Investment

Summary

This video discusses investment accounting in intermediate accounting, focusing on both debt (bonds) and equity (shares) investments. It explains the reasons for investing, such as gaining returns, influence, or using idle capital. The video covers different categories of investments like held-to-maturity, available-for-sale, and trading securities, and details how to account for these investments through journal entries. It also explores equity investments, the equity method, dividend recognition, and adjustments related to gains or losses. Practical examples are provided to help viewers understand the application of these accounting methods in real-world scenarios.

Takeaways

• 😀 Investments can be categorized into two main types: debt investment (e.g., bonds) and equity investment (e.g., shares).
• 😀 Companies or individuals invest with three main goals: to earn returns (interest or dividends), to gain influence in operations or finances, and to utilize idle funds for investment.
• 😀 Debt investments can be classified into three categories: hold-to-maturity (HTM), held-for-sale (HFS), and trading securities.
• 😀 HTM investments are purchased with the intent to hold until maturity, and are valued at amortized cost.
• 😀 HFS investments may be sold before maturity if market conditions are favorable, and they are valued at fair value.
• 😀 Trading securities are actively bought and sold with frequency, and their value is also measured at fair value.
• 😀 When recording debt investment transactions, typical entries include purchasing investments, receiving interest, and making adjustments (if needed).
• 😀 In equity investments, the method of accounting depends on the ownership percentage: under 20% uses the cost method, 20-50% uses the equity method, and over 50% requires consolidation.
• 😀 The equity method is used when an investor has significant influence over the investee (typically 20-50% ownership), and this method reflects the investor’s share of the investee’s profit or loss.
• 😀 Dividends received from equity investments are recorded differently: under the cost method, they are recognized as revenue; under the equity method, they reduce the equity investment balance.
• 😀 Equity investments may require adjustments for changes in fair value, but under the equity method, only share of income and losses are recognized, not market value changes.

Q & A

What are the two primary types of investments discussed in the script?

The two primary types of investments discussed are debt investments (such as bonds) and equity investments (such as shares in companies).

What is the main reason companies or individuals invest?

The main reasons for investment are to gain returns (such as interest or dividends), to influence operational or financial aspects of other companies, and to utilize idle cash for generating returns.

What are the three categories of investment mentioned in the script?

The three categories of investment are: 1) Held-to-maturity investments, 2) Available-for-sale investments, and 3) Trading securities.

How is the valuation of 'held-to-maturity' investments typically measured?

Held-to-maturity investments are measured using amortized cost, as the intention is to hold them until their maturity date, not to sell them before then.

What differentiates 'available-for-sale' investments from 'held-to-maturity' investments?

Available-for-sale investments can be sold before maturity, unlike held-to-maturity investments, which are intended to be held until their maturity date. Available-for-sale investments are measured using fair value.

What happens to the accounting of trading securities?

Trading securities are bought and sold frequently, and they are measured at fair value. Any changes in fair value are recognized in income (gains or losses).

How are interest payments from bonds recorded in the journal for accounting purposes?

Interest payments from bonds are recorded by debiting the investment account and crediting interest revenue if interest is recognized, or by debiting cash if the interest is received.

What happens when the carrying value of a bond changes due to market conditions?

When the carrying value of a bond changes due to market conditions, the difference is recognized as a gain or loss, depending on whether the bond was sold at a higher or lower value than its book value.

How are dividends treated in the case of equity investments?

For equity investments, dividends are either recorded as dividend revenue if the investment is classified under cost or fair value, or they reduce the equity investment under the equity method if the investor has significant influence over the investee.

How is the method of accounting for equity investments determined?

The method of accounting for equity investments is determined by the level of ownership: less than 20% typically uses the cost or fair value method, between 20% and 50% uses the equity method, and more than 50% is treated as a controlling interest with consolidation.