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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Classification of Investments The following investments occurred in 2019 for Mole Company.

  1. a. Mole purchased a bond that will mature in 10 years. Mole purchased this bond because it expects that over the next 6 months, interest rates will fall, causing the bond price to increase. At that time. Mole plans to sell the bonds to earn a profit.
  2. b. Mole purchased $100,000 of Wilson Company’s convertible bonds. Mole has no intention of converting the bonds or selling the debt in the near future.
  3. c. e. Mole purchased 30% of the common stock in a supplier in an effort to have more input into the quality of the raw materials it receives.
  4. d. Mole purchased bonds for Collier Company with a face value of $100,000 for $95,000. The bonds pay interest of 8% semiannually. Mole has the ability and intent to hold the bonds to maturity and collect the principal and interest.
  5. e. Mole purchased 5% of the common stock of Brandon Company, a business with a history of paying large dividends. Mole wishes to hold these securities for the forseeable future in order to receive these dividends.

Required:

  1. 1. Classify each investment as either held-to-maturity, trading, available-for-sale, minority passive, or minority active investment.
  2. 2. Next Level Discuss the basis upon which the classification of each debt investment is based.
  3. 3. Next Level How would each of these investments be classified under IFRS?

1.

To determine

Identify the category under which each investments of Company M will fall.

Explanation

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Three categories of investment in debt securities are as follows:

  • Trading securities
  • Held-to-maturity securities
  • Available-for-sale securities

Trading securities: These are the securities which are purchased to earn the profits due to changes in their market prices.

Held-to-maturity securities: These are the securities which are purchased with an intension to hold the securities till their maturity.

Available-for-sale securities: These are the securities which are not intended to be sold in the near future and there is no intension to hold the securities till their maturity.

Classify the investment made by Company M:

a. Company M purchased a 10-year bond with an intention to sell the bond after 6 months from the date of purchase to earn profit out of interest rate fluctuation...

2.

To determine

Identify the basis under which each debt investments are classified.

3.

To determine

Classify each of the investment of Company M under IFRS.

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