For each situation below, indicate how the investment would be classified, and how it would be accounted for. The investor is a public company.
a. Common shares are bought in a public company whose shares are broadly held and widely traded. The company is a supplier of the investor. The investor owns 30% of the voting shares, and puts three people on a 16- member Board of Directors. The intent is to hold the investment for a considerable period of time because of strategic ties.
b. Twenty- year, fixed rate bonds. Management expects interest rates to fall and the price of the bonds to increase significantly over the coming year. The investment will be sold when this happens. The investor wishes gains and losses to be excluded from earnings because of volatility.
c. A mining company has been incorporated to develop a mineral reserve. The investor has agreed to contribute equipment and expertise to physically mine the site, in exchange for 55% of the shares and six members on the 10- member Board of Directors. The remaining shares are held by the company who owned the mineral rights to the property.
d. To invest idle cash, common shares are bought in a large, public company, a tiny fraction of the outstanding common shares. The shares are pledged as collateral against demand bank loans. The fair value of the shares, and market conditions, are regularly evaluated to see if the shares should be held or sold. The investor wishes gains and losses to be excluded from earnings because of volatility.
e. Investment in $ 8,000,000 of 20- year bonds, part of a portfolio that is held to generate principal and interest cash flows.
f. Common shares are bought in a large public company, whose shares are broadly held and widely traded. The investor owns 5% of the voting shares, sits on the Board, and is the largest single shareholder. The fair value of the shares and market conditions are regularly evaluated to see if the shares should be held or sold.
g. Common shares are bought in a small, family- owned business. The investor is the only nonfamily shareholder. The shares constitute 30% of the voting shares, and the investor has one member on an eight- member Board of Directors, all of the rest of whom are appointed by members of the family investor group. Fair values for the shares are not available as they are rarely sold.