Investments- Why Corporations Invest
Content
Chapter
13
Investments
Financial Accounting, Sixth Edition
Chapter 13-1
Study Objectives
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 financial statements. 6. Distinguish between short-term and long-term investments.
Chapter 13-2
Investments
Why Corporations Invest Cash management Investment income Strategic reasons
Accounting for Debt Investments Recording acquisition of bonds Recording bond interest Recording sale of bonds
Accounting for Stock Investments Holdings of less than 20% Holdings between 20% and 50% Holdings of more than 50%
Valuing and Reporting Investments Categories of securities Balance sheet presentation Realized and unrealized gain or loss Classified balance sheet
Chapter 13-3
Why Corporations Invest
Corporations generally invest in debt or stock securities for one of three reasons.
1.
Corporation may have excess cash.
2. To generate earnings from investment income. 3. For strategic reasons.
Temporary investments and the operating cycle
Illustration 13-1
Chapter 13-4
SO 1 Discuss why corporations invest in debt and stock securities.
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 13-5
SO 1 Discuss why corporations invest in debt and stock securities.
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 face value of the bond times the interest rate times the portion of the year the bond is outstanding.
Chapter 13-6
SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Recording 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 13-7
SO 2 Explain the accounting for debt investments.
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 13-8
SO 2 Explain the accounting for debt investments.
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 13-9
SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Exercise: July 1 Received semiannual interest on Hollis Co. bonds. Sold 30 Hollis Co. bonds for $34,000 less $500 brokerage fees. July 1 Cash Interest revenue Cash Debt investments Gain on sale * ($60,000 x 8% x ½ = $2,400) ** ($34,000 - $500 = $33,500)
Chapter 13-10
2,400 * 2,400 33,500 ** 30,450 *** 3,050 *** ($60,900 x ½ = $30,450)
SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Exercise: (b) Prepare the adjusting entry for the accrual of interest at December 31. Dec 31 Interest receivable Interest revenue 1,200 * 1,200
* ($30,000 x 8% x ½ = $1,200)
Chapter 13-11
SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Question
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 investment. c. a change in the name of the firm issuing the debt securities. d. sale of the debt investment.
Chapter 13-12
SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Question
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.
Chapter 13-13
SO 2 Explain the accounting for debt investments.
Accounting for Stock Investments
Ownership Ownership Percentages
--------------20% 0 --------------20% ------------ 50% -------------- 100%
No significant influence usually exists Investment valued using Cost Method Significant influence usually exists Investment valued using Equity Method Control usually exists Investment valued on parent·s books using Cost Method or Equity Method (investment eliminated in Consolidation)
The accounting depends on the extent of the investor·s influence over the operating and financial affairs of the issuing corporation.
Chapter 13-14
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Cost Method
Cost includes all expenditures necessary to acquire investment, such as price paid plus brokerage fees (commissions). Revenue recognized only when cash dividends are received.
Chapter 13-15
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Exercise: Dossett Company had the following transactions pertaining to stock investments. Feb. 1 Purchased 800 shares of Hippo common stock (2%) for $8,000 cash, plus brokerage fees of $200. July 1 Received cash dividends of $1 per share on Hippo common stock. Sept. 1 Sold 300 shares of Hippo common stock for $4,400, less brokerage fees of $100. Instructions: Journalize the transactions.
Chapter 13-16
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Exercise: Feb. 1 Purchased 800 shares of Hippo common stock (2%) for $8,000 cash, plus brokerage fees of $200. July 1 Received cash dividends of $1 per share on Hippo common stock. Feb. 1 Stock investments Cash Cash Dividend revenue 8,200 * 8,200 800 ** 800
July 1
* ($8,000 + $200 = $8,200) ** (800 x $1 = $800)
Chapter 13-17
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Exercise: Sept. 1 Sold 300 shares of Hippo common stock for $4,400, less brokerage fees of $100. Sept. 1 Cash Stock investments Gain on sale 4,300 * 3,075 ** 1,225
* ($4,400 - $100 = $4,300) ** ($8,200 x 3/8 = $3,075)
Chapter 13-18
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Equity Method
Record investment at cost and subsequently adjust amount each period for
investor·s proportionate share of earnings
(losses) and
dividends received by investor.
If investor·s share of investee·s losses exceeds carrying amount of investment, investor ordinarily should discontinue applying the equity method.
Chapter 13-19
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Question
Under the equity method, the investor records dividends received by crediting: a. Dividend Revenue. b. Investment Income. c. Revenue from Investment. d. Stock Investments.
Chapter 13-20
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Exercise: (Equity Method) On January 1, 2007, 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 entries for Pennington to record purchase and any additional entries related to this investment in Edwards Company in 2007.
Chapter 13-21
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
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.
Stock investments Cash Stock investments Investment revenue Cash Stock investments
Chapter 13-22
180,000 180,000 24,000
($80,000 x 30%)
24,000 6,000
($20,000 x 30%)
6,000
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
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.
After Pennington posts the transactions for the year, its investment and revenue accounts will show the following.
Stock Investments Debit 180,000 24,000 198,000
Chapter 13-23
Investment Revenue Debit Credit 24,000
Credit 6,000
SO 3 Explain the accounting for stock investments.
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 parent·s books as a long-term investment. Parent generally prepares consolidated financial statements.
Chapter 13-24
SO 4 Describe the use of consolidated financial statements.
Valuing and Reporting Investments
Categories of Securities
Debt and stock investments:
Trading securities Available-for-sale securities Held-to-maturity securities
Applies to all debt securities and all stock investments in which the holdings are less than 20%.
Chapter 13-25
SO 5 Indicate how debt and stock investments are reported in financial statements.
Valuing and Reporting Investments
Trading Securities
Held with intention of selling in a short period. Trading means frequent buying and selling. Report at fair value, and report changes from cost as part of net income.
Chapter 13-26
SO 5 Indicate how debt and stock investments are reported in financial statements.
Valuing and Reporting Investments
Available-for-Sale Securities
Held with intent of selling sometime in the future. Classified as current assets or as long-term assets, depending on intent of management. Report at fair value, and report changes from cost as a component of stockholders· equity section.
Chapter 13-27
SO 5 Indicate how debt and stock investments are reported in financial statements.
Valuing and Reporting Investments
Question
Marketable securities bought and held primarily for sale in the near term are classified as: a. available-for-sale securities. b. held-to-maturity securities. c. stock securities. d. trading securities
Chapter 13-28
SO 5 Indicate how debt and stock investments are reported in financial statements.
Trading Securities
Problem: Loxley Company has the following portfolio of
securities at September 30, 2007, its last reporting date.
rading Securities an ogelberg, nc. common ,000 shares Petra, nc. preferred 3, 00 shares im Weisberg Corp. common ,000 shares Cost 22 ,000 33,000 0,000 air Value 200,000 0,000 7 ,000
On Oct. 0, 2007, the ogelberg shares were sold at a price per share. n addition, 3,000 shares of Los igres of common stock were acquired at . 0 per share on Nov. 2, 2007. he ec. 3 , 2007, fair values were: Petra 6,000, Los igres 32,000, and the Weisberg common 3,000.
Chapter 13-29
SO 5 Indicate how debt and stock investments are reported in financial statements.
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 2007. Portfolio at September 30, 2007
Trading ecurities an Fogel erg, nc. co on ,000 shares Petra, nc. preferred , 00 shares eis erg Corp. co on ,000 shares Ti Cost 22 ,000 ,000 0,000 ,000 Fair alue 200,000 0,000 7 ,000 ,000
Market Adjust ent ² Trading account alance
,000
Chapter 13-30
SO 5 Indicate how debt and stock investments are reported in financial statements.
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, 2007 (Fogelberg): Cash (5,000 x $54) Trading securities Gain on sale November 2, 2007 (Los Tigres): Trading securities (3,000 x $59.50) Cash
Chapter 13-31
270,000 225,000 45,000
178,500 178,500
SO 5 Indicate how debt and stock investments are reported in financial statements.
Trading Securities
Problem: Portfolio at December 31, 2007
Trading Securities Petra, Inc. preferred Tim Weisberg Corp. common Los Tigres common $ Cost 133,000 180,000 178,500 491,500 Fair Value $ 96,000 193,000 132,000 $ 421,000 Unrealized Gain (Loss) $ (37,000) 13,000 (46,500) (70,500) $ (19,000) (51,500)
$ Prior market adjustment balance Market fair value adjustment
December 31, 2007: Unrealized loss - Income Market adjustment - Trading
Chapter 13-32
51,500 51,500
SO 5 Indicate how debt and stock investments are reported in financial statements.
Available-forAvailable-for-Sale Securities
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 Loss³Equity account is used instead of Unrealized Gain or Loss³Income. Unrealized loss would be deducted from stockholders· equity rather than charged to the income statement.
Chapter 13-33
SO 5 Indicate how debt and stock investments are reported in financial statements.
Available-for-Sale Securities Available-for-
Question
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 stockholders' equity. d. deducted from the cost of the investment.
Chapter 13-34
SO 5 Indicate how debt and stock investments are reported in financial statements.
Balance Sheet Presentation
Short-Term Investments ShortAlso 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 13-35
SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Realized and Unrealized Gain or Loss
Nonoperating items related to investments (reported in the income statement).
Illustration 13-10
Chapter 13-36
SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Realized and Unrealized Gain or Loss
Unrealized gain or loss on available-for-sale securities are reported as a separate component of stockholders· equity.
Illustration 13-11
Chapter 13-37
SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Classified Balance Sheet
Illustration 13-12
Chapter 13-38
SO 6 Distinguish between short-term and long-term investments.
All About You
A Good Day to Start Saving
When is a good time to get serious about saving? Some Facts: Only about 48% of people in their twenties whose employers have a 401(k) plan participate in that plan. Only 40% of working couples currently are covered by pension plans, but 61% of workers expect to get income from a company pension plan.
Chapter 13-39
All About You
A Good Day to Start Saving
When is a good time to get serious about saving? More Facts: More than half of workers age 55 and older have less than $50,000 in retirement savings. 80% of individuals between the ages of 18 to 26 said that, if given $10,000, they would deposit the money into a traditional bank savings account rather than invest in the stock market.
Chapter 13-40
All About You
When you are 25 years old, if you start putting $300 per month into an investment earning 8%, by the age of 65 you will have accumulated more than $1 million.
Chapter 13-41
All About You
What Do You Think?
You·ve got $3,000 in credit card bills at an 18% interest rate. Your employer has a 401(k) plan in which it will match your contributions, up to 10% of your annual salary. Should you pay off your credit card bills before you start putting money into the 401(k)?
X
Paying off debt, thus avoiding 18% interest payments, is essentially equivalent to earning 18% on investments. Reducing your debts reduces your financial vulnerability. Take part of the money you would have used to pay off your debt each month and instead put it into the 401(k).
Chapter 13-42
Copyright
´Copyright © 2008 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.µ
Chapter 13-43
13
Investments
Financial Accounting, Sixth Edition
Chapter 13-1
Study Objectives
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 financial statements. 6. Distinguish between short-term and long-term investments.
Chapter 13-2
Investments
Why Corporations Invest Cash management Investment income Strategic reasons
Accounting for Debt Investments Recording acquisition of bonds Recording bond interest Recording sale of bonds
Accounting for Stock Investments Holdings of less than 20% Holdings between 20% and 50% Holdings of more than 50%
Valuing and Reporting Investments Categories of securities Balance sheet presentation Realized and unrealized gain or loss Classified balance sheet
Chapter 13-3
Why Corporations Invest
Corporations generally invest in debt or stock securities for one of three reasons.
1.
Corporation may have excess cash.
2. To generate earnings from investment income. 3. For strategic reasons.
Temporary investments and the operating cycle
Illustration 13-1
Chapter 13-4
SO 1 Discuss why corporations invest in debt and stock securities.
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 13-5
SO 1 Discuss why corporations invest in debt and stock securities.
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 face value of the bond times the interest rate times the portion of the year the bond is outstanding.
Chapter 13-6
SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Recording 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 13-7
SO 2 Explain the accounting for debt investments.
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 13-8
SO 2 Explain the accounting for debt investments.
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 13-9
SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Exercise: July 1 Received semiannual interest on Hollis Co. bonds. Sold 30 Hollis Co. bonds for $34,000 less $500 brokerage fees. July 1 Cash Interest revenue Cash Debt investments Gain on sale * ($60,000 x 8% x ½ = $2,400) ** ($34,000 - $500 = $33,500)
Chapter 13-10
2,400 * 2,400 33,500 ** 30,450 *** 3,050 *** ($60,900 x ½ = $30,450)
SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Exercise: (b) Prepare the adjusting entry for the accrual of interest at December 31. Dec 31 Interest receivable Interest revenue 1,200 * 1,200
* ($30,000 x 8% x ½ = $1,200)
Chapter 13-11
SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Question
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 investment. c. a change in the name of the firm issuing the debt securities. d. sale of the debt investment.
Chapter 13-12
SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Question
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.
Chapter 13-13
SO 2 Explain the accounting for debt investments.
Accounting for Stock Investments
Ownership Ownership Percentages
--------------20% 0 --------------20% ------------ 50% -------------- 100%
No significant influence usually exists Investment valued using Cost Method Significant influence usually exists Investment valued using Equity Method Control usually exists Investment valued on parent·s books using Cost Method or Equity Method (investment eliminated in Consolidation)
The accounting depends on the extent of the investor·s influence over the operating and financial affairs of the issuing corporation.
Chapter 13-14
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Cost Method
Cost includes all expenditures necessary to acquire investment, such as price paid plus brokerage fees (commissions). Revenue recognized only when cash dividends are received.
Chapter 13-15
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Exercise: Dossett Company had the following transactions pertaining to stock investments. Feb. 1 Purchased 800 shares of Hippo common stock (2%) for $8,000 cash, plus brokerage fees of $200. July 1 Received cash dividends of $1 per share on Hippo common stock. Sept. 1 Sold 300 shares of Hippo common stock for $4,400, less brokerage fees of $100. Instructions: Journalize the transactions.
Chapter 13-16
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Exercise: Feb. 1 Purchased 800 shares of Hippo common stock (2%) for $8,000 cash, plus brokerage fees of $200. July 1 Received cash dividends of $1 per share on Hippo common stock. Feb. 1 Stock investments Cash Cash Dividend revenue 8,200 * 8,200 800 ** 800
July 1
* ($8,000 + $200 = $8,200) ** (800 x $1 = $800)
Chapter 13-17
SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Exercise: Sept. 1 Sold 300 shares of Hippo common stock for $4,400, less brokerage fees of $100. Sept. 1 Cash Stock investments Gain on sale 4,300 * 3,075 ** 1,225
* ($4,400 - $100 = $4,300) ** ($8,200 x 3/8 = $3,075)
Chapter 13-18
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Equity Method
Record investment at cost and subsequently adjust amount each period for
investor·s proportionate share of earnings
(losses) and
dividends received by investor.
If investor·s share of investee·s losses exceeds carrying amount of investment, investor ordinarily should discontinue applying the equity method.
Chapter 13-19
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Question
Under the equity method, the investor records dividends received by crediting: a. Dividend Revenue. b. Investment Income. c. Revenue from Investment. d. Stock Investments.
Chapter 13-20
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Exercise: (Equity Method) On January 1, 2007, 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 entries for Pennington to record purchase and any additional entries related to this investment in Edwards Company in 2007.
Chapter 13-21
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
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.
Stock investments Cash Stock investments Investment revenue Cash Stock investments
Chapter 13-22
180,000 180,000 24,000
($80,000 x 30%)
24,000 6,000
($20,000 x 30%)
6,000
SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
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.
After Pennington posts the transactions for the year, its investment and revenue accounts will show the following.
Stock Investments Debit 180,000 24,000 198,000
Chapter 13-23
Investment Revenue Debit Credit 24,000
Credit 6,000
SO 3 Explain the accounting for stock investments.
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 parent·s books as a long-term investment. Parent generally prepares consolidated financial statements.
Chapter 13-24
SO 4 Describe the use of consolidated financial statements.
Valuing and Reporting Investments
Categories of Securities
Debt and stock investments:
Trading securities Available-for-sale securities Held-to-maturity securities
Applies to all debt securities and all stock investments in which the holdings are less than 20%.
Chapter 13-25
SO 5 Indicate how debt and stock investments are reported in financial statements.
Valuing and Reporting Investments
Trading Securities
Held with intention of selling in a short period. Trading means frequent buying and selling. Report at fair value, and report changes from cost as part of net income.
Chapter 13-26
SO 5 Indicate how debt and stock investments are reported in financial statements.
Valuing and Reporting Investments
Available-for-Sale Securities
Held with intent of selling sometime in the future. Classified as current assets or as long-term assets, depending on intent of management. Report at fair value, and report changes from cost as a component of stockholders· equity section.
Chapter 13-27
SO 5 Indicate how debt and stock investments are reported in financial statements.
Valuing and Reporting Investments
Question
Marketable securities bought and held primarily for sale in the near term are classified as: a. available-for-sale securities. b. held-to-maturity securities. c. stock securities. d. trading securities
Chapter 13-28
SO 5 Indicate how debt and stock investments are reported in financial statements.
Trading Securities
Problem: Loxley Company has the following portfolio of
securities at September 30, 2007, its last reporting date.
rading Securities an ogelberg, nc. common ,000 shares Petra, nc. preferred 3, 00 shares im Weisberg Corp. common ,000 shares Cost 22 ,000 33,000 0,000 air Value 200,000 0,000 7 ,000
On Oct. 0, 2007, the ogelberg shares were sold at a price per share. n addition, 3,000 shares of Los igres of common stock were acquired at . 0 per share on Nov. 2, 2007. he ec. 3 , 2007, fair values were: Petra 6,000, Los igres 32,000, and the Weisberg common 3,000.
Chapter 13-29
SO 5 Indicate how debt and stock investments are reported in financial statements.
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 2007. Portfolio at September 30, 2007
Trading ecurities an Fogel erg, nc. co on ,000 shares Petra, nc. preferred , 00 shares eis erg Corp. co on ,000 shares Ti Cost 22 ,000 ,000 0,000 ,000 Fair alue 200,000 0,000 7 ,000 ,000
Market Adjust ent ² Trading account alance
,000
Chapter 13-30
SO 5 Indicate how debt and stock investments are reported in financial statements.
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, 2007 (Fogelberg): Cash (5,000 x $54) Trading securities Gain on sale November 2, 2007 (Los Tigres): Trading securities (3,000 x $59.50) Cash
Chapter 13-31
270,000 225,000 45,000
178,500 178,500
SO 5 Indicate how debt and stock investments are reported in financial statements.
Trading Securities
Problem: Portfolio at December 31, 2007
Trading Securities Petra, Inc. preferred Tim Weisberg Corp. common Los Tigres common $ Cost 133,000 180,000 178,500 491,500 Fair Value $ 96,000 193,000 132,000 $ 421,000 Unrealized Gain (Loss) $ (37,000) 13,000 (46,500) (70,500) $ (19,000) (51,500)
$ Prior market adjustment balance Market fair value adjustment
December 31, 2007: Unrealized loss - Income Market adjustment - Trading
Chapter 13-32
51,500 51,500
SO 5 Indicate how debt and stock investments are reported in financial statements.
Available-forAvailable-for-Sale Securities
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 Loss³Equity account is used instead of Unrealized Gain or Loss³Income. Unrealized loss would be deducted from stockholders· equity rather than charged to the income statement.
Chapter 13-33
SO 5 Indicate how debt and stock investments are reported in financial statements.
Available-for-Sale Securities Available-for-
Question
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 stockholders' equity. d. deducted from the cost of the investment.
Chapter 13-34
SO 5 Indicate how debt and stock investments are reported in financial statements.
Balance Sheet Presentation
Short-Term Investments ShortAlso 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 13-35
SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Realized and Unrealized Gain or Loss
Nonoperating items related to investments (reported in the income statement).
Illustration 13-10
Chapter 13-36
SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Realized and Unrealized Gain or Loss
Unrealized gain or loss on available-for-sale securities are reported as a separate component of stockholders· equity.
Illustration 13-11
Chapter 13-37
SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Classified Balance Sheet
Illustration 13-12
Chapter 13-38
SO 6 Distinguish between short-term and long-term investments.
All About You
A Good Day to Start Saving
When is a good time to get serious about saving? Some Facts: Only about 48% of people in their twenties whose employers have a 401(k) plan participate in that plan. Only 40% of working couples currently are covered by pension plans, but 61% of workers expect to get income from a company pension plan.
Chapter 13-39
All About You
A Good Day to Start Saving
When is a good time to get serious about saving? More Facts: More than half of workers age 55 and older have less than $50,000 in retirement savings. 80% of individuals between the ages of 18 to 26 said that, if given $10,000, they would deposit the money into a traditional bank savings account rather than invest in the stock market.
Chapter 13-40
All About You
When you are 25 years old, if you start putting $300 per month into an investment earning 8%, by the age of 65 you will have accumulated more than $1 million.
Chapter 13-41
All About You
What Do You Think?
You·ve got $3,000 in credit card bills at an 18% interest rate. Your employer has a 401(k) plan in which it will match your contributions, up to 10% of your annual salary. Should you pay off your credit card bills before you start putting money into the 401(k)?
X
Paying off debt, thus avoiding 18% interest payments, is essentially equivalent to earning 18% on investments. Reducing your debts reduces your financial vulnerability. Take part of the money you would have used to pay off your debt each month and instead put it into the 401(k).
Chapter 13-42
Copyright
´Copyright © 2008 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.µ
Chapter 13-43
