Investment
Terms
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- Two motivations for company to invest i.e. management intent
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(1) Return
(2) Strategy - What is the return motivation for investment?
- gain through interest, dividends, capital gain i.e. price increase.
- What is strategy motivation for inventment?
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gain influence or control in other companies by investing in common shares.
e.g. maintain supplies of raw materials - Why is it necessary to know the types and motivation of investment as an accountant?
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- By knowing the types of investment [short term, long term, debt, equity], we can use correct treatment to report the investment appropriately.
- Also, by knowing the motivation, we can reflect economic substance of the investment appropriately in the report. - Security?
- is a share, debt agreement (bond) or right to own (derivatives)
- Instrument?
- Any asset that are considered as financial instrument and its value can be held, transferred, or accomplished
- Derivatives?
- contract btw two parties and its value depends on the fluctuation of underlying assets include bonds, stocks, interests rate, market index etc.
- Security can be issued in 2 forms
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- bearer form: ownership is not recorder. the physical form of the security proved the ownership.
- registered form: ownership is recorded in the firm and the firm will mail out interest to owners - Debt security
- instrument of lending that will be repaid by the borrowing company with a specific amount, on a specific maturity date, with(out) specific interest rate.
- Examples of debt security
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e.g. notes, bonds [government, corporate], convertible debt, commerial paper, and all debt instruments,
special: trade receivables, and loan receivables - Examples of debt instruments
- e.g. notes, bonds, certificates, mortgages, leases or other agreements between a lender and a borrower
- 4 types of debt security
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1. loan and receivables (ls)
& 3 securities
2. held to maturity (htm)
3. held to trading (htt)
4. available for sale (afs) security - what is loan & receivables?
- is a promise that borrow will repay lender on specific date (with interest) after receiving lender's money or goods
- what is held to maturity security?
- a security that company will held till maturity date.
- what is held to trading security?
- a security that company is intended for short term trading.
- what is available for sale security?
- a security that is not htm and htt.
- How to valuate ls, htm, htt, and afs?
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ls - amortized cost
htm - amortized cost
htt - fair value
afs - fair value - what is amortized cost?
- total amount that is calculated from present value all cash payments received in the subsequent periods and reduced by the uncollectible & impairement.
- what is fair value?
- amount that is agreed by 2 parties in armlength's tranaction [i.e. unrelated, no conflict interest] who are under no compulsion to act.
- what are the income effect for ls, htm, htt, and afs?
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1) ls, htm, htt, and afs: interest revenue, gain/loss at sales
2) extra for afs: unrealized gain/loss in previous periods. - any unrealized gain/loss for ls, htm, htt, afs?
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1) ls, htm: has none.
2) htt: recognized unrealized "holding" gain/loss at each year end [I/S]
3) **afs: recognized unrealized gain/loss at each year end [other comprehensive income] - formal notes is also called ______
- promissory note
- borrower of the notes is called _______
- maker
- lender of the notes is called _______
- payee
- what are two types of notes?
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1) interest bearing
2) non-interest bearing - what is interest bearing notes?
- pay interest at an interest rate on the face value of the notes
- what is non-interest bearing notes?
- pay interest at the difference of face value and the proceed (i.e. the borrowed amount)
- All the notes contain interest? T or F?
- True.
- Notes are usually in where?
- over due A/R, high risk new customers, borrowing to employees, and subsidiaries, or sales of PP&E
- What is stated rate, face rate, or coupon rate?
- all equal to the interest rate paid by the borrower
- what is effective interest rate, market rate, or yield rate?
- all equal to the market rate
- What will affect the proceed (borrow amount) of the notes receivables?
- interest rate >, = , or < coupon rate
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How does i=r, i<r, i>r affect to the borrowed amount?
i=market rate, r=coupon rate -
(i) i=r, proceed = face value
(2) i<r, proceed > face value
(3) i>r, proceed < face value
=> (2) at premium,
=> (3) at discount - How to calculate interest payment?
- face value * r
- How to calculate interest revenue?
- Present value at each period * i
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Discount = ___________
where to put discount on F/S -
Face value - proceed
=> contra acc't of notes receivable -
Premium = _____________
where to put premium on F/S -
Proceed - Face value
=> adjunct acc't of notes receivables - If procced at discount, how to affect interest revenue & interest received?
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interest rev = interest payment + discount
interest received = interest payments - If procced at premium, how to affect interest revenue & interest received?
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interest revenue = interest payment - premium
interest received = interest payments - When to receive Interest for interest bearing and non-interest bearing notes?
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=> interest bearing = at each period
=> non-interest bearing = at the end - Journal entry for notes receivables at Discount/Premium:
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Dr Notes receivables
Cr/Dr Dis.[Pre.]on notes rec.
Cr Cash - In the amortization schedule for discount/premium notes receivables, the discount/ premium amortized will be at the increasing rate at ____
- at the rate of market rate i.e. the next one/the previous one = i