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Chapter 9

Management and Organizational Studies 3360A/B Chapter Notes - Chapter 9: Premium Bond, Equity Method, Commercial Paper


Department
Management and Organizational Studies
Course Code
MOS 3360A/B
Professor
Christina Maco
Chapter
9

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Investments- Chapter 9
Understanding Investments
Types of investments
o Companies hold investments for 1 of 2 reasons
To have the capital appreciate
To earn dividends and/or income
o Debt instruments
Right to interest + principal at maturity
Includes debt securities- government & corporate bonds, convertible debt,
commercial paper
o Equity
Common, preferred other capital stock/shares
Represent ownership interests- voting rights, dividend rights
Types of companies that have investments
o Motivation for investing
Returns provided by the investments
Through interest, dividends or capital appreciation
Some types provide guaranteed returns while others are riskier
May invest for short- or long-term results
Corporate strategy
May invest in common shares of other companies because they want to have a
special relationship with a supplier or customer
So, the investor can exercise its rights to influence or control the operations of
the other company
Intent is usually to establish a long-term operating relationship between the 2
entities
Type of security
Management Intent
Valuation Approach
Debt
No plans to sell
Plan to sell
Amortized cost
Fair value
Equity
Plan to sell
Exercise some control
Fair value
Equity method
Measurement
How investments are accounted for can depend on the type of instrument, management’s intent,
company strategy and the ability to reliably measure the investment’s fair value
Category
Valuation
ASPE
IFRS
Held to maturity
Cost
Debt instruments
-bond at par equity instruments (not
traded in active market)
Debt instruments
-bond at par
Amortized
cost
Debt instruments
-bond at discount / premium
Debt instruments
-bond at discount / premium

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Held for trading
FV- NI
Equity instruments (traded in an active
market)
May elect to use FV- NI for investments
Equity instruments
Debt instruments
May elect to use FV-NI for investments
Available for
sale
FV- OCI
N/A
Equity instruments (no significant
influence) and elects to use FV- OCI
Debt instruments
Bond at par- no discounts or premiums
Discount present- stated rate lower than the market
Premium present- coupon rate greater than yield or stated is greater than market
Available for sale- intention to collect income but not hold until maturity, intend to sell at some
point in the long-term
Company
Unrealized holding gains
or losses
Realized holding
gains and losses
Other income effects
Held-to-maturity-
Cost/Amortized
Not recognized
In net income
Interest when earned;
gains and losses from sale
Trading securities-
FV-NI
Recognized in net
income
In net income
Interest when earned;
gains and losses from sale
Available-for-sale-
FV-OCI
Recognized as other
comprehensive income
and as separate
component of
shareholders' equity
Transfer total
realized gains/losses
to net income
(recycling) or directly
to R/E (no recycling)
Interest when earned;
gains and losses from sale
Unrealized holding gains and losses- comes about when at year end
o FV N/I- recorded under income
o FV OCI- goes under OCI
PV of the bond- effective interest method
o Principal portion x PV of a single sum (Table Pg. 785)
o Interest amount x PV of an ordinary annuity of 1 (Table Pg. 787)
Date
Cash
Income
Amortization
CV
PV of bond
Interest amount
Previous CV x %
Income cash
Previous CV + Amortization
PV of bond > maturity value = premium subtracting, credit bond investment
PV of bond < maturity value = discount adding, debit bond investment
Straight line method
o Cost of bond acquired -/+ maturity value of bond = premium/discount to be amortized
o Premium/discount to be amortized / # years = amortization per year (bond amortization)
Amortized cost
1. When the investment is bought- recording at cost or amortized cost (PV)
Dr. Bonds Investment
Cr. Cash
2. Income earned on investment
Dr. Cash- interest amount
Dr. Bond investment- amortization
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