oFor equity
oNo need to adjust the values
oAt the acquisition they are recorded at cost = fair value (but value changes over time)
oIncome statement (only realized gain or loss)
Valuation Model for Non-Strategic Investments
Fair value
through profit or
loss
Fair value through other
comprehensive income
Amortized cost Cost
Used for Debt or equity
investments
Debt or equity investments Debt investments Equity
investments
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Debit investments: guaranteed investment certificates or term deposits, bonds, commercial paper and other debt securities, earn interest over tine, borrower is usually obligated to return the original investment (principal) Equity investments: preferred and common shares of other corporations, may or may not earn any revenue, no obligation to return the investment. Reasons for purchasing non-strategic investments: effective use of excess cash, invest in low risk and high liquidity, to earn capital gains held for trading investment. Other comprehensive income, but for debt investments, reclassified to the income statement and for equity investments, reclassified to retained earnings. #1 fair value model through profit and loss. Assume that on december 31, 2015, plano corporation has the following cost and fair values: Equity method (more than 20% but less than 50%) Investment in common shares is initially recorded at cost "investment in associates" (long term asset account) Recording acquisitions of shares journal entries equity method.
