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1、Prepared by Marianne Bradford, Ph.D. Bryant College John Wiley and stock securities (mutual funds and pension funds) To meet strategic goalsStocks of companies in a related industry or in an unrelated industry that the company wishes to enter STUDY OBJECTIVE 2 Explain the accounting for debt investm

2、ents. ACCOUNTING FOR DEBT INVESTMENTS RECORDING AQUISITION OF BONDS Debt investments are investments in government and corporation bonds. In accounting for debt investments, entries are required to record the 1 acquisition, 2 interest revenue, and 3 sale. At acquisition the cost principle applies. C

3、ost includes all expenditures necessary to acquire these investments. Kuhl Corporation acquires 50 Doan Inc. 12%, 10-year, $1,000 bonds on January 1, 2002, for $54,000, including brokerage fees of $1,000. The entry to record the investment is: DateAccount Titles and ExplanationDebitCredit Jan. 1Debt

4、 Investments Cash (To record purchase of 50 Doan Inc. bonds) 54,000 54,000 ACCOUNTING FOR DEBT INVESTMENTS RECORDING BOND INTEREST The bonds pay $3,000 interest on July 1 and January 1 ($50,000 x 12% x ). The July 1 entry is: It is necessary to accrue $3,000 interest earned since July 1 at year-end.

5、 The December 31 entry is: DateAccount Titles and ExplanationDebitCredit July 1Cash Interest Revenue (To record receipt of interest on Doan Inc. bonds) 3,000 3,000 DateAccount Titles and ExplanationDebitCredit Dec. 31Interest Receivable Interest Revenue (To accrue interest on Doan Inc. bonds) 3,000

6、3,000 ACCOUNTING FOR DEBT INVESTMENTS RECORDING BOND INTEREST DateAccount Titles and ExplanationDebitCredit Jan. 1Cash Interest Receivable (To record receipt of accrued interest) When the interest is received on January 1, the entry is: 3,000 3,000 ACCOUNTING FOR DEBT INVESTMENTS RECORDING SALE OF B

7、ONDS Any difference between the net proceeds from the sale (sales price less brokerage fees) and the cost of the bonds is recorded as a gain or loss. Kuhl Corporation receives net proceeds of $58,000 on the sale of the Doan Inc. bonds on January 1, 2003, after receiving the interest due. Since the s

8、ecurities cost $54,000, a gain of $4,000 has been realized. The entry to record the sale is: DateAccount Titles and ExplanationDebitCredit Jan. 1Cash Debt Investments Gain on Sale of Debt Investments (To record sale of Doan Inc. bonds) 58,000 54,000 4,000 STUDY OBJECTIVE 3 Explain the accounting for

9、 stock investments. Investors OwnershipPresumed Interest in InvesteesInfluenceAccounting Common Stockon InvesteeGuidelines Less than 20%InsignificantCost method Between 20%SignificantEquity method and 50% More than 50%ControllingConsolidated financial statements ILLUSTRATION 17-3 ACCOUNTING GUIDELIN

10、ES FOR STOCK INVESTMENTS Stock investments are investments in the capital stock of corporations. When a company holds stock or debt of various corporations, the group of securities is identified as an investment portfolio. RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20% In accounting for stock in

11、vestments of less than 20%, the cost method is used. Under the cost method, the investment is recorded at cost, and revenue is recognized only when cash dividends are received. On July 1, 2002, Sanchez Corporation acquires 1,000 shares (10% ownership) of Beal Corporation common stock. Sanchez pays $

12、40 per share plus brokerage fees of $500. The entry for the purchase is: DateAccount Titles and ExplanationDebitCredit July 1Stock Investments Cash (To record purchase of 1,000 shares of Beal Corporation common stock) 40,500 40,500 RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20% Entries are requi

13、red for any cash dividends received during the time the stock is held. If a $2 per share dividend is received by Sanchez Corporation on December 31, the entry is: Dividend Revenue is reported under Other Revenue and Gains in the income statement. Since dividends do not accrue, adjusting entries are

14、not made to accrue dividends. DateAccount Titles and ExplanationDebitCredit Dec. 31Cash (1,000 x $2) Dividend Revenue (To record receipt of a cash dividend) 2,000 2,000 RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20% When stock is sold, the difference between the net proceeds from the sale and th

15、e cost of the stock is recognized as a gain or loss. Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal Corporation common stock on February 10, 2003. Because the stock cost $40,500, a loss of $1,000 has been incurred. The entry to record the sale is: DateAccount Titles and

16、 ExplanationDebitCredit Feb. 10Cash Loss on Sale of Stock Investments Stock Investments (To record sale of Beal common stock) 39,500 1,000 40,500 ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50% When an investor owns between 20% and 50% of the common stock of a corporation, the investor

17、 has significant influence over the financial and operating activities of the investee. Under the equity method, the investment in common stock is initially recorded at cost, and the investment account is adjusted annually to show the investors equity in the investee. Each year, the investor 1) debi

18、ts the investment account and credits revenue for its share of the investees net income and 2) credits dividends received to the investment account. ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50% Milar Corporation acquires 30% of the common stock of Beck Company for $120,000 on Januar

19、y 1, 2002. The entry to record this transaction is: DateAccount Titles and ExplanationDebitCredit Jan. 1Stock Investments Cash (To record purchase of Beck common stock) 120,000 120,000 ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50% Beck reports 2002 net income of $100,000 and declares

20、 and pays a $40,000 cash dividend. Milar is required to record 1) its share of Becks net income, $30,000 (30% X $100,000) and 2) the reduction in the investment account for the dividends received, $12,000 ($40,000 X 30%). The entries are: Date Account Titles and Explanation Debit Credit Dec. 31 Stoc

21、k Investments Revenue from Investment in Beck Company (To record 30% equity in Becks 2002 net income) 30,000 30,000 DateAccount Titles and ExplanationDebitCredit Dec. 31Cash Stock Investments (To record dividends received) 12,000 12,000 ILLUSTRATION 17-4 INVESTMENT AND REVENUE ACCOUNTS AFTER POSTING

22、 Stock Investments January 1120,000 December 3112,000 December 3130,000 December 31 Balance138,000 Revenue from Investment in Beck Company December 3130,000 After posting the transactions for the year, the investment and revenue accounts will show the above results. During the year, the investment a

23、ccount has increased by $18,000 which represents Milars 30% equity in the $60,000 increase in Becks retained earnings ($100,000 - $40,000). Milar will also report $30,000 of revenue from its investment, which is 30% of Becks net income of $100,000. Milar would report only $12,000 (30% X $40,000) of

24、dividend revenue if the cost method were used. RECORDING STOCK INVESTMENTS HOLDINGS OF MORE THAN 50% v A company that owns more than 50% of the common stock of another entity is known as a parent company. v The entity whose stock is owned by the parent company is called the subsidiary (affiliated) c

25、ompany. v The parent company is perceived to have a controlling interest in the subsidiary due to its stock ownership. v When one company owns more than 50% of the common stock of another company, consolidated financial statements are usually prepared. RECORDING STOCK INVESTMENTS MANAGEMENT PERSPECT

26、IVE Controlling Group Home Box Office Board of Directors Time Warner, Inc. Board of Directors Home Box Office Corporation Time Warner, Inc. Time Warner, Inc. Control Control Separate Legal Entities Single Economic Entity Time Warner, Inc. own 100% of the common stock of Home Box Office (HBO). The co

27、mmon stockholders of Time Warner elect the board of directors of the company, who, in turn, select the officers and managers of the company. The Board of Directors controls the property owned by the corporation, which includes the common stock of HBO. STUDY OBJECTIVE 4 Indicate how debt and stock in

28、vestments are valued and reported on the financial statements. ILLUSTRATION 17-5 VALUATION GUIDELINES Trading Well sell within ten days. Available-for-Sale Well hold the stock for a while to see how it performs. Held-to-Maturity We intend to hold these bonds until maturity. At fair value with change

29、s reported in net income At fair value with changes reported in the stockholders equity section At amortized cost Fair value is the amount for which a security could be sold in a normal market and offers the best approach at investment valuation since it represents the expected cash realizable value

30、 of the securities. CATEGORIES OF SECURITIES For purposes of valuation and reporting at a financial statement date, debt and stock investments are classified into the following THREE categories of securities: 1) Trading securities are securities bought and held primarily for sale in the near term to

31、 generate income on short-term price differences. 2) Available-for-sale securities are securities that may be sold in the future. 3) Held-to-maturity securities are debt securities that the investor has the intent and ability to hold to maturity. ILLUSTRATION 17-6 VALUATION OF TRADING SECURITIES v T

32、rading securities are 1) held with the intention of selling them in a short period (generally less than a month), and 2) are reported at fair value, and changes from cost are reported as part of net income. v The changes are reported as unrealized gains or losses since the securities have not been s

33、old. The unrealized gain or loss is the difference between the total cost of trading securities and their total fair value. v Pace Corporation has the following costs and fair values for its investments classified as trading securities: Trading Securities, December 31, 2002 Investments Cost Fair Val

34、ue Unrealized Gain (Loss) Yorkville Company bonds $ 50,000 $ 48,000 $ (2,000) Kodak Company stock 90,000 99,000 9,000 Total $ 140,000 $ 147,000 $ 7,000 VALUATION AND REPORTING OF INVESTMENTS TRADING SECURITIES Pace Corporation has an unrealized gain of $7,000 because total fair value ($147,000) is $

35、7,000 greater than total cost ($140,000). Fair value and the unrealized gain or loss are recorded through an adjusting entry at the time financial statements are prepared. A valuation allowance account, Market Adjustment - Trading, is used to record the difference between the total cost and the tota

36、l fair value of the securities. The adjusting entry for Pace Corporation is: DateAccount Titles and ExplanationDebitCredit Dec. 31Market Adjustment Trading Unrealized Gain Income (To record unrealized gain on trading securities) 7,000 7,000 1 The fair value of the securities is the amount reported o

37、n the balance sheet. 2 The unrealized gain is reported on the income statement in the Other Revenues and Gains section. 3 The unrealized loss is reported on the income statement in the Other Expenses and Losses section. VALUATION AND REPORTING OF INVESTMENTS TRADING SECURITIES ILLUSTRATION 17-7 VALU

38、ATION OF AVAILABLE- FOR-SALE SECURITIES v Available-for-sale securities are 1) held with the intention of selling them in the near future, and 2) are reported at fair value, and changes from cost are reported as a component of stockholders equity. v The changes are reported as unrealized gains or lo

39、sses since the securities have not been sold. v The unrealized gain or loss is the difference between the total cost of the securities in the category and their total fair value. v Elbert Corporation has the following costs and fair values for its investments classified as available-for-sale securit

40、ies: Available-for-Sale Securities, December 31, 2002 Investments Cost Fair Value Unrealized Gain (Loss) Campbell Soup Corporation 8% bonds $ 93,537 $ 103,600 $ 10,063 Hersey Corporation stock 200,000 180,400 (19,600) Total $ 293,537 $ 284,000 $ ( 9,537) VALUATION AND REPORTING OF INVESTMENTS AVAILA

41、BLE-FOR-SALE SECURITIES Elbert Corporation has an unrealized loss of $9,537 because total fair value ($284,000) is $9,537 less than total cost ($293,537). Fair value and the unrealized gain or loss are recorded through an adjusting entry at the time financial statements are prepared. A valuation all

42、owance account, Market Adjustment - Available-for-Sale, is used to record the difference between the total cost and the total fair value of the securities. The adjusting entry for Elbert Corporation is: DateAccount Titles and ExplanationDebitCredit Dec. 31Unrealized Loss Equity Market Adjustment Ava

43、ilable-for-Sale (To record unrealized loss on available-for-sale securities) 9,537 9,537 VALUATION AND REPORTING OF INVESTMENTS AVAILABLE-FOR-SALE SECURITIES 1 The fair value of the securities is the amount reported on the balance sheet. 2 The unrealized gain or loss is reported as a separate compon

44、ent of stockholders equity. STUDY OBJECTIVE 5 Distinguish between short-term and long-term investments. SHORT-TERM INVESTMENTS vShort-term investments 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,

45、whichever is longer. vAn investment is readily marketable when it can be sold easily whenever the need for cash arises. vIntent to convert means that management intends to sell the investment within the next year or operating cycle, whichever is longer. ILLUSTRATION 17-8 PRESENTATION OF SHORT- TERM

46、INVESTMENTS v Short Term investments are listed immediately below cash in the current asset section of the balance sheet due to their liquidity.They are reported at fair value. PACE CORPORATION Balance Sheet (partial) Current assets Cash $ 21,000 Short-term Investments at fair value 147,000 ILLUSTRA

47、TION 17-9 NONOPERATING ITEMS RELATED TO INVESTMENTS Other Revenues and GainsOther Expenses and Losses Interest RevenueLoss on Sale of Investments Dividend RevenueUnrealized Loss Income Gain on Sale of Investments Unrealized Gain Income v Long-term investments are typically reported in a separate sec

48、tion of the balance sheet immediately below current assets. v In the income statement, the items below are reported in the nonoperating section: ILLUSTRATION 17-10 UNREALIZED LOSS IN STOCKHOLDERS EQUITY SECTION v An unrealized gain or loss on available-for-sale securities is reported as a separate c

49、omponent of stockholders equity. v Dawson Inc. has common stock of $3,000,000, retained earnings of $1,500,000, and an unrealized loss on available-for-sale securities of $100,000. v The statement presentation of the unrealized loss is shown below. DAWSON INC. Partial Balance Sheet Stockholders equi

50、ty Common stock$ 3,000,000 Retained earnings 1,500,000 Total paid-in capital and retained earnings 4,500,000 Less: Unrealized loss on available-for-sale securities ( 100,000) Total stockholders equity$ 4,400,000 ILLUSTRATION 17-11 COMPREHENSIVE BALANCE SHEET The comprehensive balance sheet for Pace

51、Corporation includes the following assets: 1 Short-term Investments, 2 Investments of less than 20%, and 3 Investments of 20% - 50%. PACE CORPORATION Balance Sheet December 31, 2002 Assets Current assets Cash $ 21,000 Short-term investments, at fair value 147,000 Accounts receivable $ 84,000 Less: A

52、llowance for doubful acco unts 4,000 80,000 Merchandise inventory, at FIFO cost 43,000 Prepaid insurance 23,000 Total current assets 314,000 Investments Bond sinking fund 100,000 Investments in stock of le ss than 20% owned companies, at fair value 50,000 Investment in stock of 20% 50% owned company

53、, at equity 150,000 Total investments 300,000 Property, plant, and equipment Land 200,000 Buildings $ 800,000 Less: Accumulated depreciation 200,000 600,000 Equipment 180,000 Less: Accumulated depreciation 54,000 126,000 Total property, plant, and equipment 926,000 Intangible assets Goodwill (Note 1) 170,000 Total intangible assets 170,000 Total assets $