Memorandum to the File
Date: February 1, 2017
From: Mayra Ramirez Caicedo
Re: The proper accounting treatment for investments debt and equity securities
Facts
Orange Corporation, our client, acquired four security investments during the year 2016. First, on January 1, 2016, Orange purchased a 35% interest in Canary, Inc. for $800,000 and it paid Orange a dividend of $60,000. The fair value of the interest was $1,000,000 at the end of the year. Second, on July 1, 2016, Orange acquired 5%, 10 year bonds of ABC, Inc. for $200,000 and received semiannually payments at the end of the year. The fair value of the bonds on December 31 was $204,000. Third, on October 2, 2016, Orange purchased 500 shares of Brown Corporation for $160,000 and it paid Orange
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How should Orange Corporation classify each security investment?
2. What are the respectively journal entries for each security investments?
3. What amounts should Orange Corporation report on the income statement and balance sheet for its security investments?
Conclusion
According to FASB Financial Accounting Standard Board, a security is a financial instrument that represents ownership position. It is a share, participation, obligation and interest in property or in an entity of the issuer. (FASB ASC 320-10-20 Glossary). Securities are typically divided into debts and equities. (FASB ASC 320-10-15-5). A debt security represents money borrowed that must be paid as well as “any security representing a creditor relationship with an entity. Debt securities include preferred stock, government and corporate bonds, U.S. treasury securities etc.” (FASB ASC 320-10-20 Glossary). Equity security represents ownership interest held by shareholders in a corporation. (FASB ASC 320-10-20 Glossary). Equity security includes any Convertible debt or preferred stock, written equity and cash- settled options. Unlike debt securities who receive only interest and repayment, equity securities are able to get profit from capital