Chapter 16-1
Accounting for InvetmentsAccounting for InvetmentsSession 11 (I & 2)Session 11 (I & 2)
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and those who only listen shall also and those who only listen shall also be marked for class participationbe marked for class participation
There may be a verbal quiz following There may be a verbal quiz following each presentationeach presentation
Chapter 16-2
Accounting for InvetmentsAccounting for InvetmentsSession 11 (I & 2)Session 11 (I & 2)
Next slide contains participant wise Next slide contains participant wise distribution of topics to be distribution of topics to be
delivered. The participants can add delivered. The participants can add slides for their topics and can bring slides for their topics and can bring in their own material for discussionin their own material for discussion
Chapter 16-3
1. Investment Motives (By Owais: 10 minutes: 3 to 5)
2. Accounting for Debt Investments (By Shehzad: 20 to 30 minutes: 6 to 13)
3. Accounting for stock investments: Less than 20% stake (Huzaifa: 10 to 15 minutes: 14 to 18)(Shahid: 10 to 20 minutes: 19 to 23)(Ali Mansoor: 10 to 20 minutes: 24 to 26)
4. Accounting for stock investments: B/w 20% & 50% stake (Amjad: 30 minutes: 27 to 31)
5. Balance Sheet Presentation: (Ubaid Younus: 15 to 20 minutes: 32 to 38)
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 16-4
Chapter 16
Investments
Accounting Principles, Ninth Edition
Chapter 16-5
Corporations generally invest in debt or stock securities for one of three reasons.
Why Corporations InvestWhy Corporations InvestWhy Corporations InvestWhy Corporations Invest
SO 1 Discuss why corporations invest in debt and stock SO 1 Discuss why corporations invest in debt and stock securities.securities.
1. Corporation may have excess cash Held for Trading & Debt Securities
2. To generate earnings from investment income
Available For Sale & Debt Securities
3. For strategic reasonsSubsidiaries & Associated Companies
Chapter 16-6
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.
QuestionQuestion
Why Corporations InvestWhy Corporations InvestWhy Corporations InvestWhy Corporations Invest
SO 1 Discuss why corporations invest in debt and stock SO 1 Discuss why corporations invest in debt and stock securities.securities.
Chapter 16-7
Accounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt Investments
SO 2 Explain the accounting for debt investments.SO 2 Explain the accounting for debt investments.
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
Chapter 16-8
Accounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt Investments
SO 2 Explain the accounting for debt investments.SO 2 Explain the accounting for debt investments.
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 16-9
Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, 2010, for $54,000, including brokerage fees of $1,000. The entry to record the investment is:
Debt investments 54,000
Cash 54,000
Accounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt Investments
SO 2 Explain the accounting for debt investments.SO 2 Explain the accounting for debt investments.
Jan. 1
Chapter 16-10
Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, 2010, for $54,000, including brokerage fees of $1,000. The bonds pay interest semiannually on July 1 and January 1. The entry for the receipt of interest on July 1 is:
Accounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt Investments
SO 2 Explain the accounting for debt investments.SO 2 Explain the accounting for debt investments.
Cash 2,000
Interest revenue 2,000
* ($50,000 x 8% x ½ = $2,000)
*July 1
What if company closes its accounts six monthly!!! Monthly !!!
Chapter 16-11
Illustration: If Kuhl Corporation’s fiscal year ends on December 31, prepare the entry to accrue interest since July 1.
Accounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt Investments
SO 2 Explain the accounting for debt investments.SO 2 Explain the accounting for debt investments.
Interest receivable 2,000
Interest revenue 2,000
Kuhl reports receipt of the interest on January 1 as follows.
Cash 2,000
Interest receivable 2,000
Dec. 31
Jan. 1
Chapter 16-12
Illustration: Assume that Kuhl corporation receives net proceeds of $58,000 on the sale of the Doan Inc. bonds on January 1, 2011, after receiving the interest due. Prepare the entry to record the sale of the bonds.
Accounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt Investments
SO 2 Explain the accounting for debt investments.SO 2 Explain the accounting for debt investments.
Cash 58,000
Debt investments 54,000
Gain on sale of investments 4,000
Jan. 1
Chapter 16-13
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.
QuestionQuestion
Accounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt Investments
SO 2 Explain the accounting for debt investments.SO 2 Explain the accounting for debt investments.
Chapter 16-14
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.
QuestionQuestion
Accounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt Investments
SO 2 Explain the accounting for debt investments.SO 2 Explain the accounting for debt investments.
Chapter 16-15
0 --------------20% ------------ 50% -------------- 100%0 --------------20% ------------ 50% -------------- 100%No
significant influence
usually exists
Significant influence
usually exists
Control usually exists
Investment valued using
Cost Method
Subsequent market value adjustments
Investment valued using
Equity Method
Investment valued on parent’s books using
Cost Method or Equity Method (investment
eliminated in Consolidation)
Ownership PercentagesOwnership Percentages
Accounting for Stock InvestmentsAccounting for Stock InvestmentsAccounting for Stock InvestmentsAccounting for Stock Investments
SO 3 Explain the accounting for stock investments.SO 3 Explain the accounting for stock investments.
The accounting depends on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation.
Strategic Motives Investment
Chapter 16-16
Companies use the cost method. Under the cost method, companies record the investment at cost, and recognize revenue only when cash dividends are received.
Cost includes all expenditures necessary to acquire these investments, such as the price paid plus any brokerage fees (commissions).
Holdings of Less than 20%Holdings of Less than 20%Holdings of Less than 20%Holdings of Less than 20%
SO 3 Explain the accounting for stock investments.SO 3 Explain the accounting for stock investments.
Chapter 16-17
July 1
SO 3 Explain the accounting for stock investments.SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%Holdings of Less than 20%Holdings of Less than 20%Holdings of Less than 20%
Illustration: On July 1, 2010, Sanchez Corporation acquires 1,000 shares (10% ownership) of Beal Corporation common stock. Sanchez pays $40 pershare plus brokerage fees of $500. The entry for the purchase is:
Stock investments 40,500
Cash 40,500
Chapter 16-18
Dec. 31
SO 3 Explain the accounting for stock investments.SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%Holdings of Less than 20%Holdings of Less than 20%Holdings of Less than 20%
Illustration: During the time Sanchez owns the stock, it makes entries for any cash dividends received. If Sanchez receives a $2 per share dividend on December 31, the entry is:
Cash 2,000
Dividend revenue 2,000
What should be the entry by Sanchez if Beal Company approved dividends but not yet paid !
Chapter 16-19
Feb. 10
SO 3 Explain the accounting for stock investments.SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%Holdings of Less than 20%Holdings of Less than 20%Holdings of Less than 20%
Illustration: Assume that Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal stock on February 10, 2011. Because the stock cost $40,500, Sanchez incurred a loss of $1,000. The entry to record the sale is:
Cash 39,500
Loss on sale of stock 1,000
Stock investments 40,500
Chapter 16-20
Valuing and Reporting InvestmentsValuing and Reporting InvestmentsValuing and Reporting InvestmentsValuing and Reporting Investments
Categories of Securities
Companies classify debt and stock investments into three categories:
Trading securities
Available-for-sale securities
Held-to-maturity securities
These guidelines apply to all debt securities and all stock investments in which the holdings are less than 20%.
SO 5 Indicate how debt and stock SO 5 Indicate how debt and stock investments are reported in investments are reported in financial statements.financial statements.
Chapter 16-21
Valuing and Reporting InvestmentsValuing and Reporting InvestmentsValuing and Reporting InvestmentsValuing and Reporting Investments
Trading Securities
Companies hold trading securities with the intention of selling them in a short period.
Trading means frequent buying and selling.
Companies report trading securities at fair value, and report changes from cost as part of net income.
SO 5 Indicate how debt and stock SO 5 Indicate how debt and stock investments are reported in investments are reported in financial statements.financial statements.
Chapter 16-22
Valuing and Reporting InvestmentsValuing and Reporting InvestmentsValuing and Reporting InvestmentsValuing and Reporting Investments
Available-for-Sale Securities
Companies hold available-for-sale securities with the intent of selling these investments sometime in the future.
These securities can be classified as current assets or as long-term assets, depending on the intent of management.
Companies report securities at fair value, and report changes from cost as a component of the stockholders’ equity section. SO 5 Indicate how debt and stock SO 5 Indicate how debt and stock
investments are reported in investments are reported in financial statements.financial statements.
Chapter 16-23
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
QuestionQuestion
Valuing and Reporting InvestmentsValuing and Reporting InvestmentsValuing and Reporting InvestmentsValuing and Reporting Investments
SO 5 Indicate how debt and stock SO 5 Indicate how debt and stock investments are reported in investments are reported in financial statements.financial statements.
Chapter 16-24
Illustration: Investment of Pace classified as trading securities on December 31, 2010.
Trading SecuritiesTrading SecuritiesTrading SecuritiesTrading Securities
The adjusting entry for Pace Corporation is:
SO 5 Indicate how debt and stock SO 5 Indicate how debt and stock investments are reported in investments are reported in financial statements.financial statements.
Dec. 31Trading Invest. Valuation a/c 7,000(Balance Sheet)
Unrealized gain / Loss on Trading Invest.
7,000(Income Statement)
Illustration 16-7
Chapter 16-25
Problem: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 Loss—Equity (Balance Sheet) account is used instead of Unrealized Gain or Loss—Income Statement A/c.
The unrealized gain / loss would be added / deducted from the stockholders’ equity section rather than charged to the income statement.
Available-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale Securities
SO 5 Indicate how debt and stock SO 5 Indicate how debt and stock investments are reported in investments are reported in financial statements.financial statements.
Chapter 16-26
Illustration: Assume that Ingrao Corporation has two securities that it classifies as available-for-sale. Illustration 16-8 provides information on their valuation.
The adjusting entry for Ingrao Corporation is:
SO 5 Indicate how debt and stock SO 5 Indicate how debt and stock investments are reported in investments are reported in financial statements.financial statements.
Dec. 31 Unrealized gain / loss on AFS Invest. 9,537Balance Sheet – Equity)
AFS Invest. Valuation a/c 9,537
(Balance Sheet)
Illustration 16-8
Available-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale Securities
Chapter 16-27
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.
QuestionQuestion
Available-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale Securities
SO 5 Indicate how debt and stock SO 5 Indicate how debt and stock investments are reported in investments are reported in financial statements.financial statements.
Chapter 16-28
Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%
Equity Method
Record the investment at cost and subsequently adjust the amount each period for
the investor’s proportionate share of the earnings (losses) and
dividends received by the investor
The investee company is known as associated company of the investor companyIf investor’s share of investee’s losses exceeds the carrying
amount of the investment, the investor ordinarily should discontinue applying the equity method.
SO 3 Explain the accounting for stock investments.SO 3 Explain the accounting for stock investments.
Chapter 16-29
Under the equity method, the investor records dividends received by crediting:
a. Dividend Revenue.
b. Investment Income.
c. Revenue from Investment.
d. Stock Investments.
QuestionQuestion
Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%
SO 3 Explain the accounting for stock investments.SO 3 Explain the accounting for stock investments.
Chapter 16-30
Illustration: Illustration: Milar Corporation acquires 30% of the common shares of Beck Company for $120,000 on January 1, 2010. For 2010, Beck reports net income of $100,000 and paid dividends of $40,000. Prepare the entries for these transactions.
Stock investments 120,000
Cash
120,000
Cash 12,000
Stock investments
12,000
Stock investments 30,000
Revenue from investments
30,000
Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%
($40,000 x 30%)
($100,000 x 30%)
SO 3 Explain the accounting for stock investments.SO 3 Explain the accounting for stock investments.
Jan. 1
Dec. 31
Dec. 31
Chapter 16-31
After Milar posts the transactions for the year, its investment and revenue accounts will show the following.
Debit Credit
Stock Investments
120,000120,000 30,00030,000
Debit Credit
Revenue from Investments
Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%
SO 3 Explain the accounting for stock investments.SO 3 Explain the accounting for stock investments.
30,00030,000 12,00012,000
138,000138,000
Illustration: Illustration: Milar Corporation acquires 30% of the common shares of Beck Company for $120,000 on January 1, 2010. For 2010, Beck reports net income of $100,000 and paid dividends of $40,000. Prepare the entries for these transactions.
Chapter 16-32
Exercise: Exercise: (Equity Method) On January 1, 2010, Pennington Corporation purchased 25%% 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 the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2008.
Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%
SO 3 Explain the accounting for stock investments.SO 3 Explain the accounting for stock investments.
Chapter 16-33
Holdings of More Than 50%Holdings of More Than 50%Holdings of More Than 50%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 the parent’s books as a long-term investment.
Parent generally prepares consolidated financial statements.
SO 4 Describe the use of consolidated financial SO 4 Describe the use of consolidated financial statements.statements.
Chapter 16-34
Chapter 16-35
Also 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.
Short-Term InvestmentsShort-Term Investments
Balance Sheet PresentationBalance Sheet PresentationBalance Sheet PresentationBalance Sheet Presentation
SO 6 Distinguish between short-term and long-term investments.
Investments that do not meet both criteria are classified as long-term investments.
Chapter 16-36
Nonoperating items related to investments
Presentation of Realized and Presentation of Realized and Unrealized Gain or LossUnrealized Gain or Loss
Balance Sheet PresentationBalance Sheet PresentationBalance Sheet PresentationBalance Sheet Presentation
SO 6 Distinguish between short-term and long-term investments.
Illustration 16-10
Chapter 16-37
Realized and Unrealized Gain or LossRealized and Unrealized Gain or Loss
Balance Sheet PresentationBalance Sheet PresentationBalance Sheet PresentationBalance Sheet Presentation
SO 6 Distinguish between short-term and long-term investments.
Unrealized gain or loss on available-for-sale securities are reported as a separate component of stockholders’ equity.
Illustration 16-11
Chapter 16-38
Balance Sheet PresentationBalance Sheet PresentationBalance Sheet PresentationBalance Sheet Presentation
SO 6 Distinguish between short-term and long-term investments.
Classified Balance Sheet (partial)Classified Balance Sheet (partial)
Illustration 16-12
Chapter 16-39
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