Principles, Chapter
16
Investments
Chapter
16-1
Accounting Ninth Edition
Study Objectives
1.
Discusswhycorporationsinvestindebtandstocksecurities.
2.
Explaintheaccountingfordebtinvestments.
3.
Explaintheaccountingforstockinvestments.
4.
Describetheuseofconsolidatedfinancialstatements.
5.
Indicatehowdebtandstockinvestmentsarereportedinfinancial
statements.
6.
Distinguishbetweenshorttermandlongterminvestments.
Chapter
16-2
Long-Term Liabilities
Why
Why
Corporations
Invest
Invest
Cash
Cash
management
management
Investment
Investment
income
income
Strategic
Strategic
reasons
reasons
Chapter
16-3
Accounting for
Accounting
Debt
Investments
Investments
Recording
Recording
acquisition of
bonds
bonds
Recording bond
Recording
interest
interest
Recording sale
Recording
of bonds
of
Accounting for
Accounting
Stock
Investments
Investments
Holdings of less
Holdings
than 20%
than
Holdings
Holdings
between 20%
and 50%
and
Holdings of more
Holdings
than 50%
than
Valuing and
Valuing
Reporting
Investments
Investments
Categories of
Categories
securities
securities
Balance sheet
Balance
presentation
presentation
Realized and
Realized
unrealized gain
or loss
or
Classified
Classified
balance sheet
balance
Why Corporations Invest
Corporationsgenerallyinvestindebtorstocksecuritiesforoneof
threereasons.
1.
Corporationmayhave excess cash.
2.
Togenerateearnings from investment income.
3.
Forstrategic reasons.
Illustration 16-1
T e m p o ra ry
inve s tm e nts
a nd th e
o p e ra ting c y c le
Chapter
16-4
SO 1 Discuss why corporations invest in debt and stock securities.
Why Corporations Invest
Question
Pensionfundsandbanksregularlyinvestindebtandstocksecurities
to:
a. houseexcesscashuntilneeded.
b. generateearnings.
c. meetstrategicgoals.
d. avoidatakeoverbydisgruntledinvestors.
Chapter
16-5
SO 1 Discuss why corporations invest in debt and stock securities.
Accounting for Debt Investments
Recording Acquisition of Bonds
Costincludesallexpendituresnecessarytoacquiretheseinvestments,
suchasthepricepaidplusbrokeragefees(commissions),ifany.
Recording Bond Interest
Calculateandrecordinterestrevenuebaseduponthecarryingvalueof
thebondtimestheinterestratetimestheportionoftheyearthebondis
outstanding.
Chapter
16-6
SO 2 Explain the accounting for debt investments.
Accounting for Debt Investments
Sale of Bonds
Credittheinvestmentaccountforthecostofthebondsandrecordasa
gainorlossanydifferencebetweenthenetproceedsfromthesale(sales
pricelessbrokeragefees)andthecostofthebonds.
Chapter
16-7
SO 2 Explain the accounting for debt investments.
Accounting for Debt Investments
Illustration: KuhlCorporationacquires50DoanInc.8%,10year,
$1,000bondsonJanuary1,2010,for$54,000,includingbrokeragefeesof
$1,000.Theentrytorecordtheinvestmentis:
Jan. 1
Debtinvestments
Cash
Chapter
16-8
54,000
54,000
SO 2 Explain the accounting for debt investments.
Accounting for Debt Investments
Illustration: KuhlCorporationacquires50DoanInc.8%,10year,
$1,000bondsonJanuary1,2010,for$54,000,includingbrokeragefeesof
$1,000.ThebondspayinterestsemiannuallyonJuly1andJanuary1.The
entryforthereceiptofinterestonJuly1is:
July 1
Cash
Interestrevenue
2,000 *
2,000
* ($50,000x8%x=$2,000)
Chapter
16-9
SO 2 Explain the accounting for debt investments.
Accounting for Debt Investments
Illustration: IfKuhlCorporationsfiscalyearendsonDecember31,
preparetheentrytoaccrueinterestsinceJuly1.
Dec. 31
Interestreceivable
Interestrevenue
2,000
2,000
KuhlreportsreceiptoftheinterestonJanuary1asfollows.
Jan. 1
Chapter
16-10
Cash 2,000
Interestreceivable
2,000
SO 2 Explain the accounting for debt investments.
Accounting for Debt Investments
Illustration: AssumethatKuhlcorporationreceivesnetproceedsof
$58,000onthesaleoftheDoanInc.bondsonJanuary1,2011,after
receivingtheinterestdue.Preparetheentrytorecordthesaleofthebonds.
Jan. 1
Cash 58,000
Debtinvestments
Gainonsaleofinvestments
Chapter
16-11
54,000
4,000
SO 2 Explain the accounting for debt investments.
Accounting for Debt Investments
Question
Aneventrelatedtoaninvestmentindebtsecuritiesthatdoesnot
requireajournalentryis:
a. acquisitionofthedebtinvestment.
b. receiptofinterestrevenuefromthedebtinvestment.
c. achangeinthenameofthefirmissuingthedebtsecurities.
d. saleofthedebtinvestment.
Chapter
16-12
SO 2 Explain the accounting for debt investments.
Accounting for Debt Investments
Question
Whenbondsaresold,thegainorlossonsaleisthedifferencebetween
the:
a. salespriceandthecostofthebonds.
b. netproceedsandthecostofthebonds.
c. salespriceandthemarketvalueofthebonds.
d. netproceedsandthemarketvalueofthebonds.
Chapter
16-13
SO 2 Explain the accounting for debt investments.
Accounting for Stock Investments
Ownership Percentages
020%50%100%
Nosignificant
influenceusually
exists
Significant
influenceusually
exists
Investmentvalued
usingCost
Method
Inve s tm e nt
va lue d us ing
Equity
Method
Controlusually
exists
Inve s tm e ntva lue d o n
p a re nts b o o ks us ing C o s t
Me th o d o rEq uityMe th o d
( inve s tm e nte lim ina te d in
Consolidation)
Theaccountingdependsontheextentoftheinvestors influenceovertheoperating
andfinancialaffairsoftheissuingcorporation.
Chapter
16-14
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Companiesusethecost method.Underthecostmethod,
companiesrecordtheinvestmentatcost,andrecognizerevenueonly
whencashdividendsarereceived.
Costincludesallexpendituresnecessarytoacquiretheseinvestments,
suchasthepricepaidplusanybrokeragefees(commissions).
Chapter
16-15
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Illustration: OnJuly1,2010,SanchezCorporationacquires1,000
shares(10%ownership)ofBealCorporationcommonstock.Sanchezpays
$40per
shareplusbrokeragefeesof$500.Theentryforthepurchaseis:
July 1
Stockinvestments
Cash
Chapter
16-16
40,500
40,500
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Illustration:DuringthetimeSanchezownsthestock,itmakesentries
foranycashdividendsreceived.IfSanchezreceivesa$2pershare
dividendonDecember31,theentryis:
Dec. 31
Cash 2,000
Dividendrevenue
Chapter
16-17
2,000
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Illustration:AssumethatSanchezCorporationreceivesnetproceedsof
$39,500onthesaleofitsBealstockonFebruary10,2011.Becausethe
stockcost$40,500,Sanchezincurredalossof$1,000.Theentrytorecord
thesaleis:
Feb. 10
Cash 39,500
Lossonsaleofstock
Stockinvestments
Chapter
16-18
1,000
40,500
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Equity Method
Recordtheinvestmentatcostandsubsequentlyadjustthe
amounteachperiodfor
theinvestorsproportionateshareoftheearnings(losses)
and
dividendsreceivedbytheinvestor.
Ifinvestorsshareofinvesteeslossesexceedsthecarryingamountoftheinvestment,the
investorordinarilyshoulddiscontinueapplyingtheequitymethod.
Chapter
16-19
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Question
Undertheequitymethod,theinvestorrecordsdividendsreceivedby
crediting:
a. DividendRevenue.
b. InvestmentIncome.
c. RevenuefromInvestment.
d. StockInvestments.
Chapter
16-20
SO Explain 3 the accounting for stock investments.
Holdings Between 20% and 50%
Exercise: (Equity Method) OnJanuary1,2010,Pennington
Exercise:
Corporationpurchased30%ofthecommonsharesofEdwardsCompanyfor
$180,000.Duringtheyear,Edwardsearnednetincomeof$80,000and
paiddividendsof$20,000.
Instructions:
PreparetheentriesforPenningtontorecordthepurchaseandany
additionalentriesrelatedtothisinvestmentinEdwardsCompanyin2008.
Chapter
16-21
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Illustration: MilarCorporationacquires30%ofthecommonsharesofBeck
Illustration:
Companyfor$120,000onJanuary1,2010.For2010,Beckreportsnetincomeof
$100,000andpaiddividendsof$40,000.Preparetheentriesforthesetransactions.
Jan.1
Stockinvestments
120,000
Cash
Dec.31
120,000
Stockinvestments
($ 1 0 0 ,0 0 0 x3 0 % )
30,000
Revenuefrominvestments
Dec.31
Cash
($ 4 0 ,0 0 0 x3 0 % )
Stockinvestments
Chapter
16-22
30,000
12,000
12,000
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Illustration: MilarCorporationacquires30%ofthecommonsharesofBeck
Illustration:
Companyfor$120,000onJanuary1,2010.For2010,Beckreportsnetincomeof
$100,000andpaiddividendsof$40,000.Preparetheentriesforthesetransactions.
AfterMilarpoststhetransactionsfortheyear,itsinvestmentandrevenue
accountswillshowthefollowing.
StockInvestments
Debit
120,000
3 0 ,0 0 0
RevenuefromInvestments
Credit
Debit
1 2 ,0 0 0
Credit
30,000
1 3 8 ,0 0 0
Chapter
16-23
SO 3 Explain the accounting for stock investments.
Holdings of More Than 50%
Controlling InterestWhenonecorporationacquiresavoting
interestofmorethan50percentinanothercorporation
Investorisreferredtoastheparent.
Investeeisreferredtoasthesubsidiary.
Investmentinthesubsidiaryisreportedontheparentsbooksasa
longterminvestment.
Parentgenerallypreparesconsolidated financial
statements.
Chapter
16-24
SO 4 Describe the use of consolidated financial statements.
Chapter
16-25
Valuing and Reporting Investments
Categories of Securities
Companiesclassifydebtandstockinvestmentsintothree
categories:
Trading securities
Available-for-sale securities
Held-to-maturity securities
T h e s e g uid e line s a p p ly to a lld e b ts e c uritie s a nd a lls to c kinve s tm e nts
inwh ic h th e h o ld ing s a re le s s th a n2 0 % .
Chapter
16-26
SO 5 Indicate how debt and stock investments are
SO
reported in financial statements.
reported
Valuing and Reporting Investments
Trading Securities
Companiesholdtradingsecuritieswiththeintentionofselling
theminashortperiod.
Tradingmeansfrequentbuyingandselling.
Companiesreporttradingsecuritiesatfairvalue,andreport
changesfromcostaspartofnetincome.
Chapter
16-27
SO 5 Indicate how debt and stock investments are
SO
reported in financial statements.
reported
Valuing and Reporting Investments
Available-for-Sale Securities
Companiesholdavailableforsalesecuritieswiththeintentof
sellingtheseinvestmentssometimeinthefuture.
Thesesecuritiescanbeclassifiedascurrentassetsoraslongterm
assets,dependingontheintentofmanagement.
Companiesreportsecuritiesatfairvalue,andreportchanges
fromcostasacomponentofthestockholdersequitysection.
Chapter
16-28
SO 5 Indicate how debt and stock investments are
SO
reported in financial statements.
reported
Valuing and Reporting Investments
Question
Marketablesecuritiesboughtandheldprimarilyforsaleinthenear
termareclassifiedas:
a. availableforsalesecurities.
b. heldtomaturitysecurities.
c. stocksecurities.
d. tradingsecurities
Chapter
16-29
SO 5 Indicate how debt and stock investments are
SO
reported in financial statements.
reported
Trading Securities
Illustration:InvestmentofPaceclassifiedastradingsecuritiesonDecember
31,2010.
Illustration 16-7
TheadjustingentryforPaceCorporationis:
Dec. 31
Marketadjustmenttrading
Unrealizedgainincome
Chapter
16-30
7,000
7,000
SO 5 Indicate how debt and stock investments are
SO
reported in financial statements.
reported
Available-for-Sale Securities
Problem:Howwouldtheentrieschangeifthesecuritieswereclassified
asavailableforsale?
Theentrieswouldbethesameexceptthatthe
UnrealizedGainorLossEquityaccountisusedinsteadofUnrealizedGain
orLossIncome.
Theunrealizedlosswouldbedeductedfromthestockholdersequitysection
ratherthanchargedtotheincomestatement.
Chapter
16-31
SO 5 Indicate how debt and stock investments are
SO
reported in financial statements.
reported
Available-for-Sale Securities
Illustration:AssumethatIngraoCorporationhastwosecuritiesthatit
classifiesasavailableforsale.Illustration168providesinformationontheir
valuation.
Illustration 16-8
TheadjustingentryforIngraoCorporationis:
Dec. 31
Unrealizedgainorlossequity
Marketadjustmentavailableforsale
Chapter
16-32
9,537
9,537
SO 5 Indicate how debt and stock investments are
SO
reported in financial statements.
reported
Available-for-Sale Securities
Question
Anunrealizedlossonavailableforsalesecuritiesis:
a. reportedunderOtherExpensesandLossesintheincome
statement.
b. closedoutattheendoftheaccountingperiod.
c. reportedasaseparatecomponentofstockholders'equity.
d. deductedfromthecostoftheinvestment.
Chapter
16-33
SO 5 Indicate how debt and stock investments are
SO
reported in financial statements.
reported
Chapter
16-34
Balance Sheet Presentation
Short-Term Investments
Alsocalledmarketable securities,aresecuritiesheldbya
companythatare
(1) readilymarketableand
(2) intendedtobeconvertedintocashwithinthenextyearor
operatingcycle,whicheverislonger.
Investmentsthatdonotmeetboth criteria areclassifiedaslongterm investments.
Chapter
16-35
SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Presentation of Realized and Unrealized Gain
Presentation
or Loss
or
Nonoperatingitemsrelatedtoinvestments
Illustration 16-10
Chapter
16-36
SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Realized and Unrealized Gain or Loss
Unrealizedgainorlossonavailableforsalesecuritiesarereportedas
aseparatecomponentofstockholdersequity.
Illustration 16-11
Chapter
16-37
SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Classified Balance Sheet (partial)
Illustration 16-12
Chapter
16-38
SO 6 Distinguish between short-term and long-term investments.
Copyright
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Chapter
16-39