In a continuation of their efforts to explore the financial condition of ABC Company, the Board of Directors has now started to explore the various investment strategies of the company. They would like to understand more about the differences between debt versus equity investments. They also wish to learn more about the various types of investments reported on the Balance Sheet. Using your text and outside sources, explain the following:

(1) debt versus equity securities;

(2) various types of investments such as those listed in Exhibit 15-2; and

(3) how to account for these investments (refer to Exhibit 15-8 as a guide). Keep in mind the intended audience of the memo.

 

Accounting for investments in securities depends on three factors: (1) security type, either debt or equity; (2) the company's intent to hold the security either short term or long term; and (3) the investor's percentage of ownership in the other company's (investee's) equity securities. Exhibit 15.2 identifies six classes of securities using these three factors. EXHIBIT 15.2 Investments in Securities Held-to-Maturity Debt securities intended to be held until maturity E Debt Investments Trading Debt securities that are actively traded Available-for-Sale Debt securities that are not HTM or Trading Insignificant Influence Equity securities with insignificant influence Equity Investments Significant Influence Equity securities with significant influence Controlling Influence Equity securities with controlling influence