ACCT 1020
Lesson 3 - Chapter 15
Investments and International Operations

Learning Objectives
Click each objective to learn more about that item and link to sample problems and handouts.

1. Explain the reasons companies make investments
   • transfer excess cash into investments to produce higher income
   • to produce income from investments
   • for strategic business reasons
2. Distinguish between short-term and long-term investments
   • Short-term investments (temporary investments or marketable securities) are investments which are readily convertible to cash and which management intends to convert to cash within one year
   • Long-term investments are investments which are not readily convertible or which management intends to hold for longer than one year
3. Distinguish between debt and equity securities
   • Debt - involve a creditor relationship in which the investor will be repaid for the investment
   • Equity - involve an ownership relationship through the purchase of stock
4. Describe the five classes of securities
   • See page 597 of your textbook
5. Identify the three factors that affect a security’s class
   • security type (debt or equity)
   • company's intent to hold the security (short- or long-term)
   • the company's ownership interest (for equity securities)
6. Identify how various investments are reported on the financial statements
   • See Accounting for Investments handout
7. Determine the cost of an investment
   • The cost of an investment includes the negotiated purchase price plus any applicable fees.
8. Prepare journal entries for the following
   • Investment acquisition
   • Receipt of interest or dividends
   • Disposition of investment
   • Work Exercises 15-2 and 15-8 to practice journalizing investment acquisition, investment disposition, and receipt of investment income. Click the links below to check your answers.
   • E15-2    E15-8
9. Calculate, journalize, and report market adjustments for unrealized gains and  losses
   • Market adjustments are prepared for trading and available-for-sale securities
   • Market adjustments are typically prepared with aggregate (total) data--See Exercise 15-9 in your textbook.  Click the links below to check your answers.
      E15-7   E15-9
   • Unrealized gains (losses) are calculated as the difference between the cost of investments and the market value of the investments as of the date of the adjustment (generally the end of the accounting period)
   • Work Part 1 of Quick Study 15-10 in your textbook to practice journalizing market adjustments. Click the following link to check your answers.
     QS15-10
   • See Accounting for Investments handout for reporting guidelines
10. Calculate and report realized gains and losses upon disposition of securities
    • Realized gains (losses) are calculated as the difference between the acquisition cost of an investment and the net proceeds received upon investment disposition
    • See Handout for reporting guidelines
11. Describe and demonstrate the equity method of accounting for investments in equity securities
    • See Accounting for Investments handout
    • Work Exercise 15-9 in your textbook to practice journalizing investment transactions using the Equity Method. Click the link below to check your answers.
      E15-13
12. Define the following terms (click a term to display the definition)
    • Parent
      • Company that owns a controlling interest in a corporation (requires more than 50% of voting stock).
    • Subsidiary
      • Entity controlled by another entity (parent) in which the parent owns more than 50% of the subsidiary's voting stock
    • Consolidated financial statements
      • Financial statements that show all (combined) activities under the parent's control, including those of any subsidiaries.

Assignments
Achieve the learning objectives by completing each item listed below.

• Click each competency above to learn more about it and/or see examples.
• Read Chapter 15 of your accounting text.
• Print and review the Accounting for Investments handout.
• Complete and submit the following problems using Connect.
  • P15-2A
  • P15-5A
    HINT for Requirement 3:  Accounts affecting the investor's equity are Earnings (Losses) from Long-term Investment, Dividend Revenue, and realized Gains (Losses) on Sale of Investment.  Earnings, revenues, and gains increase equity; losses decrease equity.  To answer this question, just look for these accounts in your journal entries and add up the amounts.
    HINT for Part 2, second journal entry on Jan 2, 2013:  In addition to removing the investment from the accounting records, you must also remove the associated Fair Value Adjustment account.  Debit Unrealized Gain - Equity, credit Fair Value Adjustment.