Intermediate II Exam II

Define Investments

Define Investments

assets purchased for the purpose of earning interest (bonds), dividends (stock), and gains

Investments

when a company takes their hard earned money and put it to work for them

Define debt investments

purchasing bonds or notes of another company to earn interest

Define equity investments

Purchasing the common and preferred stock of another company to earn dividends and gains

Objectives of debt investments

earn interest on debt securities and develop deeper ties to the company

selling price of bonds equation

selling price = present value of the interest payments + present value of the face

interest payment equation

(face value)(stated rate)(time)

bonds sell at a discount

when the market rate is higher than the stated rate

bonds sell at a premium

when the market rate is lower than the stated rate

journal entry for purchase of discounted bonds

debit: investment bonds

credit: discount on bond investment

credit: cash

journal entry for purchase of premium bonds

debit: investment bonds

debit: premium on bond investment

credit: cash

journal entry over life of the bond

debit: cash

debit: discount on bond investment

credit: interest revenue

journal entry at maturity

debit: bond investment

credit: cash (at face value)

3 classification of debt investments

held to maturity, trading, and available for sale

held to maturity

buyer has the intent and ability to hold debt until it matures. unrealized gains and losses are not recognized. is reported at amortized cost

trading

debt held in an active trading account for quick sale. unrealized gains and losses are recognized as income. reported at fair value

available for sale

debt not classified as held to maturity or trading. unrealized gains and losses are recognized in other comprehensive income. reported at fair value

trading securities

debt or equity investment held for the purpose of selling them quickly for a profit. reported as current asset.

journal entry for unrealized holding gains and losses

debit: fair value adjustment

credit: unrealized holding gain

fair value adjustment equation

fair value at end of year - amortized cost at end of year

journal entry for sale of trading security

debit: cash (amount received)

debit: discount on bond investment

credit: investment in bonds (cost)

credit: fair value adjustment (zero account)

available for sale

recorded at cost and at fair value on balance sheet. unrealized gains and losses are reported in other comprehensive income. default

difference between trading and available for sale

trading is recorded on income statement and available for sale recorded on other comprehensive income

unrealized

not sold

debit balance for unrealized holding gains and losses

represents a loss

credit balance for unrealized holding gains and losses

represents a gain

trading securities: balance sheet

recorded initially at cost and adjusted to fair value as time passes and value changes

trading securities: income statement

gains and losses included in net income if investment is sold

trading securities: statement of cash flow

included in operating activities

available for sale: income statement

gains and losses included in other comprehensive income

available for sale: balance sheet

initially recorded at cost and adjusted to fair value on the balance sheet date. unrealized gains and losses are recorded as other comprehensive income in stockholder’s equity

available for sale: statement of cash flow

included in investing activities

define transfers

move investments from one category to another

3 options to buying stock

buy a little: up to 20%

buy a lot: 20% - 50%

buy the company: over 50%

buy a little

use the cost method/income method. investment is reported at fair value and unrealized gains and losses go into net income

buy a lot

the equity method

define fund

money set aside for a set purpose

similar to a fund

savings account

non-current funds

reported in investments and funds

investments in life insurance policies

the policy may have a cash surrender value, the amount of such is considered an investment

journal entry for life insurance premiums and change in cash surrender value

debit: insurance expense

debit: cash surrender value

credit: cash

journal entry for insurance proceeds

debit: cash

credit: cash surrender value

credit: gain on insurance proceeds (cash - surrender value)

2 types of liabilities

current and long term

current liability

something we owe and expect to pay within one year. recorded at the amount owed

examples of current liabilities

accounts payable, notes payable, taxes payable, dividends payable

accounts payable

what we owe others for goods and services we buy on credit and promise to pay later. often only 30 days. recorded in the period when the debt is owed

difference between accounts payable and trade notes payabe

time and interest

short term notes payable

we go to the bank and borrow money short-term. agree to repay plus interest.

credit lines

a lender gives the company access to a certain amount of funds on demand. no interest

2 types of credit lines

committed and non committed

committed credit line

formal agreement with likely a commitment fee paid to keep the line available

non committed credit line

informal agreement where the borrower may access an agreed upon limit of funds

compensating balance

an agreed upon amount of money the borrower must maintain in the bank (minimum balance)

interest

the price we pay for borrowing money

interest equation

(principal value)(rate)(time)

2 types of interest

interest bearing: paid at end of note

non-interest bearing: paid beginning of note

journal entry for interest bearing

debit: cash

credit: notes payable

when paid

debit: interest expense

debit: notes payable

credit: cash

journal entry for non-interest bearing

debit: cash

debit: discount on notes payable

credit: notes payable

day of payment

debit: interest expense

credit: discount on notes payable

debit: notes payable

credit: cash

actual rate equation

interest / discount amount

secured loans

where the borrower pledges specified assets as collateral

pledging accounts receivable

where the borrower lets accounts receivable serve as collateral on the loan

factoring receivable

where the borrower sells the receivable outright

commercial paper

unsecured notes sold in minimum denominations of $25,000

accrued liabilities

represent expenses already incurred but not yet paid. (not yet paid because not yet due)

accrued liabilities: journal entry

issuance:

debit: cash

credit: notes payable

accrual entry for interest:

debit: interest expense

credit: interest payable

date of payment:

debit: interest expense

debit: interest payable

debit: notes payable

credit: cash

journal entry for vacation days

debit: salary and wages expense

credit: cash

journal entry for vacation days not taken

debit: salary and wages expense

credit: liability for future compensated absences

annual bonuses

money paid for performance to employees and are compensation when earned

advance collections

someone pays you in advance of goods or services being provided

refundable deposits

pay a deposit, when item is returned deposit is returned

product warranty expensed is recognized

at time of sale

contingency

uncertain situation involving potential gain or loss depending on the outcome of a future events

contingency gains

are NEVER journalized

3 possibilities of contingency

probable (accrual)

reasonably possible (notes)

remote (nothing)

journal entry for loss contingency

debit: expense

credit: estimated warranty liability