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Unformatted text preview: Chapter 15 Chapter 15
Investments and Fair Value Reporting Entries to record the purchase of Entries to record the purchase of bonds We have been thinking about the entries to record them from the issuance perspective. We are now switching focus to think about how the investor records the purchase of these bonds in its records. Investmentsbonds dr. Cash cr. At par (appendix talks about the amortization of premium/discount….we are not covering) and at the beginning of the bond’s life At par, in between interest payment dates Investmentsbonds dr. (face value) Interest Receivable dr. (accrued interest) Cash cr. (accrued interest + FV) Bonds as an investment Bonds as an investment
Recording the receipt of the interest payment Cash dr. Interest Revenue cr. Note: there would also be a credit to interest receivable if the bond had been purchased in between interest payments or there had been an adjusting entry Adjusting entries are required if the financial statements occurs in between interest payment dates Interest Receivable dr. Interest Revenue cr. Sale of bonds held as an Sale of bonds held as an investment
Likely will require the recognition of gain/loss Must compare the book value of the investment account to the money received Must determine if sale is taking place in between interest payments dates. Ex 153 Proceeds < book value then there is a loss Cash dr. Loss on sale of bonds dr. Investments – bonds cr. If Proceeds > book value there is a gain Cash dr. Gain on sale of bonds cr. Investments – bonds cr. Accounting for Equity Investments Accounting for Equity Investments Must look at the % of investee’s shares owned Less than 20% owned 2050% owned See next slide for the entries for purchase, dividends, and sale of stock Valuation will depend if a trading security, available for sale, or if the fair value is not readily available Significant influence It is possible to see more than 20% ownership without significant influence, but we won’t see that in this class If significant influence, we will use the equity method Control Consolidation More than 50% owned Note : we are covering the equity method in this class at a very basic level. You will learn some nuances to this method in upper level courses Advanced level course Less than 20% owned Less than 20% owned
Purchase of Stock Investments – X Co. Stock dr. Cash cr. Receipt of dividends Cash dr. Dividend revenue cr. Sale of stock Cash dr. Loss on sale of investments (if proceeds < BV) dr. Gain on Sale of Investments (if proceeds >BV) cr. Investment – X Co. Stock cr. Must compare the book value to proceeds to determine if a gain or loss is present Valuing and Reporting Investments Valuing and Reporting Investments Debt and Equity securities are classified into three groups: Trading Securities HeldtoMaturity Valued at fair value Unrealized gains/losses impact the income statement valued at the amortized cost We will learn the definition of this, but will not cover the appendix material applicable to debt securities (i.e. bonds) Valued at fair value Unrealized gains/losses impacts the stockholders equity section Available for sale In order to get the trading securities and availableforsale securities to the fair value, an adjustingentry is required when preparing the financial statements. Trading Securities Trading Securities
Are debt and equity securities that are purchased and sold to earn short term profits from changes in their market prices Most commonly held by banks and other financial institutions We will use a valuation account to record the increases/decreases in market Offset is to an account called unrealized gain on trading investments…..this account impacts the income statement If market value is greater than carrying value when preparing the financial statements, an adjusting entry for the unrealized gain is recorded Valuation Allowance for Trading Investments (BS) dr Unrealized gain on Trading Investments (IS) cr If market value is less than carrying value when preparing the financial statements are prepared, an adjusting entry for the unrealized loss is recorded Unrealized loss on Trading Investments (IS) dr. Valuation Allowance for Trading Investments (BS) cr. AvailableforSale AvailableforSale
Debt and equity securities that are not classified as trading or held tomaturity Similar to the accounting for trading securities, except that the unrealized gains/losses will impact the stockholder’s equity section rather than the income statement Adjusting entry for an increase in market value would be: VA for AvailableforSale Investments (BS) dr Unrealized Gain (loss) on Available for Sale Investments (BS) cr. This is an adjusting entry. Knowing that, does there seem to be anything out of place above? Adjusting entry to show a decrease in market value Unrealized Gain (Loss) on Available for Sale Investments dr. VA for AvailableforSale Investments cr. 4 Equity Method Equity Method Under the equity method, the investment account is adjusted for the investor’s share of the investee’s net income and dividends paid by the investee Net income will increase the investment Net loss will decrease investment account Dividends will decrease the investment account Equity Method, continued Equity Method, continued
Purchase of stock Investment in X Co. Stock dr Cash cr Reporting net income of investee co. Investment in X Co. Stock dr. (ownership % times X Co’s net income) Income of X co. cr. Income of X Co. is an income statement account Reporting dividend from X Co. Cash Investment in X co. Stock Sale of Stock under Equity Method Ex 159 Will likely require a gain/loss. Must compare sales price to the book value of the investment Fair Value Reporting Fair Value Reporting GAAP requires the use of fair value reporting for values for valuing and reporting debt and equity securities that are held as trading or available for sale securities. This is a lot different than the treatment of P,P &E (property, plant, and equipment) that we saw earlier in this semester IFRS uses fair value reporting more often than GAAP There is a trend towards fair value reporting Held at cost less accumulated depreciation. Disadvantages of fair value Disadvantages of fair value reporting There are many assets were the fair market value is not readily available. Companies might use methods that significantly vary. This would decrease comparability between the financial statements of the different companies. Fair values could result in large fluctuations year over year, which may confuse users of the financial statements. ...
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- Spring '11