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1、Prepared byMarianne Bradford, Ph.D.Bryant CollegeJohn Wiley & Sons, Inc.祛痘 studying this chapter, you should be able to: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 co

2、nsolidated financial statements.5 Indicate how debt and stock investments are valued and reported on the financial statements.6 Distinguish between short-term and long-term investments.InvestmentsWhy Corporations InvestAccounting for Debt InvestmentsRecording acquisition of bondsRecording bond inter

3、estRecording sale of bonds InvestmentsAccounting for Stock InvestmentsHoldings less than 20%Holdings between 20% and 50%Holdings of more than 50% Valuation and Reporting of InvestmentsCategories of securitiesBalance sheet presentationRealized and unrealized gain or lossComprehensive balance sheet Di

4、scuss why corporations invest in debt and stock securities.CashTemporary InvestmentsAccounts ReceivableInventoryInvestSellv At the end of their operating cycles, many companies may have temporarily idle cash on hand until the start of the next operating cycle.v These companies may invest the excess

5、funds to earn a greater return.v The relationship of temporary investments to the operating cycle is depicted below.v ReasonTypical InvestmentTo house excess cash until neededLow-risk, high-liquidity, short-term securities such as government-issued securitiesTo generate earningsI need 1,000 Treasury

6、 bills by tonight!Debt securities (banks and other financial institutions); 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 enterExplain the accounting for debt investments.De

7、bt 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. Cost includes all expenditures necessary to acquire these investments.

8、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 ExplanationDebitCreditJan. 1Debt Investments Cash (To record purchase of 50 Doan Inc. bonds)54,000 54,00

9、0The 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. The December 31 entry is:DateAccount Titles and ExplanationDebitCreditJuly 1Cash Interest Revenue (To record receipt of interest o

10、n Doan Inc. bonds)3,000 3,000DateAccount Titles and ExplanationDebitCreditDec. 31Interest Receivable Interest Revenue (To accrue interest on Doan Inc. bonds)3,000 3,000DateAccount Titles and ExplanationDebitCreditJan. 1Cash Interest Receivable (To record receipt of accrued interest)When the interest

11、 is received on January 1, the entry is: 3,000 3,000Any 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

12、, after receiving the interest due. Since the securities cost $54,000, a gain of $4,000 has been realized. The entry to record the sale is:DateAccount Titles and ExplanationDebitCreditJan. 1Cash Debt Investments Gain on Sale of Debt Investments (To record sale of Doan Inc. bonds) 58,000 54,000 4,000

13、Explain the accounting for stock investments.Investors OwnershipPresumedInterest in InvesteesInfluenceAccountingCommon Stockon InvesteeGuidelinesLess than 20%InsignificantCost methodBetween 20%SignificantEquity methodand 50%More than 50%ControllingConsolidated financialstatementsStock investments ar

14、e 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.In accounting for stock investments of less than 20%, the cost method is used. Under the cost method, the investment is rec

15、orded 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 $40 per share plus brokerage fees of $500. The entry for the purchase is:DateAccount Titles and Ex

16、planationDebitCreditJuly 1Stock Investments Cash (To record purchase of 1,000 shares of Beal Corporation common stock)40,500 40,500Entries are required 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

17、 entry is:Dividend Revenue is reported under Other Revenue and Gains in the income statement. Since dividends do not accrue, adjusting entries are not made to accrue dividends.DateAccount Titles and ExplanationDebitCreditDec. 31Cash (1,000 x $2) Dividend Revenue (To record receipt of a cash dividend

18、) 2,000 2,000When stock is sold, the difference between the net proceeds from the sale and the 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

19、, a loss of $1,000 has been incurred. The entry to record the sale is:DateAccount Titles and ExplanationDebitCreditFeb. 10CashLoss on Sale of Stock Investments Stock Investments (To record sale of Beal common stock) 39,500 1,000 40,500When an investor owns between 20% and 50% of the common stock of

20、a corporation, the investor 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

21、 year, the investor 1) debits 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 Comp

22、any for $120,000 on January 1, 2002. The entry to record this transaction is:DateAccount Titles and ExplanationDebitCreditJan. 1Stock Investments Cash (To record purchase of Beck common stock)120,000 120,000Beck reports 2002 net income of $100,000 and declares and pays a $40,000 cash dividend. Milar

23、 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 Stock Investments Revenue from Investment in

24、 Beck Company (To record 30% equity in Becks 2002 net income) 30,000 30,000DateAccount Titles and ExplanationDebitCreditDec. 31Cash Stock Investments (To record dividends received)12,000 12,000Stock InvestmentsJanuary 1120,000 December 3112,000December 3130,000December 31 Balance138,000Revenue from

25、Investment in Beck CompanyDecember 3130,000After posting the transactions for the year, the investment and revenue accounts will show the above results. During the year, the investment account has increased by $18,000 which represents Milars 30% equity in the $60,000 increase in Becks retained earni

26、ngs ($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 dividend revenue if the cost method were used.v A company that owns more than 50% of the common stock of another e

27、ntity is known as a parent company.v The entity whose stock is owned by the parent company is called the subsidiary (affiliated) company.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 s

28、tock of another company, consolidated financial statements are usually prepared.Controlling GroupHome Box Office Board of DirectorsTime Warner, Inc. Board of DirectorsHome Box Office CorporationTime Warner, Inc.Time Warner, Inc.ControlControlSeparate Legal EntitiesSingle Economic EntityTime Warner,

29、Inc. own 100% of the common stock of Home Box Office (HBO). The common 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 com

30、mon stock of HBO.Indicate how debt and stock investments are valued and reported on the financial statements.TradingWell sell within ten days.Available-for-SaleWell hold the stock for a while to see how it performs.Held-to-MaturityWe intend to hold these bonds until maturity.At fair value with chang

31、es reported in net incomeAt fair value with changes reported in the stockholders equity sectionAt amortized costFair 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 o

32、f the 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 generate income on short-ter

33、m 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. v Trading securities are 1) held with the intention of selling them in a short perio

34、d (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 sold. The unrealized gain or loss is the difference between the total cost of tradi

35、ng 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 Value Unrealized Gain (Loss) Yorkville Company bonds $ 50,000 $ 48,000 $ (2,000) Kodak

36、 Company stock 90,000 99,000 9,000 Total $ 140,000 $ 147,000 $ 7,000 Pace Corporation has an unrealized gain of $7,000 because total fair value ($147,000) is $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 fina

37、ncial statements are prepared. A valuation allowance account, Market Adjustment - Trading, is used to record the difference between the total cost and the total fair value of the securities. The adjusting entry for Pace Corporation is:DateAccount Titles and ExplanationDebitCreditDec. 31Market Adjust

38、ment Trading Unrealized Gain Income (To record unrealized gain on trading securities) 7,000 7,0001 The fair value of the securities is the amount reported on 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 r

39、eported on the income statement in the Other Expenses and Losses section. 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 r

40、eported as unrealized gains or losses 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 classifie

41、d as available-for-sale securities: 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) Elbert Corpora

42、tion 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 allowance account, Market Adjustment - Av

43、ailable-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 ExplanationDebitCreditDec. 31Unrealized Loss Equity Market Adjustment Available-for-Sale (To record unrealized lo

44、ss on available-for-sale securities)9,537 9,5371 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 component of stockholders equity.Distinguish between short-term and long-term investments.SHORT-TERM INVESTMENTSvShort

45、-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, whichever is longer.vAn investment is readily marketable when it can be sold easily whenever the need for cash arises.vIntent to conv

46、ert means that management intends to sell the investment within the next year or operating cycle, whichever is longer. 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

47、 Balance Sheet (partial) Current assets Cash $ 21,000 Short-term Investments at fair value 147,000 Other Revenues and GainsOther Expenses and LossesInterest RevenueLoss on Sale of InvestmentsDividend RevenueUnrealized Loss IncomeGain on Sale of InvestmentsUnrealized Gain Incomev Long-term investment

48、s are typically reported in a separate section of the balance sheet immediately below current assets.v In the income statement, the items below are reported in the nonoperating section:v An unrealized gain or loss on available-for-sale securities is reported as a separate component of stockholders e

49、quity.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 $100,000.v The statement presentation of the unrealized loss is shown below.DAWSON INC.Partial Balance SheetStockholders equity Common stock$ 3,000,000 Reta

50、ined 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$ 4,400,000The comprehensive balance sheet for Pace Corporation includes the following assets:1 Short-term Investments,2 Investment

51、s of less than 20%, and3 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: Allowance for doubful acco unts 4,000 80,000 Merchandise inventory, at FIFO cost 43

52、,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, 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 Good