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In this chapter, the learning objectives are: Explain how to account for debt investments, explain how to account for stock investments, discuss how debt and stock investments are reported in financial statements.
Chapter 16-1 CHAPTER CHAPTER 16 16 INVESTMENTS Accounting Principles, Eighth Edition Chapter 16-2 Study Objectives Study Objectives Discuss why corporations invest in debt and stock securities Explain the accounting for debt investments Explain the accounting for stock investments Describe the use of consolidated financial statements Indicate how debt and stock investments are reported in financial statements Distinguish between shortterm and longterm investments Chapter 16-3 LongTerm Liabilities LongTerm Liabilities Why Why Corporations Corporations Invest Invest Cash management Investment income Strategic reasons Accounting Accountingfor for Debt Debt Investments Investments Recording acquisition of bonds Accounting Accountingfor for Stock Stock Investments Investments Valuing Valuingand and Reporting Reporting Investments Investments Holdings of less than 20% Categories of securities Recording bond interest Holdings between 20% and 50% Balance sheet presentation Recording sale of bonds Holdings of more than 50% Realized and unrealized gain or loss Classified balance sheet Chapter 16-4 Why Corporations Invest Why Corporations Invest Corporations generally invest in debt or stock securities for one of three reasons Corporation may have excess cash To generate earnings from investment income For strategic reasons Illustration 161 Temporary investments and the operating cycle Chapter 16-5 LO 1 Discuss why corporations invest in debt and stock securities Why Corporations Invest Why Corporations 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 16-6 LO 1 Discuss why corporations invest in debt and stock securities Accounting for Debt Instruments Accounting for Debt 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 Recording Bond Interest Calculate and record interest revenue based upon the carrying value of the bond times the interest rate times the portion of the year the bond is outstanding Chapter 16-7 LO 2 Explain the accounting for debt investments Accounting for Debt Instruments Accounting for Debt Instruments 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 16-8 LO 2 Explain the accounting for debt investments Accounting for Debt Instruments Accounting for Debt 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 16-9 LO 2 Explain the accounting for debt investments Accounting for Debt Instruments Accounting for Debt 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 * ($60,000 + $900 = $60,900) Chapter 16-10 LO 2 Explain the accounting for debt investments Valuing and Reporting Investments Valuing and Reporting Investments Categories of Securities Companies classify debt and stock investments into three categories: Trading securities Availableforsale securities Heldtomaturity securities These guidelines apply to all debt securities and all stock investments in which the holdings are less than 20% Chapter 16-26 LO 5 Indicate how debt and stock investments are reported in financial statements Valuing and Reporting Investments Valuing and Reporting Investments Trading Securities Companies hold trading securities with the intention of selling them in a short period. Trading means frequent buying and selling Companies report trading securities at fair value, and report changes from cost as part of net income Chapter 16-27 LO 5 Indicate how debt and stock investments are reported in financial statements Valuing and Reporting Investments Valuing and Reporting Investments AvailableforSale Securities Companies hold availableforsale securities with the intent of selling these investments sometime in the future. These securities can be classified as current assets or as longterm assets, depending on the intent of management Companies report securities at fair value, and report changes from cost as a component of the stockholders’ equity section Chapter 16-28 LO 5 Indicate how debt and stock investments are reported in financial statements Valuing and Reporting Investments Valuing and Reporting Investments Question Marketable securities bought and held primarily for sale in the near term are classified as: a availableforsale securities. b heldtomaturity securities. c stock securities. d trading securities Chapter 16-29 LO 5 Indicate how debt and stock investments are reported in financial statements Trading Securities Trading Securities Problem: Loxley Company has the following portfolio of securities at September 30, 2008, its last reporting date T r ad ing S e c ur it ie s Dan Fog e lb e r g , I nc c om m on ( ,0 0 s har e s ) Pe t r a, I nc p r e f e r r e d ( ,5 0 s har e s ) T im W e is b e r g Cor p c om m on ( 1,0 0 s har e s ) Cos t $ 2 ,0 0 13 ,0 0 18 ,0 0 Fair Value $ 2 0 ,0 0 14 ,0 0 17 ,0 0 On Oct. 10, 2008, the Fogelberg shares were sold at a price of $54 per share. In addition, 3,000 shares of Los Tigres common stock were acquired at $59.50 per share on Nov. 2, 2008. The Dec. 31, 2008, fair values were: Petra $96,000, Los Tigres $132,000, and the Weisberg common $193,000. Chapter 16-30 LO 5 Indicate how debt and stock investments are reported in financial statements Trading Securities Trading Securities Problem: Prepare the journal entries to record the sale, purchase, and adjusting entries related to the trading securities in the last quarter of 2008 Portfolio at September 30, 2008 T r ad ing S e c ur it ie s Dan Fog e lb e r g , I nc c om m on ( ,0 0 s har e s ) Pe t r a, I nc p r e f e r r e d ( ,5 0 s har e s ) T im W e is b e r g Cor p c om m on ( 1,0 0 s har e s ) Market Adjustment – Trading (account balance) Chapter 16-31 Cos t $ 2 ,0 0 13 ,0 0 18 ,0 0 $ 5 ,0 0 Fair Value $ 2 0 ,0 0 14 ,0 0 17 ,0 0 $ 5 19 ,0 0 ($19,000) LO 5 Indicate how debt and stock investments are reported in financial statements Trading Securities Trading Securities Problem: On Oct. 10, the Fogelberg shares were sold at a $54 per share. In addition, 3,000 shares of Los Tigres common stock were acquired at $59.50 per share on Nov. 2 October 10, 2008 (Fogelberg): Cash (5,000 x $54) 270,000 Trading securities 225,000 Gain on sale 45,000 November 2, 2008 (Los Tigres): Trading securities (3,000 x $59.50) Cash Chapter 16-32 178,500 178,500 LO 5 Indicate how debt and stock investments are reported in financial statements Trading Securities Trading Securities Problem: Portfolio at December 31, 2008 Problem: T r ad ing S e c ur it ie s Pe t r a, I nc p r e f e r r e d T im W e is b e r g Cor p c om m on Los T ig r e s c om m on Cos t $ 13 ,0 0 18 ,0 0 17 ,5 0 $ 4 1,5 0 Pr ior m ar k e t ad j us t m e nt b alanc e Mar k e t f air value ad j us t m e nt Fair Value $ 9 ,0 0 19 ,0 0 13 ,0 0 $ 4 1,0 0 Unr e aliz e d Gain ( Los s ) $ ( ,0 0 ) 13 ,0 0 ( ,5 0 ) ( ,5 0 ) ( 19 ,0 0 ) $ ( 1,5 0 ) December 31, 2008: Unrealized loss Income 51,500 Market adjustment Trading Chapter 16-33 51,500 LO 5 Indicate how debt and stock investments are reported in financial statements AvailableforSale Securities AvailableforSale Securities Problem: How would the entries change if the securities were classified as availableforsale? The entries would be the same except that the The entries would be the same Unrealized Gain or Loss—Equity account is used instead of Unrealized Gain or Loss—Income. The unrealized loss would be deducted from the stockholders’ equity section rather than charged to the income statement Chapter 16-34 LO 5 Indicate how debt and stock investments are reported in financial statements AvailableforSale Securities AvailableforSale Securities Question An unrealized loss on availableforsale securities is: a reported under Other Expenses and Losses in the income statement. b closedout 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 16-35 LO 5 Indicate how debt and stock investments are reported in financial statements Balance Sheet Presentation Balance Sheet Presentation ShortTerm 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 16-36 LO 6 Distinguish between shortterm and longterm investments Balance Sheet Presentation Balance Sheet Presentation Presentation of Realized and Unrealized Gain or Loss Nonoperating items related to investments Chapter 16-37 Illustration 1610 LO 6 Distinguish between shortterm and longterm investments Balance Sheet Presentation Balance Sheet Presentation Realized and Unrealized Gain or Loss Unrealized gain or loss on availableforsale securities are reported as a separate component of stockholders’ equity Illustration 1611 Chapter 16-38 LO 6 Distinguish between shortterm and longterm investments Balance Sheet Presentation Balance Sheet Presentation Classified Balance Sheet (partial) Chapter 16-39 Illustration 1612 LO 6 Distinguish between shortterm and longterm investments Copyright Copyright “Copyright © 2008 John Wiley & Sons, Inc. 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Debt Debt Investments Investments Recording acquisition of bonds Accounting Accountingfor for Stock Stock Investments Investments Valuing Valuingand and Reporting Reporting Investments Investments... net proceeds and the market value of the bonds Chapter 16-14 LO 2 Explain the? ?accounting? ?for debt? ?investments Accounting? ?for Stock? ?Investments Accounting? ?for Stock? ?Investments Ownership Percentages 0 20% 50% 100%.. .CHAPTER? ? CHAPTER? ?16 16 INVESTMENTS Accounting? ?Principles, Eighth Edition Chapter 16-2 Study Objectives Study Objectives Discuss why corporations invest in debt and stock securities