Intermediate II-Chapter 12 Investments "Wait! I have a new video that is much better!" Link below

The chapter begins by introducing two main types of investments: equity securities (common and preferred stock, representing ownership) and debt securities (bonds or notes payable, representing a loan). The video discusses the pros and cons of each, such as the obligation to pay interest on debt versus the option to pay dividends on equity, and the transfer of a portion of the company in equity. Both individuals and other corporations can purchase these securities.

Debt securities, like bonds, have a specified maturity date when the principal amount must be repaid. Interest is paid periodically before maturity. Bonds can be issued at a premium or discount, depending on how their stated interest rate compares to the market interest rate. If the stated rate is higher than the market rate, the bond sells at a premium. If the stated rate is lower, it sells at a discount. The market value of fixed-rate investments moves inversely to market interest rates.

An example illustrates a company (Master Wear Industries) issuing $700,000 of 12% bonds when the market interest rate for similar bonds is 14%. Since the bond's rate is lower, it must be sold at a discount. The calculation involves determining the present value of future interest payments (an annuity) and the present value of the principal amount using the market interest rate (7% semi-annually) and the number of periods.

The journal entry for the purchaser (United Intergroup Inc.) shows an "Investment in Bonds" asset at face value ($700,000), a cash payment at the discounted price ($666,666.33), and a "Discount on Bond Investment" credit for the difference. A concept check reinforces this, showing a credit to 'Discount on bond investment' when bonds are purchased below their maturity value.

Calculating interest revenue for a discounted bond involves using the effective interest method. The actual cash received for interest is less than the recognized interest revenue because of the discount. The difference is used to amortize the discount, increasing the carrying value of the investment over time. An amortization chart demonstrates how the outstanding balance of the bond gradually increases from the discounted purchase price to its face value by maturity.

Debt investments are classified into three categories: Held-to-Maturity (HTM), Trading Securities, and Available-for-Sale. This section focuses on HTM, which are debt investments a company intends to hold until maturity. Unrealized holding gains and losses (due to market fluctuations) are not recognized in net income for HTM investments; they are only disclosed in financial statement notes. These investments are reported on the balance sheet at their amortized cost.

If an HTM investment is sold before maturity due to unforeseen circumstances, the sale triggers the recognition of a realized gain or loss. The journal entry records the cash received, removes the remaining discount on bond investment, eliminates the investment in bonds from the balance sheet, and recognizes the gain or loss on sale. This realized gain/loss affects the income statement. Cash flows from buying and selling HTM securities are classified as investing activities.