Chapter 15, Problem 11DQ

To determine

Introduction:

Investment in securities:

An investment in the security of another company can and influencing investment or non influencing on the basis of type of investment made. An influencing investment in securities provides the controlling or influencing power to the investor in the company.

Influencing investments can be classified into two major types as follows:

1. Controlling interest: In this case the investor holds more than 50% equity of the company and it has control over the management of the company. The accounts of the company are required to be consolidated in such cases.
2. Significant influence: In this case the investor holds more than 20% but less than 50% equity of the company and it has significant influence over the management of the company. The investor follows the equity method to account such type of investments.

Non influencing investments can be classified into three major types as follows:

1. Held to maturity: Held to maturity is a type of investment that the investor intends to hold till maturity. These securities are recorded at cost.
2. Trading: Trading securities are purchased by the investor for the purpose to sell within a short term period to each profit. These securities are recorded at their fair value and any gain or loss in recognized in the income statement for that period.
3. Available for sale: All the other securities are considered as available for sale and these securities are recorded at their fair value and any gain or loss is recognized unrealized gain or loss until the securities are actually sold.

The circumstances when a company prepare consolidated financial statements.