Accounting principles 8th weygars kieso kimmel chapter 16

Accounting for Debt Investments Accounting for Stock Investments Accounting for Stock Investments Valuing and Reporting Investments Valuing and Reporting Investments Categories of secu

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Chapter 16-1

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Chapter

16-3

securities

statements

reported in financial statements

investments

Study Objectives

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Accounting for

Debt Investments

Accounting for

Stock Investments

Accounting for

Stock Investments

Valuing and Reporting Investments

Categories of securities

Balance sheet presentation Realized and unrealized gain

or loss Classified balance sheet

Holdings of less than 20%

Holdings between 20%

and 50%

Holdings of more than 50%

Recording acquisition of bonds

Recording bond interest

Recording sale

of bonds

Long-Term Liabilities

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Chapter

16-5

Corporations generally invest in debt or stock

securities for one of three reasons.

Why Corporations Invest

LO 1 Discuss why corporations invest in debt and stock securities.

Temporary

investments

and the

operating cycle

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Pension funds and banks regularly invest in debt and stock securities to:

Question

Why Corporations Invest

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Chapter

16-7

Accounting for Debt Instruments

LO 2 Explain the accounting for debt investments.

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

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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

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Chapter

16-9

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.

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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

Cash 60,900

* ($60,000 + $900 = $60,900)

*

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Chapter

16-11

less $500 brokerage fees.

July 1

Interest revenue2,400

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Exercise: (b) Prepare the adjusting entry for the

accrual of interest at December 31

Dec 31

Interest revenue1,200

* ($30,000 x 8% x ½ = $1,200)

*

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Chapter

16-13

An event related to an investment in debt securities that does not require a journal entry is:

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When bonds are sold, the gain or loss on sale is the

difference between the:

bonds

Question

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Significant influence usually exists

Control usually exists

Investment valued using

Cost Method

Investment valued using

Equity Method

Investment valued on parent’s books using Cost

Method or Equity Method

(investment eliminated in

Consolidation)

Ownership Percentages

Accounting for Stock Investments

LO 3 Explain the accounting for stock investments.

The accounting depends on the extent of the investor’s influence

over the operating and financial affairs of the issuing corporation.

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Companies use the cost method Under the cost

method, companies record the investment at cost,

and recognize revenue only when cash dividends are

received

Cost includes all expenditures necessary to acquire

these investments, such as the price paid plus any

brokerage fees (commissions)

Holdings of Less than 20%

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Chapter

16-17

transactions pertaining to stock investments

(2%) for $8,000 cash, plus brokerage fees of $200

Hippo common stock

$4,400, less brokerage fees of $100

Instructions

Journalize the transactions

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Exercise: Feb 1 Purchased 800 shares of Hippo

common stock (2%) for $8,000 cash, plus brokerage

per share on Hippo common stock

Feb 1

Cash8,200

* ($8,000 + $200 = $8,200)

Dividend revenue800

*

**

July 1

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Chapter

16-19

stock for $4,400, less brokerage fees of $100

Sept 1

Cash3,075

* ($4,400 - $100 = $4,300)

** ($8,200 x 3/8 = $3,075)

*

Gain on sale1,225

**

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Holdings Between 20% and 50%

Equity Method

Record the investment at cost and subsequently

adjust the amount each period for

 the investor’s proportionate share of the

earnings (losses) and

 dividends received by the investor.

If investor’s share of investee’s losses exceeds the carrying

amount of the investment, the investor ordinarily should

discontinue applying the equity method.

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Chapter

16-21

Under the equity method, the investor records

dividends received by crediting:

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Exercise: (Equity Method) On January 1, 2008,

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 the entries for Pennington to record the

purchase and any additional entries related to this

investment in Edwards Company in 2008

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Chapter

16-23

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.

($20,000 x 30%) ($80,000 x 30%)

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After Pennington posts the transactions for the year, its

investment and revenue accounts will show the following.

Debit Credit

Stock Investments

Debit Credit Investment Revenue

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.

24,000 6,000198,000

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Chapter

16-25

Holdings of More Than 50%

voting interest of more than 50 percent in another

corporation

parent’s books as a long-term investment

LO 4 Describe the use of consolidated financial statements.

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Categories of Securities

Companies classify debt and stock investments

into three categories:

These guidelines apply to all debt securities and all stock

investments in which the holdings are less than 20%.

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Chapter

16-27

Trading Securities

Companies hold trading securities with the intention of selling them in a short period

Companies report trading securities at fair value, and report changes from cost as part of net income

LO 5 Indicate how debt and stock investments

are reported in financial statements.

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Available-for-Sale Securities

Companies hold available-for-sale securities with the intent of selling these investments

sometime in the future

These securities can be classified as current assets or as long-term 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

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Problem: Loxley Company has the following portfolio of

securities at September 30, 2008, its last reporting date.

Trading Securities Cost Fair Value Dan Fogelberg, Inc common (5,000 shares) $ 225,000 $ 200,000 Petra, Inc preferred (3,500 shares) 133,000 140,000 Tim Weisberg Corp common (1,000 shares) 180,000 179,000

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

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Chapter

16-31

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

Trading Securities Cost Fair Value Dan Fogelberg, Inc common (5,000 shares) $ 225,000 $ 200,000 Petra, Inc preferred (3,500 shares) 133,000 140,000 Tim Weisberg Corp common (1,000 shares) 180,000 179,000

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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.

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$ $ 421,000 (70,500) Prior market adjustment balance (19,000) Market fair value adjustment $ (51,500)

Unrealized loss - Income 51,500

December 31, 2008:

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Problem: How would the entries change if the securities

The entries would be the same

The entries would be the same except that the

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

Available-for-Sale Securities

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Chapter

16-35

An unrealized loss on available-for-sale securities is:

the income statement

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Also called marketable securities , are securities

held by a company that are

next year or operating cycle, whichever is longer

Short-Term Investments

Balance Sheet Presentation

Investments that do not meet both criteria are

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Chapter

16-37

Nonoperating items related to investments

Presentation of Realized and Unrealized Gain or Loss

LO 6 Distinguish between short-term and long-term investments.

Illustration 16-10

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Realized and Unrealized Gain or Loss

Unrealized gain or loss on available-for-sale

securities are reported as a separate component of

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Chapter

16-39

LO 6 Distinguish between short-term and long-term investments.

Illustration 16-12

Classified Balance Sheet (partial)

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