Chapter 22: Investments in Stocks and Bonds of Other CompaniesClassifications of Investments- Common stock is the ownership unit of a corporationo that common stockholders are the owners of a corporation.o have the right to vote on corporate policies and the right to share in the corporation’s net income by receiving dividends- bonds are a type of note in which a company agrees to pay the holder the face value on the maturity dateand to pay interest on the face value periodically at a specified rate.o Bondholders are creditors of a companyo Cannot voteo “share” in the company’s income by receiving interest- A company (investor) may choose to invest in the common stock of another company (called the investee)- How the investor company accounts for its investments in stock depends on its “influence” over the investee- Influence is defined by the percentage ownership the investor company has; percentage ownership relates to the number of votes the investor company has.- If an investor company has no significant influence over the investee (less than 20% ownership), it has an investment in “available-for-sale stock.”o The investor company typically makes this investment to receive dividends and participate in an increase in the market value of stock.o The company reports this investment on its balance sheet using the market value method.- If the investor company has significant influence over the investee (between 20% and 50% ownership), it has an equity investment.o It has larger ownership (equity) interest in the investee and that larger interest provides it with significant influenceo The investor company reports this investment using the equity method.- If the investor company has control over the investee (more than 50% ownership), the investee is no longer a separate economic entity from the investor company, so the investor company prepares consolidated financial statements.- A company may choose to invest in another company’s bonds.o How a company reports its investments in bonds depend on how long it expects to hold the bonds If the company expects to sell the bonds before maturity date, it calls them “available-for-sale bonds” and reports this investment using the market value method. If the company expects to hold the bonds for their entire life, it calls them “held-to-maturity bonds” ands reports this investment using the amortized cost method.Market Prices of Stocks and Bonds- A stockbroker is a person or company that buys and sells (trades) stocks and bonds for other people or companies.- The stocks and bonds of large corporations are traded on organized securities exchanges, such as the New York Stock Exchange, the Tokyo Stock Exchange, or the Oslo Stock Exchange.- The stocks and bonds of other corporations are traded in the over-the-counter method, such as NASDAQ, in which brokers deal directly with each other rather than through a stock exchange- Market prices of stocks/bonds are quoted daily- Quoted market prices show the prices an investor had to pay to purchase (or would receive to sell) the securities on the date the prices were quoted.o In addition, the investor must pay a fee to the stockbroker to make a purchase or sale.o Thus, when a company purchases securities, it records the purchase in an Investment account (asset) at the cost of acquisition, which is the quoted market price on the date of the purchase plus any commissions paid to stockbrokers, and any transfer or sales taxes that are imposed.o Market value=fair valueMarket Value Method- A company uses the market value method for investments in available-for-sale securities.o Common stock or bondso Common stock available for sale the investor does not have significant influence because it owns less than 20% of the investeeo Bonds available for saleinvestor does not expect to hold the bonds until their maturity date- Available-for-sale securities are sometimes called marketable securities- An investor company records dividend revenue on stock paid by the investee when it receives the dividends.- The investor records interest revenue on bonds in the period the interest is earned.o Interest is earned over time continuously, whereas dividends are discretionary periodic payments.- An investor reports investments in available-for-sale securities (both stocks and bonds) at their market value at year-end.- An investor computes the gain or loss on the sale of securities by comparing the cash received from the sale with the cost of the securities that it sold.o EX 1: On January 1st, Unlimited Decadence had excess cash to invest, and purchased 200 shares of Fox Company common stock for $4,000 and 8 bonds of Crow Company for $8,000. The bonds have a face value of $8,000, have a contract rate of 10%, and pay interest semiannually onJune 30 and December 31.. Unlimited Decadence records the investment on January 1, 2011 at a cost of $12,000, as follows: Assets = Liabilities + Stockholder’s EquityCash Investments inAvailable-for-SaleSecurities-$12,000 +$12,000o Unlimited Decadence has exchanged one current asset, Cash, for another asset, Investments in Available-for-Sale Securities.- The company reports its investment as a current asset because it intends to sell the securities within one year.- If the company intended to keep its investment for at least one year, it would report the investment as a noncurrent asset.- A company’s investments portfolio includes all of its investments in the securities of other companies.o Thus, Unlimited Decadence’s $12,000 portoflio of investments in available-for-sale securities on January 1, 2011 consists of 200 shares of common stock costing $4,000 and 8 bonds costing $1,000.- Recording Dividends and Interesto A company records dividend revenue when it receives the cash dividend.o From EX 1: If Unlimited Decadence receives $200 of dividends on the Fox Company common stock during 2011, it records the receipt as follows:Assets= Liabilities + Stockholders’ EquityNet IncomeRevenues - ExpensesCash Dividend Revenue+$200 +$200o A company records interest revenue as the interest is earned during the year.o From EX 1:  Unlimited Decadence records $400 [$8,000 face value x (10% contract rate ÷ 2)] of the interest revenue semiannually on June 30 and December 31 as follows:Assets = Liabilities + Stockholders’ EquityNet IncomeRevenues - ExpensesCash Interest Revenue+$400 +$400 -