introduction chapters
chapter 9
Long-term
Investments
goals discussion
goals
achievement
fill
in the blanks
multiple
choice
problems
check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
What are the general rules for deciding which method should be used to account for an investment in the stock of another company?
Understand how intent influences the accounting technique for a particular investment.
Describe the basic accounting approaches and guidelines for assessment relating to different types of investments.
Recall the accounting for trading securities.
Describe the method of accounting for available-for-sale securities, and be able to provide a comprehensive illustration.
Understand the nature of Other Comprehensive Income.
How should an initial investment in a bond be recorded?
Note that a separate premium or discount account is not used for investments in bonds.
Be able to record bond interest income.
Be able to account for the full life cycle of a bond investment, including situations involving premiums and discounts.
Describe the equity method of accounting for an investment in stock, and be able to provide a comprehensive illustration.
What is the rationale for the equity method?
Know when consolidation is appropriate.
Understand that the investment in a subsidiary will likely differ from the total equity of a subsidiary, and know what becomes of the "purchase differential."
What is goodwill, and how does it arise?
What accounts appear in a consolidated balance sheet, and how is the reported amount for each account determined?
Have a basic understanding of the nature of amounts reported in a consolidated income statement.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| all inclusive approach | A concept of income by which virtually all nonequity-based transactions and events are captured and reported in the income statement; the preferred approach for income theory |
| amortized cost method | The approach mandated for held-to-maturity securities; investments are reported at their cost with any premium or discount amortized over the life of the investment |
| available for sale securities | Investments that are neither "held-to-maturity" or "trading;" a default category that is accounted for at fair value with changes in value recognized in other comprehensive income |
| consolidation | To prepare financial reports for a parent and subsidiary company as a single economic unit |
| current operating approach | A concept of income where income is limited to transactions related to central ongoing operations; not an acceptable approach for income theory |
| discount on bonds | The difference between face value and issue price of a bond, where the issue price is less; causes the effective yield to be higher than that stated |
| equity method | Method to account for stock investment when significant influence is present; changes in equity of the investee are recognized by the investor on a pro rata basis |
| goodwill | The excess of the purchase price of an acquired company over the fair value of the identifiable net assets acquired |
| held to maturity investments | Investments purchased with intent to hold to maturity; usually investment in debt; accounted for by amortized cost method |
| investee | The company in which another has an investment |
| issue price | The amount a company receives in exchange for the initial issue of debt or other financial instrument |
| other comprehensive income | An account for changes in value of available for sale securities; not part of income from continuing operations and generally positioned as a special category within equity |
| par value on bonds | The face or contract amount of a bond; the amount to be repaid at maturity along with any interest |
| premium on bonds | The difference between face value and issue price of a bond, where the issue price is more; causes the effective yield to be lower than that stated |
| significant influence | The ability to sway management and decision making of another entity, but generally not enough to assert absolute control |
| straight-line amortization | A method for amortizing premiums and discounts on bonds; the premium or discount is spread uniformly over the life of the bond as an adjustment of interest |