Chapter 12 Special Income and Investment Reporting Issues 549and losses are excluded from earnings and reported as a component of other compre-
hensive income (loss), net of related estimated tax provisions or benefits.eBay did not have any equity method investments. Thus, eBay accounted for all of
their investments in marketable equity securities at fair (market) value.Business Combinations
Businesses may combine in order to produce more efficiently or to diversify product
lines. Business combinations occur when one corporation acquires a controlling share
of the outstanding voting stock of another corporation by paying cash or exchanging
stock. The corporation owning all or a majority of the voting stock of the other corpo-
ration is called the parent company. The corporation that is controlled is called the
subsidiary company. For example, PayPalbecame a subsidiary of eBay when eBay ex-
changed eBay common stock for all the outstanding common stock of PayPal.
Although parent and subsidiary corporations may operate as a single economic
unit, they continue to maintain separate accounting records and prepare their own pe-
riodic financial statements. At the end of the year, the financial statements of the par-
ent and subsidiary are combined and reported as a single company. These combined
financial statements are called consolidated financial statements. Such statements are
usually identified by adding “and subsidiary(ies)” to the name of the parent corpora-
tion or by adding “consolidated” to the statement title. To the stockholders of the par-
ent company, consolidated financial statements are more meaningful than separate
statements for each corporation. This is because the parent company, in substance, con-
trols the subsidiaries, even though the parent and its subsidiaries are separate entities.
Accounting for business combinations and preparing consolidated financial state-
ments is discussed in greater detail in advanced accounting courses.INVESTMENTS IN BONDS
In the previous section, we discussed the accounting for investments in equity securi-
ties. A business may also make investments in municipal, government, or corporate
bonds. If bonds are held for possible sale in managing the cash flow needs of the busi-
ness, they should be accounted for as available-for-sale securities, as discussed in the
previous section. If, however, the business intends and has the ability to hold the
bonds for their entire life, then these securities should be accounted for as held-to-
maturity securities. Held-to-maturity securities are disclosed on the balance sheet at
amortized cost. In this section, we will illustrate accounting for bonds as held-to-
maturity securities.What Does It Take to Succeed in Life?
The answer to this question, according to Warren Buffett, the
noted investment authority, is three magic ingredients; intelli-
gence, energy, and integrity. According to Buffett, “If you lack
the third ingredient, the other two will kill you.” In other words,
without integrity, your intelligence and energy may very well mis-
guide you.
Source:Eric Clifford, University of Tennessee Torchbearer, Summer
2002.INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS
Record entries for the
purchase, interest, discount
and premium amortization,
and sale of bond
investments.