Scenario

The head of the accounting department of your company has determined that there is idle cash and is considering options for investing it$.$ You are assigned to explain the costs and benefits of various debt and equity investments. You need to include the accounting treatment of the various investment options and the strategies involved in choosing among them.

Directions

Write a memo to the accounting department head explaining the costs and benefits and detailing the options and strategies for various debt and equity investments.

Specifically, you must address the following rubric criteria:

Explain the advantages and disadvantages of investing in bonds versus equity.

Outline the accounting requirements for equity investments based on ownership percentage, including purchase and allocation requirements. Include the following:

Less than $20\%$ of company ownership

Between $20\%$ and $50\%$ of company ownership

More than $50\%$ of company ownership

Explain how goodwill is created and accounted for if the idle cash is used for an acquisition.

Differentiate which methods to use to account for investments. Include the following:

The fair value method for debt investments

The cost and equity methods for equity investments