There are three main reasons companies purchase investments in debt or stock securities. The first reason is if corporations have extra cash that they don’t need for immediate purchase of operating assets.
The second reason is; Companies purchase investments to generate earnings from investment income. The third reason companies purchase investments is for strategic reasons. A company can exercise some influence over a customer by owning a significant, but not controlling, interest in that company. Or, a company may purchase a non controlling interest in another company in a related industry in which it wishes to establish a presence. (Weygandt, Kimmel, & Kieso, 2010).
Sometimes corporations will have excess cash for investment reasomns. It may invest in things, incase in the future the economy falls then it has money to fall back on when money is gone, or low. 3. Low-risk, high-liquidity, short-term securities such as government-issued securities are best when investing for short periods of time. 4. Debt securities, from banks and other financial institutions and stock securities from mutual funds and pension funds generate earnings when investing. 5.
6. Stocks of companies in a related industry or in an unrelated industry that the company wishes to enter
Q: E12-2 Foren Corporation had the following transactions pertaining to debt investments. Jan. 1 Purchased 50 8%, $1,000 Choate Co. bonds for $50,000
cash plus brokerage fees of $900. Interest is payable semiannually on July 1 and January 1. July 1 Received semiannual interest on Choate Co. bonds. July 1 Sold 30 Choate Co. bonds for $34,000 less $500 brokerage fees. Instructions
(a) Journalize the transactions.
(b) Prepare the adjusting entry for the accrual of interest at December 31.
A. Jan. 1
Debt investments $50,900
Debt Investment $33,540
Gain on sale $2,960
Interest receivable $2000
Interest revenue $2000
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting (7th ed.). Hoboken, NJ: John Wiley & Sons.