Accounting principles 9e willey kieso chapter 16

Accounting for Debt InvestmentsAccounting for Stock Investments Accounting for Stock Investments Valuing and Reporting Investments Valuing and Reporting Investments Categories of secur

Chapter 16

Investments

Chapter

16-2

1 Discuss why corporations invest in debt and stock

securities.

2 Explain the accounting for debt investments.

3 Explain the accounting for stock investments.

4 Describe the use of consolidated financial statements.

5 Indicate how debt and stock investments are reported in

Accounting for Debt Investments

Accounting for

Stock Investments

Accounting for

Stock Investments

Valuing and Reporting 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

Long-Term Liabilities

Chapter

16-4

Corporations generally invest in debt or stock

securities for one of three reasons.

Why Corporations Invest

Why Corporations Invest

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

1. Corporation may have excess cash

2. To generate earnings from investment income

3. For strategic reasons Illustration 16-1

Temporary

investments

and the

operating cycle

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

Question

Why Corporations Invest

Why Corporations Invest

Chapter

16-6

Accounting for Debt Investments

Accounting for Debt Investments

SO 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

Accounting for Debt Investments

Accounting for Debt Investments

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

Illustration: Kuhl Corporation acquires 50 Doan Inc

8%, 10-year, $1,000 bonds on January 1, 2010, for

$54,000, including brokerage fees of $1,000 The entry

to record the investment is:

Debt investments 54,000

Accounting for Debt Investments

Accounting for Debt Investments

SO 2 Explain the accounting for debt investments.

Jan 1

Illustration: Kuhl Corporation acquires 50 Doan Inc

8%, 10-year, $1,000 bonds on January 1, 2010, for

$54,000, including brokerage fees of $1,000 The

bonds pay interest semiannually on July 1 and January 1 The entry for the receipt of interest on July 1 is:

Accounting for Debt Investments

Accounting for Debt Investments

Chapter

16-10

Illustration: If Kuhl Corporation’s fiscal year ends on December 31, prepare the entry to accrue interest since July 1

Accounting for Debt Investments

Accounting for Debt Investments

SO 2 Explain the accounting for debt investments.

Illustration: Assume that Kuhl corporation receives net proceeds of $58,000 on the sale of the Doan Inc bonds

on January 1, 2011, after receiving the interest due

Prepare the entry to record the sale of the bonds

Accounting for Debt Investments

Accounting for Debt Investments

Gain on sale of investments 4,000

Jan 1

Chapter

16-12

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

Accounting for Debt Investments

Accounting for Debt Investments

SO 2 Explain the accounting for debt investments.

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

Question

Accounting for Debt Investments

Accounting for Debt Investments

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

Accounting for Stock Investments

SO 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.

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%

Holdings of Less than 20%

Chapter

16-16

July 1

SO 3 Explain the accounting for stock investments.

Holdings of Less than 20%

Holdings of Less than 20%

Illustration: On July 1, 2010, Sanchez Corporation

acquires 1,000 shares (10% ownership) of Beal

Corporation common stock Sanchez pays $40 per

share plus brokerage fees of $500 The entry for the purchase is:

Stock investments 40,500

Dec 31

Holdings of Less than 20%

Holdings of Less than 20%

Illustration: During the time Sanchez owns the stock,

it makes entries for any cash dividends received If

Sanchez receives a $2 per share dividend on December

31, the entry is:

Chapter

16-18

Feb 10

SO 3 Explain the accounting for stock investments.

Holdings of Less than 20%

Holdings of Less than 20%

Illustration: Assume that Sanchez Corporation

receives net proceeds of $39,500 on the sale of its

Beal stock on February 10, 2011 Because the stock

cost $40,500, Sanchez incurred a loss of $1,000 The entry to record the sale is:

Loss on sale of stock 1,000

Holdings Between 20% and 50%

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.

Chapter

16-20

Under the equity method, the investor records

dividends received by crediting:

Holdings Between 20% and 50%

Holdings Between 20% and 50%

SO 3 Explain the accounting for stock investments.

Exercise: (Equity Method) On January 1, 2010,

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

Holdings Between 20% and 50%

Holdings Between 20% and 50%

Chapter

16-22

Illustration: Milar Corporation acquires 30% of the common shares of Beck Company for $120,000 on January 1, 2010 For

2010, Beck reports net income of $100,000 and paid dividends

of $40,000 Prepare the entries for these transactions.

Holdings Between 20% and 50%

Holdings Between 20% and 50%

After Milar posts the transactions for the year, its

investment and revenue accounts will show the following.

Debit Credit

Stock Investments

Debit Credit Revenue from Investments

Holdings Between 20% and 50%

Holdings Between 20% and 50%

30,000 12,000138,000

Illustration: Milar Corporation acquires 30% of the common shares of Beck Company for $120,000 on January 1, 2010 For

2010, Beck reports net income of $100,000 and paid dividends

of $40,000 Prepare the entries for these transactions.

Chapter

16-24

Holdings of More Than 50%

Holdings of More Than 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 the

parent’s books as a long-term investment

 Parent generally prepares consolidated financial

statements

SO 4 Describe the use of consolidated financial statements.

Chapter

16-26

Valuing and Reporting Investments

Valuing and Reporting Investments

Categories of Securities

Companies classify debt and stock investments

into three categories:

 Trading securities

 Available-for-sale securities

 Held-to-maturity securities

These guidelines apply to all debt securities and all stock

investments in which the holdings are less than 20%.

SO 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

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

Chapter

16-28

Valuing and Reporting Investments

Valuing and Reporting Investments

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

SO 5 Indicate how debt and stock investments

are reported in financial statements.

Marketable securities bought and held primarily for sale in the near term are classified as:

Valuing and Reporting Investments

Valuing and Reporting Investments

The adjusting entry for Pace Corporation is:

SO 5 Indicate how debt and stock investments

are reported in financial statements.

Dec 31 Market adjustment—trading 7,000

Unrealized gain—income 7,000

Illustration 16-7

Problem: How would the entries change if the securities

were classified as available-for-sale?

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

Available-for-Sale Securities

Chapter

16-32

Illustration: Assume that Ingrao Corporation has two

securities that it classifies as available-for-sale Illustration 16-8 provides information on their valuation.

The adjusting entry for Ingrao Corporation is:

SO 5 Indicate how debt and stock investments

are reported in financial statements.

Dec 31 Unrealized gain or loss—equity 9,537

Market adjustment—available-for-sale 9,537

Illustration 16-8

Available-for-Sale Securities

Available-for-Sale Securities

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

Chapter 16-34

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

Short-Term Investments

Balance Sheet Presentation

Balance Sheet Presentation

Investments that do not meet both criteria are

classified as long-term investments

Chapter

16-36

Nonoperating items related to investments

Presentation of Realized and Unrealized Gain

or Loss

Balance Sheet Presentation

Balance Sheet Presentation

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

Illustration 16-10

Realized and Unrealized Gain or Loss

Balance Sheet Presentation

Balance Sheet Presentation

Unrealized gain or loss on available-for-sale

securities are reported as a separate component of

stockholders’ equity Illustration 16-11

Chapter

16-38

Balance Sheet Presentation

Balance Sheet Presentation

SO 6 Distinguish between short-term and long-term investments.Classified Balance Sheet (partial)

Illustration 16-12

“Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted

in Section 117 of the 1976 United States Copyright Act

without the express written permission of the copyright owner

is unlawful Request for further information should be

addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher

assumes no responsibility for errors, omissions, or damages,

caused by the use of these programs or from the use of the information contained herein.”

Copyright

Copyright