Financial accounting IFRS 4 kieoso ch13 PPT

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Chapter Outline

Learning Objectives

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Learning Objective 1

Explain How to Account for Debt Investments

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Corporations purchase investments in debt or share securities for one of three reasons

Why Companies Invest

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Why Companies Invest

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Debt investments are investments in government and company bonds.

Entries are made to record

Accounting for Debt Investments

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At acquisition, investments are recorded at cost.

Cost includes all expenditures necessary to acquire these investments, such as the price paid plus brokerage fees (commissions), if any.

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Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000 bonds on January 1, 2020, at a cost of €50,000 The entry to record the investment is:

Jan 1 Debt Investments (50 × €1,000) 50,000

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Calculate and record interest revenue based upon the

• times the interest rate

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Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000 bonds on January 1, 2020, for €50,000 The bonds pay interest of

€4,000 annually on January 1 (€50,000 × 8%) If Kuhl NV’s fiscal year ends on December 31, it accrued the interest of

€4,000 earned since January 1

The entry to accrue interest on Doan SA bonds is:

Dec 31 Interest Receivable 4,000

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€4,000 annually on January 1 (€50,000 × 8%) The entry to record receipt of accrued interest on January 1 is:

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• Credit the investment account for the cost of the bonds.

and

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€4,000 annually on January 1 (€50,000 × 8%) Assume that Kuhl NV receives net proceeds of €54,000 on the sale of the Doan SA bonds on January 1, 2021, after receiving the interest due The entry to record the sale of the bonds is:

Gain on Sale of Debt Investments 4,000

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DO IT! 1: Debt Investments (1 of 4)

Waldo AG had the following transactions pertaining to debt investments

Jan 1, 2020 Purchased 30, €1,000 Hillary AG 10% bonds for €30,000 Interest is payable annually on January 1

Dec 31, 2020 Accrued interest on Hillary AG bonds in 2020

Jan 1, 2021 Received interest on Hillary AG bonds

Jan 1, 2021 Sold 15 Hillary AG bonds for €14,600

Journalize the transactions

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Jan 1, 2020 Purchased 30, €1,000 Hillary AG 10% bonds for €30,000 Interest is payable annually on January 1

Debt Investments 30,000

Cash 30,000

Interest Receivable 3,000

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Jan 1, 2021 Received interest on Hillary AG bonds

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Interest Receivable 1,500

Interest Revenue (€15,000 × 10%) 1,500

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Explain How to Account for Share Investments

LO 1

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Less than 20%

Insignificant influence on

Investee

Cost method with adjustment

for fair value

Between 20% and 50%

Significant influence on investee

Accounting for Share Investments

Investor’s Ownership Interest in Investee’s Ordinary Shares

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• Companies use the cost method

received.

paid plus any brokerage fees (commissions), if any.

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On July 1, 2020, Lee Ltd acquires 1,000 shares (10% ownership) of Beal Ltd Lee pays HK$405 per share The entry for the purchase is:

July 1 Share Investments (1,000 × HK$405) 405,000

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During the time Lee owns the shares, it makes entries for any cash dividends received If Lee receives a HK$20 per share dividend on December 31, the entry is:

Dec 31 Cash (1,000 × HK$20) 20,000

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Assume that Lee Corporation receives net proceeds of HK$395,000 on the sale of its Beal shares on February 10,

2021 Because the shares cost HK$405,000, Lee incurred a loss of HK$10,000 The entry to record the sale is:

Feb 10 Cash (1,000 × HK$395) 395,000

Loss on Sale of Share Investments 10,000

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• Companies use the equity method

the:

• investor’s share of the associate’s net income and

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Milar plc acquires 30% of the ordinary shares of Beck plc for ₤120,000 on January 1, 2020 The entry to record the transaction is:

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Assume that for 2020, Beck reports net income of ₤100,000 The entry to record the transaction is:

Dec 31 Share Investments (30% × ₤100,000) 30,000

Revenue from Share Investments 30,000

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Assume that for 2020, Beck pays a ₤40,000 cash dividend The entry to record the transaction is:

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Milar plc acquires 30% of the ordinary shares of Beck plc for ₤120,000 on January 1, 2017 For 2017, Beck reports net income of ₤100,000 and paid dividends of ₤40,000.

After Milar posts the transactions for the year, its investment and revenue accounts will show the following

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• Parent company - A company that owns more than 50% of the ordinary shares of another entity.

• Subsidiary (affiliated) company - entity whose shares the parent company owns.

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• Capital Cities/ABC, Inc.

• Disneyland, Disney World

• Mighty Ducks

• Anaheim Angels

• ESPN

Consolidated statements indicate the magnitude and scope of operations of the companies under common control

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Accounting Across the Organization

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DO IT! 2: Share Investments (1 of 5)

Rho Jean Ltd acquired 5% of the 400,000 ordinary shares of Stillwater Ltd at a total cost of NT$60 per share on May

18, 2020 On August 30, Stillwater declared and paid a NT$750,000 dividend On December 31, Stillwater reported net income of NT$2,440,000 for the year

Prepare all necessary journal entries for 2017

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Natal, Ltd obtained significant influence over North Sails by buying 40% of North Sails’ 60,000 outstanding ordinary shares at a cost of NT$120 per share on January 1, 2020 On April 15, North Sails declared and paid a cash dividend

of NT$450,000 On December 31, North Sails reported net income of NT$1,200,000 for the year

Prepare all necessary journal entries for 2020

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Dec 31:

Share Investments 480,000

(NT$1,200,000 × 40%)

Revenue from Share Investments 480,000

(To record 40% equity in North Sails’ net income)

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Indicate how debt and share investments are reported in financial statements

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Valuing and Reporting Investments

These guidelines apply to all debt securities and to those share investments in which the holdings are less than 20%

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Categories of Securities

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• Companies hold trading securities with the intention of selling them in a short period (generally less than a month)

• Trading means frequent buying and selling.

net income.

• Classified as current asset.

Trading Securities

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Investments of Pace SA are classified as trading securities on December 31, 2020.

Trading Securities Illustration

Trading Securities, December 31, 2020 Investments Cost Fair Value Unrealized Gain (Loss)

The adjusting entry to record unrealized gain on trading securities for Pace SA is:

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Investments of Pace SA are classified as trading securities on December 31, 2021.

Trading Securities Illustration

The adjusting entry to record unrealized loss on trading securities for Pace SA is:

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• These securities can be classified as current assets or as non-current assets , depending on the intent of management.

• Procedure for determining fair value and the unrealized gain or loss for these securities is the same as for trading securities.

of other comprehensive income.

Non-Trading Securities

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Ingrao AG has two securities that it classifies as non-trading.

Non-Trading Securities Illustration

The adjusting entry to record unrealized loss on non-trading securities for Pace SA is:

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Inagrao AG Comprehensive Income Statement For the Year Ended December 31, 2020

Other comprehensive income

The closing entry to transfer the Unrealized Gain or Loss—Equity to Accumulated Other Comprehensive Income is:

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Inagrao AG Statement of Financial Position (partial)

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Fair value of Ingrao’s non-trading securities on December 31, 2021, its second year of operations.

Non-Trading Securities Illustration

Non-Trading Securities, December 31, 2021

Investments Cost Fair Value Unrealized Gain (Loss)

It has a €9,537 credit balance from the previous year, so Ingrao must debit its Fair Value Adjustment—Non-Trading account by €11,174 (€9,537 + €1,637)

to achieve a €1,637 debit balance

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Inagrao AG Comprehensive Income Statement For the Year Ended December 31, 2021

Other comprehensive income

The closing entry to transfer the Unrealized Gain or Loss—Equity to Accumulated Other Comprehensive Income is:

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Inagrao AG Statement of Financial Position (partial)

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In the statement of financial position, a debit balance in Unrealized Gain or Loss—Equity results in a(n):

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In the statement of financial position, a debit balance in Unrealized Gain or Loss—Equity results in a(n):

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DO IT! 3a: Trading and Non-Trading Securities (1 of 3)

Some of Chengdu Ltd.’s investment securities are classified as trading securities and some are classified as

non-trading The cost and fair value of each category at December 31, 2020, are as follows

Cost Fair Value Unrealized Gain (Loss)

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At December 31, 2019, the Fair Value Adjustment—Trading account had a debit balance of ¥92,000, and the Fair Value Adjustment—Non-Trading account had a credit balance of ¥57,500 Prepare the required journal entries for each group of securities for December 31, 2020

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At December 31, 2019, the Fair Value Adjustment—Trading account had a debit balance of ¥92,000, and the Fair Value Adjustment—Non-Trading account had a credit balance of ¥57,500 Prepare the required journal entries for each group of securities for December 31, 2020

Non-trading securities:

Fair Value Adjustment—Non-Trading 83,500

Unrealized Gain or Loss—Equity 83,500 (¥57,500 + ¥26,000)

(To record unrealized gain on trading securities)

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Short-term investments , also called marketable securities, are securities held by a company that are

is longer.

Investments that do not meet both criteria are classified as long-term investments

Statement of Financial Position Presentation

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Pace SA Statement of Financial Position (partial)

Current assets

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In the income statement, companies report gains and losses in the non-operating activities section

Presentation of Realized and Unrealized Gain or Loss

Other Income and Expense

Interest Revenue Unrealized Gain—Income

Dividend Revenue Loss on Sale of Investments

Gain on Sale of Investments Unrealized Loss—Income

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Dawson plc Statement of Financial Position (partial)

Presentation of Realized and Unrealized Gain or Loss

In the statement of financial position, companies report in the equity section accumulated other comprehensive income or loss

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Statement of Financial Position December 31, 2020

Less: Accumulated depreciation—equipment 54,000 126,000

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Assets

Investments

Investments in held-for-collection debt securities, at amortized cost 20,000

Investment in shares of less than 20% owned companies, at fair value 30,000

Investment in share of 20—50% owned company, at equity 150,000 200,000

Current assets

Less: Allowance for doubtful accounts 4,000 80,000

Short-term investments, at fair value 147,000

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Equity and Liabilities

Accumulated other comprehensive income 10,000 €1,165,000

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Identify where each of the following items would be reported in the financial statements.

1. Interest earned on investments in bonds

2. Fair value adjustment—non-trading

3. Unrealized loss on non-trading securities

4. Gain on sale of share investments

5. Unrealized gain on trading securities

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DO IT! 3b: Financial Statement Presentation of Investments (1 of 2)

Use the following possible categories:

Statement of financial position:

Intangible assets EquityProperty, plant, and equipment Non-current liabilitiesInvestments Current liabilities

Current assets

Income statement:

Other income and expense

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DO IT! 3b: Financial Statement Presentation of Investments (2 of 2)

Item Financial Statement Category

1 Interest earned on investments in bonds Income statement Other income and expense

2 Fair value adjustment—non-trading Statement of financial position Investments

3 Unrealized loss on non-trading securities Comprehensive income statement Other comprehensive income

4 Gain on sale of share investments Income statement Other income and expense

5 Unrealized gain on trading securities Income statement Other income and expense

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Describe the form and content of consolidated financial statements

as well as how to prepare them

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• Companies prepare consolidated statements of financial position from the individual

statements of their affiliated companies.

transactions and are eliminated in consolidation.

Consolidated Statement of Financial Position

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Assume that on January 1, 2017, Powers plc pays ₤150,000 in cash for 100% of Serto plc’s ordinary shares Powers records the investment at cost.

The combined totals do not represent a consolidated statement of financial position, because there has been a double-counting of assets and equity in the amount of ₤150,000.

Consolidated Statement of Financial Position Example

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Statements of Financial Position

January 1, 2020

Assets

Powers plc

Serto plc

Combined Data

Consolidated Data

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Cost Equal to Book Value

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