Concerning the continuing survey, I would like to clarify the types of investments used in the company in the past years. Both equity and debt securities have been incorporated to maintain a higher ground in the business. This memo should address the various types of investments reported in the balance sheets, their characteristics, longevity, and benefits. Equity securities are a type of partnership whereby the investor owns part of the entity they invest in; they gain voting rights for the organization and do not expect immediate and precise returns. They earn variable refunds or incur losses from shares and capital gains of these companies. Debt securities involve loaning a company and waiting for its maturity date to get predefined dividends. The lenders gain from interest rates imposed on the borrowers and hold no privileges concerning the enterprise’s decision-making.
Various types of securities
Stocks are a type of equity security; investors purchase shares of a company and therefore co-own it. They are classified into three categories; under 20% investment, the investor has an insignificant value of control over the company. Between 20% to 50% gives the stockholder significant worth that accords them influence over the company. Stakeholders having shares above 50% acquire a controlling influence over a company. The amount control is used to decide the type of accounting to be done.
Bonds are fixed-income investments that involve investors loaning money to a company. It is a type of debt security where predefined returns are expected from the organization when the agreement is held to maturity and classified as long-term investments (Bergant et al., 2020). They can also be ‘available for sale’ where the maturity contract is not signed and can be sold at any time. A third type is the trading agreement that is actively traded for income and classified as a short investment.
Accounting for these investments
If stocks are of insignificant value, they are accounted for using the cost method and classified as fair value. If they fall between 20% to 50%, they are accounted for using the equity method. However, the investor is at liberty to opt for the cost method. If they are higher than 50%, consolidated financial statements are made since the investor has acquired control over the company.
Debt securities that are held to maturity are accounted for using balance sheets where the cost of the bond is amortized. If classified under ‘available for sale’, the value of the bond varies with the market price; therefore, a gain or loss may be incurred during the time of purchase which will flow through other comprehensive income. If it falls under trading, then it is of fair value (Khan, 2019). However, any gains or losses incurred will flow through the net income.
If ABC Company were to purchase 10%, ten-year $1,000 bonds issued by the S&P Global on January 1, 2015, for $5,500 with a broker’s fee of $50, both the purchases cost and the broker fee would be recorded in the purchases record.
Interest from the bonds is paid every June 30 and December 31; when the semiannual is received on June 30, both debits and credits (interest) increase revenue in the entry to record it for $250 ($5,000 × 10% × 6/ 12).
If the bond is held to ripeness, the above entries will be recorded semiannually for the next 10 years and classified as a long-time investment. The difference between the cost of the bond and the value at maturity is amortized to the income report over the life of the bond.
From a personal point of view, it is recommended to use the equity type of security. It will allow the investor to grow with the company generating ideas, filing in loopholes, and earning simultaneously; however, the debt way is less risky. If you need more information on the topics covered in this memo, feel free to contact me.
References
Bergant, K., Fidora, M., & Schmitz, M. (2020). International capital flows at the security level–evidence from the ECB’s asset purchase programme. International Monetary Fund.
Khan, U. (2019). Does fair value accounting contribute to systemic risk in the banking industry? Contemporary Accounting Research, 36(4), 2588-2609.