Investments Why Have extra cash do not want it to just sit there Generate income Stocks and bonds can generate interest Investing in stock in other companies can help them meet strategic goals The accounting for investments 1 what type of investment has been acquired Debt securities vs Equity securities 2 what is the percentage of ownership have we obtained when acquiring equity security investments Do you own more or less than 20 of the other company s outstanding stock Investments in debt securities and investments in equity securities less than 20 4 Accountable Events related to these investments 1 When the investment is acquired record it at cost represents an asset 2 If any dividends are received record them as dividend revenue 3 Mark to market Adjustment At year end make an adjusting entry to reflect any changes in the market value of the investment Change the valuation of the asset on the balance sheet from its cost to its This an exception to GAAP principle Historical Cost Concept assets are current market value shown at their cost 4 When the investments are sold record the cash received from the sale and any gain or loss realized from the sale To calculate sale or loss compare the selling price of the investment to the amount at which the investments are being reported on the balance sheet Realized Gains and Losses Only result from the sale of investments Unrealized Gains and Losses adjustment Both are reported on the income statement Results from the changes in the value of investment used in the mark to market Investments in equity securities where you own 20 or more of the other company s outstanding stock 4 Accountable Events When the investment is acquired record it at cost If any dividends are received record them as a decrease to the investment account Record your share of the other company s net income as an increase to the investment account and as investment revenue Other company s Net Income x ownership When the investments are sold record the cash received from the sale and any gain or loss realized from the sale KEY POINTS The accounting for these types of investments is called the equity method There is no mark to market adjustment related to these types of investments
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