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Chapter 13
13
Investments
Study
Study Objectives
Objectives
1.
2.
3.
4.
5.
6.
Chapter
13-2
Investments
Investments
Why
Corporations
Invest
Cash
management
Investment
income
Strategic
reasons
Chapter
13-3
Accounting for
Debt
Investments
Accounting for
Stock
Investments
Recording
acquisition of
bonds
Holdings of
less than
20%
Recording
bond interest
Holdings
between 20%
and 50%
Recording
sale of bonds
Holdings of
more than
50%
Valuing and
Reporting
Investments
Categories of
securities
Balance
sheet
presentation
Realized and
unrealized
gain or loss
Classified
balance
sheet
Why
Why Corporations
Corporations Invest
Invest
Corporations generally invest in debt or stock
securities for one of three reasons.
1.
Illustration 13-1
Temporary
investments
and the
operating cycle
Chapter
13-4
Why
Why Corporations
Corporations Invest
Invest
Question
Pension funds and banks regularly invest in debt and
stock securities to:
a. house excess cash until needed.
b. generate earnings.
c. meet strategic goals.
d. avoid a takeover by disgruntled investors.
Chapter
13-5
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Recording Acquisition of Bonds
Cost includes all expenditures necessary to acquire
these investments, such as the price paid plus
brokerage fees (commissions), if any.
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Recording Sale of Bonds
Credit the investment account for the cost of the
bonds and record as a gain or loss any difference
between the net proceeds from the sale (sales price
less brokerage fees) and the cost of the bonds.
Chapter
13-7
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Exercise: Issel Corporation had the following
transactions pertaining to debt investments.
Jan. 1 Purchased 60, 8%, $1,000 Hollis Co. bonds for
$60,000 cash plus brokerage fees of $900. Interest is
payable semiannually on July 1 and January 1.
July 1 Received semiannual interest on Hollis Co. bonds.
July 1 Sold 30 Hollis Co. bonds for $34,000 less $500
brokerage fees.
Instructions (a) Journalize the transactions. (b)
Prepare the adjusting entry for the accrual of interest at
December 31.
Chapter
13-8
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Exercise: Jan. 1 Purchased 60, 8%, $1,000 Hollis Co.
bonds for $60,000 cash plus brokerage fees of $900.
Interest is payable semiannually on July 1 and January 1.
Jan 1
Debt investment
Cash
60,900 *
60,900
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Exercise: July 1 Received semiannual interest on
Hollis Co. bonds. Sold 30 Hollis Co. bonds for $34,000
less $500 brokerage fees.
July 1
Cash
Interest revenue
Cash
Debt investments
Gain on sale
* ($60,000 x 8% x = $2,400)
** ($34,000 - $500 = $33,500)
Chapter
13-10
2,400 *
2,400
33,500 **
30,450 ***
3,050
*** ($60,900 x = $30,450)
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Exercise: (b) Prepare the adjusting entry for the
accrual of interest at December 31.
Dec 31 Interest receivable
Interest revenue
1,200 *
1,200
* ($30,000 x 8% x = $1,200)
Chapter
13-11
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Question
An event related to an investment in debt securities
that does not require a journal entry is:
a. acquisition of the debt investment.
b. receipt of interest revenue from the debt
investment.
c. a change in the name of the firm issuing the
debt securities.
d. sale of the debt investment.
Chapter
13-12
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Question
When bonds are sold, the gain or loss on sale is the
difference between the:
a. sales price and the cost of the bonds.
b. net proceeds and the cost of the bonds.
c. sales price and the market value of the bonds.
d. net proceeds and the market value of the
bonds.
Chapter
13-13
Accounting
Accounting for
for Stock
Stock Investments
Investments
Ownership Percentages
Significant
influence
usually exists
Investment
valued using
Cost
Method
Investment
valued using
Equity
Method
Control
usually exists
Investment valued on
parents books using Cost
Method or Equity Method
(investment eliminated in
Consolidation)
Holdings
Holdings of
of Less
Less than
than 20%
20%
Cost Method
Cost includes all expenditures necessary to acquire
investment, such as price paid plus brokerage fees
(commissions).
Revenue recognized only when cash dividends are
received.
Chapter
13-15
Holdings
Holdings of
of Less
Less than
than 20%
20%
Exercise: Dossett Company had the following
transactions pertaining to stock investments.
Feb. 1 Purchased 800 shares of Hippo common stock
(2%) for $8,000 cash, plus brokerage fees of $200.
July 1 Received cash dividends of $1 per share on
Hippo common stock.
Sept. 1 Sold 300 shares of Hippo common stock for
$4,400, less brokerage fees of $100.
Instructions: Journalize the transactions.
Chapter
13-16
Holdings
Holdings of
of Less
Less than
than 20%
20%
Exercise: Feb. 1 Purchased 800 shares of Hippo
common stock (2%) for $8,000 cash, plus brokerage
fees of $200. July 1 Received cash dividends of $1
per share on Hippo common stock.
Feb. 1
July 1
Stock investments
Cash
Cash
Dividend revenue
8,200 *
800 **
8,200
800
Holdings
Holdings of
of Less
Less than
than 20%
20%
Exercise: Sept. 1 Sold 300 shares of Hippo common
stock for $4,400, less brokerage fees of $100.
Sept. 1
Cash
Stock investments
Gain on sale
4,300 *
3,075 **
1,225
Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
Equity Method
Record investment at cost and subsequently
adjust amount each period for
investors proportionate share of earnings
(losses) and
Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
Question
Under the equity method, the investor records
dividends received by crediting:
a. Dividend Revenue.
b. Investment Income.
c. Revenue from Investment.
d. Stock Investments.
Chapter
13-20
Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
Exercise: (Equity Method) On January 1, 2007,
Pennington Corporation purchased 30% of the common
shares of Edwards Company for $180,000. During the
year, Edwards earned net income of $80,000 and paid
dividends of $20,000.
Instructions
Prepare entries for Pennington to record purchase and
any additional entries related to this investment in
Edwards Company in 2007.
Chapter
13-21
Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
Exercise: Pennington purchased 30% of the common
shares of Edwards for $180,000. Edwards earned net
income of $80,000 and paid dividends of $20,000.
Stock investments
180,000
Cash
180,000
Stock investments
24,000
Investment revenue
Cash
6,000
Stock investments
Chapter
13-22
24,000
($80,000 x 30%)
($20,000 x 30%)
6,000
Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
Exercise: Pennington purchased 30% of the common
shares of Edwards for $180,000. Edwards earned net
income of $80,000 and paid dividends of $20,000.
After Pennington posts the transactions for the year, its
investment and revenue accounts will show the following.
Stock Investments
Debit
Credit
180,000
24,000
Investment Revenue
Debit
Credit
24,000
6,000
198,000
Chapter
13-23
Holdings
Holdings of
of More
More Than
Than 50%
50%
Controlling Interest - When one corporation acquires a
voting interest of more than 50 percent in another
corporation
Investor is referred to as the parent.
Investee is referred to as the subsidiary.
Investment in the subsidiary is reported on
statements.
Chapter
13-24
Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Categories of Securities
Debt and stock investments:
Trading securities
Available-for-sale securities
Held-to-maturity securities
Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Trading Securities
Held with intention of selling in a short period.
Chapter
13-26
Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Available-for-Sale Securities
Held with intent of selling sometime in the
future.
Classified as current assets or as long-term
assets, depending on intent of management.
Report at fair value, and report changes from
cost as a component of stockholders equity
section.
Chapter
13-27
Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Question
Marketable securities bought and held primarily for
sale in the near term are classified as:
a. available-for-sale securities.
b. held-to-maturity securities.
c. stock securities.
d. trading securities
Chapter
13-28
Trading
Trading Securities
Securities
Problem: Loxley Company has the following portfolio of
Cost
$ 225,000
133,000
180,000
Fair Value
$ 200,000
140,000
179,000
Trading
Trading Securities
Securities
Problem: Prepare the journal entries to record the sale,
Cost
$ 225,000
133,000
180,000
$ 538,000
Chapter
13-30
Fair Value
$ 200,000
140,000
179,000
$ 519,000
($19,000)
Trading
Trading Securities
Securities
Problem: On Oct. 10, the Fogelberg shares were sold at a
270,000
Trading securities
225,000
Gain on sale
45,000
178,500
178,500
Trading
Trading Securities
Securities
Problem: Portfolio at December 31, 2007
Trading Securities
Petra, Inc. preferred
Tim Weisberg Corp. common
Los Tigres common
Cost
133,000
180,000
178,500
491,500
Fair Value
$ 96,000
193,000
132,000
$ 421,000
Unrealized
Gain (Loss)
$ (37,000)
13,000
(46,500)
(70,500)
$
(19,000)
(51,500)
51,500
51,500
Available-for-Sale
Available-for-Sale Securities
Securities
Problem: How would the entries change if the securities
were classified as available-for-sale?
Chapter
13-33
Available-for-Sale
Available-for-Sale Securities
Securities
Question
An unrealized loss on available-for-sale securities is:
a. reported under Other Expenses and Losses in
the income statement.
b. closed-out at the end of the accounting period.
c. reported as a separate component of
stockholders' equity.
d. deducted from the cost of the investment.
Chapter
13-34
Balance
Balance Sheet
Sheet Presentation
Presentation
Short-Term Investments
Also called marketable securities, are securities
held by a company that are
(1) readily marketable and
(2) intended to be converted into cash within the
next year or operating cycle, whichever is
longer.
Investments that do not meet both criteria are
classified as long-term investments.
Chapter
13-35
Balance
Balance Sheet
Sheet Presentation
Presentation
Realized and Unrealized Gain or Loss
Nonoperating items related to investments
(reported in the income statement).
Illustration 13-10
Chapter
13-36
Balance
Balance Sheet
Sheet Presentation
Presentation
Realized and Unrealized Gain or Loss
Unrealized gain or loss on available-for-sale
securities are reported as a separate component of
stockholders equity.
Illustration 13-11
Chapter
13-37
Balance
Balance Sheet
Sheet Presentation
Presentation
Classified Balance Sheet
Chapter
13-38
Illustration 13-12
All
All About
About You
You
A Good Day to Start Saving
When is a good time to get serious about saving?
Some Facts:
Only about 48% of people in their twenties whose
employers have a 401(k) plan participate in that
plan.
Only 40% of working couples currently are covered
by pension plans, but 61% of workers expect to get
income from a company pension plan.
Chapter
13-39
All
All About
About You
You
A Good Day to Start Saving
When is a good time to get serious about saving?
More Facts:
More than half of workers age 55 and older have
less than $50,000 in retirement savings.
80% of individuals between the ages of 18 to 26
said that, if given $10,000, they would deposit the
money into a traditional bank savings account rather
than invest in the stock market.
Chapter
13-40
All
All About
About You
You
When you are 25 years old, if you start putting $300 per
month into an investment earning 8%, by the age of 65
you will have accumulated more than $1 million.
Chapter
13-41
All
All About
About You
You
What Do You Think?
Youve got $3,000 in credit card bills at an 18% interest
rate. Your employer has a 401(k) plan in which it will match
your contributions, up to 10% of your annual salary. Should
you pay off your credit card bills before you start putting
money into the 401(k)?
X
Chapter
13-42
Copyright
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information contained herein.
Chapter
13-43