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Chapter 8

Valuation and Reporting of Investments in Other Corporations

Book Version 3
By Boundless
Boundless Accounting
Accounting
by Boundless
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Section 1
Approaches to Investment Accounting
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Types of Investments: Dependence on Ownership Share

Types of investments include: 20% to 50% (as an asset), greater than 50% (as a subsidiary), and less than 20% (as an investment position).

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Accounting Methodologies: Amortized Cost, Fair Value, and Equity

Due to different durations of holding and other factors, companies use several accounting methodologies, including amortized cost, fair value, and equity.

Section 2
Debt Held to Maturity
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Amortized Cost Method

Debt held to maturity is shown on the balance sheet at the amortized acquisition cost.

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Accounting for Interest Earned and Principal at Maturity

At maturity, firms should debit cash and credit held to maturity investments the balance of the principal payment.

Section 3
Debt for Sale
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Accounting for Sale of Debt

How debt sales are recorded depends on whether the debt is classified as "held-to-maturity," "a trading security," or "available-for-sale".

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Accounting for Sale of Stock

How the stock sale is accounted for depends on the type of stock sold.

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Assessing Fair Value

Companies must calculate the fair market value for these available for sale securities at the end of each subsequent accounting period.

Section 4
Holding Less than 20% of Shares
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Fair Value Method

The ownership of less than 20% creates an investment position carried at fair market value in the investor's balance sheet.

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Calculating Fair Value

Calculating fair value involves considering objective factors including acquisition, supply vs. demand, actual utility, and perceived value.

Reporting Fair Value

Stock investments of 20% or less are recorded at cost (considered its fair value) and reported as an asset on the balance sheet.

Section 5
Holding 20-50% of Shares
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Equity Method

Equity method is the process of treating equity investments (usually 20–50%) of companies. The investor keeps such equities as an asset.

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Assessing Control

An investor has significant influence by holding 20% to 50% of shares, serving on the board, or participating in policy making.

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Reporting Equity Investments

Investments recorded under the equity method usually consist of stock ownership of a company between 20% to 50%.

Section 6
Holding More than 50% of Shares (Ownership)
Reporting for a Combined Entity

When the amount of stock owned is >50% of common stock, a parent-subsidiary relationship is formed that requires consolidated reporting.

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Chapter 7
Controlling and Reporting of Intangible Assets
  • Introduction to Intangible Assets
  • Types of Intangible Assets
  • Intangible Asset Impairment
  • Research & Development Cost
  • Reporting and Analyzing Intangibles
Current Chapter
Chapter 8
Valuation and Reporting of Investments in Other Corporations
  • Approaches to Investment Accounting
  • Debt Held to Maturity
  • Debt for Sale
  • Holding Less than 20% of Shares
  • Holding 20-50% of Shares
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Chapter 9
Reporting of Current and Contingent Liabilities
  • Introduction to Liabilities
  • Current Liabilities
  • Contingencies
  • Reporting and Analyzing Current Liabilities
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