Chapter 8 Long term Investments the Time Value of Money 8 1 Analyze and report investments in held to maturity debt securities Investor entity that owns corporation s stock Investee corporation the issues stock Current Assets BS Debits cash short term investments accounts receivable inventories and prepaid expenses Credits total current assets long term investments property plant and equipment intangible assets and other assets Major investors in bonds are financial institutions Held to Maturity Investments Recorded as amortized cost Interest received semi annually Issued in 1 000 denominations Price is quoted as percent of par o Fluctuate with market interest rates quiz or exam If market rate face rate sell at discount If market rate face rate sell at premium Accounting for held to maturity investments Long term investment in bonds purchase price x annual interest o Debit Long term Credit Cash Interest revenue purchase price x percentage of bond x months used 12 o Debit cash Credit interest revenue Amortize bond purchase price long term in bonds outstanding in months x months used o Debit Long term Credit interest revenue Amortization of Held to Maturity Investment Increases long term investment account as it reaches maturity Records interest revenue earned from carrying amount increase 8 2 Analyze and report investments in available for sales securities Available for Sale May be debt securities not held to maturity or equity securities Initially record at cost Adjust to current fair value at balance sheet date Accounting Methods for Long term Investments Depends on percentage of ownership by investor GAAP Methods Less than 20 Fair market value 20 50 Equity Greater than 50 Consolidation Accounting for Available for Sale Investments Purchased shares x market price o Debit Long term Credit cash Purchased shares x cash dividend o Debit cash Credit dividend revenue Allowance to adjust investment to market Unrealized gain on investment Investment fair value investment cost The Fair Value Adjustment If market value is greater than carrying value JE Allowance to adjust investment to market Adjusted investment to market If market value is less than carrying value JE Unrealized loss on investment Adjusted investment to market Selling an Available for Sale Investment If cash cost gain would be debit JE 8 6 Explain the impact of the time value of money on certain types of investments Time Value of Money The term refers to the fact that money earns interest over time Unrealized gain on investment Eliminate unrealized gain on investment sold Cash Loss on sale Allowance to adjust investment to market Long Term Present value x 1 interest rate n Future value Future value 1 interest rate n Present value o n number of periods Present Value What amount in the future is worth today Often called discounting To simplify calculations o Present value tables Exam o Excel software Single amount or annuity Present Value of Investments in Bonds Market price of bonds equals Present value of principal received at maturity Single amount Present value of interest payments Annuity Time Value of Money Prefer payment now vs in future due to interest factor Applicable to both personal and business decisions Time Value of Money factors Principal amount p Single lump sum Annuity Interest rate i Number of periods n Investment x interest rate Simple Interest Add all interest to get total interest Investment x interest Compound interest Add all compound interest to get total interest Total simple interest Total compound interest extra interest from compounding Pg 488 489 Need Will show up on exam FOCUS ON TABLES Investment compound interest x interest rate do for each period
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