Professional Documents
Culture Documents
Study Objectives
Objectives
Reporting and 3.
4.
Explain the accounting for stock investments.
Describe the purpose and usefulness of consolidated
Analyzing Investments 5.
financial statements.
Indicate how debt and stock investments are valued and
reported in financial statements.
6. Distinguish between short-term and long-term investments.
Why
Why Corporations
Corporations Invest
Invest Why
Why Corporations
Corporations Invest
Invest Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Excel
Accounting
Accounting for
for Debt
Debt Instruments
Instruments Accounting
Accounting for
for Debt
Debt Instruments
Instruments Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Sale of Bonds Illustration: Kuhl Corporation acquires 50 Doan Inc. Illustration: Kuhl Corporation acquires 50 Doan Inc.
12%, 10-year, $1,000 bonds on January 1, 2010, for 12%, 10-year, $1,000 bonds on January 1, 2010, for
Credit the investment account for the cost of the $54,000, including brokerage fees of $1,000. The entry $54,000, including brokerage fees of $1,000. The
bonds and record as a gain or loss any difference to record the investment is: bonds pay interest semiannually on July 1 and January 1.
between the net proceeds from the sale (sales price The entry for the receipt of interest on July 1 is:
less brokerage fees) and the cost of the bonds. Jan. 1
July 1
Illustration: If Kuhl Corporation’s fiscal year ends on Illustration: Assume that Kuhl corporation receives net Question
December 31, prepare the entry to accrue interest since proceeds of $58,000 on the sale of the Doan Inc. bonds
An event related to an investment in debt securities
July 1. on January 1, 2011, after receiving the interest due. that does not require a journal entry is:
Prepare the entry to record the sale of the bonds.
Dec. 31 a. acquisition of the debt investment.
Accounting
Accounting for
for Debt
Debt Instruments
Instruments Accounting
Accounting for
for Stock
Stock Investments
Investments Holdings
Holdings of
of Less
Less than
than 20%
20%
Ownership
Ownership Percentages
Question Percentages
Companies use the cost method. Under the cost
When bonds are sold, the gain or loss on sale is the 0 --------------20%
--------------20% ------------ 50% -------------- 100% method, companies record the investment at cost,
difference between the: No significant Significant Control
influence influence usually exists and recognize revenue only when cash dividends are
a. sales price and the cost of the bonds. usually exists usually exists received.
b. net proceeds and the cost of the bonds. Investment Investment Investment valued on Cost includes all expenditures necessary to acquire
c. sales price and the market value of the bonds. valued using valued using parent’s books using Cost
Cost Equity Method or Equity Method these investments, such as the price paid plus any
d. net proceeds and the market value of the Method Method (investment eliminated in brokerage fees (commissions).
bonds. Consolidation)
Holdings
Holdings of
of Less
Less than
than 20%
20% Holdings
Holdings of
of Less
Less than
than 20%
20% Holdings
Holdings of
of Less
Less than
than 20%
20%
Illustration: On July 1, 2010, Sanchez Corporation Illustration: During the time Sanchez owns the stock, Illustration: Assume that Sanchez Corporation
acquires 1,000 shares (10% ownership) of Beal it makes entries for any cash dividends received. If receives net proceeds of $39,500 on the sale of its
Corporation common stock. Sanchez pays $40 per Sanchez receives a $2 per share dividend on December Beal stock on February 10, 2011. Because the stock
share plus brokerage fees of $500. The entry for the 31, the entry is: cost $40,500, Sanchez incurred a loss of $1,000. The
purchase is: entry to record the sale is:
Dec. 31
July 1 Feb. 10
Holdings
Holdings Between
Between 20%
20% and
and 50%
50% Holdings
Holdings of
of More
More Than
Than 50%
50% Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Illustration: Milar Corporation acquires 30% of the common
Controlling Interest - When one corporation acquires a Categories of Securities
shares of Beck Company for $120,000 on January 1, 2010. For
voting interest of more than 50 percent in another
2010, Beck reports net income of $100,000 and paid dividends Companies classify debt and stock investments
corporation
of $40,000. Prepare the entries for these transactions. into three categories:
¾ Investor is referred to as the parent.
After Milar posts the transactions for the year, its
¾ Trading securities
investment and revenue accounts will show the following. ¾ Investee is referred to as the subsidiary.
¾ Available-for-sale securities
Stock Investments Revenue from Investments ¾ Investment in the subsidiary is reported on the
Debit Credit Debit Credit parent’s books as a long-term investment. ¾ Held-to-maturity securities
120,000 30,000 ¾ Parent generally prepares consolidated financial
30,000 12,000 These guidelines apply to all debt securities and all stock
statements. investments in which the holdings are less than 20%.
138,000
Appendix Appendix Appendix SO 5 Indicate how debt and stock investments are valued and reported
reported in
D-22 SO 3 Explain the accounting for stock investments. D-23 SO 4 Describe the use of consolidated financial statements. D-24
financial statements.
Valuing
Valuing and
and Reporting
Reporting Investments
Investments Valuing
Valuing and
and Reporting
Reporting Investments
Investments Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Appendix SO 5 Indicate how debt and stock investments are valued and reported
reported in Appendix SO 5 Indicate how debt and stock investments are valued and reported
reported in Appendix SO 5 Indicate how debt and stock investments are valued and reported
reported in
D-25
financial statements. D-26
financial statements. D-27
financial statements.
Trading
Trading Securities
Securities Available-for-Sale
Available-for-Sale Securities
Securities Available-for-Sale
Available-for-Sale Securities
Securities
Illustration: Investment of Pace classified as trading Problem: How would the entries change if the securities Illustration: Assume that Ingrao Corporation has two
securities on December 31, 2010. were classified as available-for-sale? securities that it classifies as available-for-sale. Illustration
Illustration D-6
16-8 provides information on their valuation.
Illustration D-7
Appendix SO 5 Indicate how debt and stock investments are valued and reported
reported in Appendix SO 5 Indicate how debt and stock investments are valued and reported
reported in Appendix SO 5 Indicate how debt and stock investments are valued and reported
reported in
D-28
financial statements. D-29
financial statements. D-30
financial statements.
Available-for-Sale
Available-for-Sale Securities
Securities Balance
Balance Sheet
Sheet Presentation
Presentation Presentation
Presentation of
of Realized
Realized and
and Unrealized
Unrealized Gain
Gain or
or Loss
Loss
Question Short-
Short-Term Investments Nonoperating items related to investments
An unrealized loss on available-for-sale securities is: Also called marketable securities, are securities Illustration D-10
a. reported under Other Expenses and Losses in held by a company that are
the income statement.
(1) readily marketable and
b. closed-out at the end of the accounting period.
(2) intended to be converted into cash within the
c. reported as a separate component of next year or operating cycle, whichever is
stockholders' equity.
longer.
d. deducted from the cost of the investment.
Investments that do not meet both criteria are
classified as long-term investments.
Appendix SO 5 Indicate how debt and stock investments are valued and reported
reported in Appendix Appendix
D-31
financial statements. D-32 SO 6 Distinguish between short-term and long-term investments. D-33 SO 6 Distinguish between short-term and long-term investments.
Presentation
Presentation of
of Realized
Realized and
and Unrealized
Unrealized Gain
Gain or
or Loss
Loss Statement
Statement of
of Cash
Cash Flows
Flows Presentation
Presentation Copyright
Copyright
Realized and Unrealized Gain or Loss Illustration D-12 “Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
Unrealized gain or loss on available-for-sale
in Section 117 of the 1976 United States Copyright Act without
securities are reported as a separate component of the express written permission of the copyright owner is
stockholders’ equity. unlawful. Request for further information should be addressed
Illustration D-11
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.”