1、Prepared byMarianne Bradford, Ph.D.Bryant CollegeJohn Wiley & Sons, Inc.After 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 us

2、e of consolidated 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.CHAPTER 17 INVESTMENTSPREVIEW OF CHAPTER 17InvestmentsWhy Corporations InvestAccounting for Debt Investments

3、Recording acquisition of bondsRecording bond interestRecording sale of bonds PREVIEW OF CHAPTER 17InvestmentsAccounting for Stock InvestmentsHoldings less than 20%Holdings between 20% and 50%Holdings of more than 50% Valuation and Reporting of InvestmentsCategories of securitiesBalance sheet present

4、ationRealized and unrealized gain or lossComprehensive balance sheet STUDY OBJECTIVE 1Discuss why corporations invest in debt and stock securities.ILLUSTRATION 17-1 TEMPORARY INVESTMENTS AND THE OPERATING CYCLECashTemporary InvestmentsAccounts ReceivableInventoryInvestSellv At the end of their opera

5、ting 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 funds to earn a greater return.v The relationship of temporary investments to the operating cycle is depicted below. ILLUSTRATION 17-2 WHY CORPORATIO

6、NS INVESTReasonTypical InvestmentTo house excess cash until neededLow-risk, high-liquidity, short-term securities such as government-issued securitiesTo generate earningsI need 1,000 Treasury bills by tonight!Debt securities (banks and other financial institutions); and stock securities (mutual fund

7、s and pension funds)To meet strategic goalsStocks of companies in a related industry or in an unrelated industry that the company wishes to enterSTUDY OBJECTIVE 2Explain the accounting for debt investments.ACCOUNTING FOR DEBT INVESTMENTS RECORDING AQUISITION OF BONDSDebt investments are investments

8、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. Kuhl Corporation acquires 50 Do

9、an 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 54,000ACCOUNTING FOR DEBT INVESTMENT

10、S RECORDING BOND INTERESTThe 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 reco

11、rd receipt of interest on Doan Inc. bonds)3,000 3,000DateAccount Titles and ExplanationDebitCreditDec. 31Interest Receivable Interest Revenue (To accrue interest on Doan Inc. bonds)3,000 3,000ACCOUNTING FOR DEBT INVESTMENTS RECORDING BOND INTERESTDateAccount Titles and ExplanationDebitCreditJan. 1Ca

12、sh Interest Receivable (To record receipt of accrued interest)When the interest is received on January 1, the entry is: 3,000 3,000ACCOUNTING FOR DEBT INVESTMENTS RECORDING SALE OF BONDSAny difference between the net proceeds from the sale (sales price less brokerage fees) and the cost of the bonds

13、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 securities cost $54,000, a gain of $4,000 has been realized. The entry to record the sale is:DateAccount Titles and Expl

14、anationDebitCreditJan. 1Cash Debt Investments Gain on Sale of Debt Investments (To record sale of Doan Inc. bonds) 58,000 54,000 4,000STUDY OBJECTIVE 3Explain the accounting for stock investments.Investors OwnershipPresumedInterest in InvesteesInfluenceAccountingCommon Stockon InvesteeGuidelinesLess

15、 than 20%InsignificantCost methodBetween 20%SignificantEquity methodand 50%More than 50%ControllingConsolidated financialstatementsILLUSTRATION 17-3 ACCOUNTING GUIDELINES FOR STOCK INVESTMENTSStock investments are investments in the capital stock of corporations. When a company holds stock or debt o

16、f various corporations, the group of securities is identified as an investment portfolio.RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20%In accounting for stock investments of less than 20%, the cost method is used. Under the cost method, the investment is recorded at cost, and revenue is recogniz

17、ed 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 ExplanationDebitCreditJuly 1Stock Invest

18、ments Cash (To record purchase of 1,000 shares of Beal Corporation common stock)40,500 40,500RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20%Entries 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 Dece

19、mber 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 not made to accrue dividends.DateAccount Titles and ExplanationDebitCreditDec. 31Cash (1,000 x $2) Dividend Revenue (To record receipt of a c

20、ash dividend) 2,000 2,000RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20%When 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 com

21、mon 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 ExplanationDebitCreditFeb. 10CashLoss on Sale of Stock Investments Stock Investments (To record sale of Beal common stock) 39,500 1,000 40,500ACC

22、OUNTING 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 has significant influence over the financial and operating activities of the investee. Under the equity method, the investment in common stock is ini

23、tially recorded at cost, and the investment account is adjusted annually to show the investors equity in the investee. Each 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. A

24、CCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%Milar Corporation acquires 30% of the common stock of Beck Company 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 Bec

25、k common stock)120,000 120,000ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%Beck reports 2002 net income of $100,000 and declares 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 invest

26、ment 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 Beck Company (To record 30% equity in Becks 2002 net income) 30,000 30,000DateAccount Titles and ExplanationDebitCr

27、editDec. 31Cash Stock Investments (To record dividends received)12,000 12,000ILLUSTRATION 17-4 INVESTMENT AND REVENUE ACCOUNTS AFTER POSTINGStock InvestmentsJanuary 1120,000 December 3112,000December 3130,000December 31 Balance138,000Revenue from Investment in Beck CompanyDecember 3130,000After post

28、ing 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 earnings ($100,000 - $40,000). Milar will also report $30,

29、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.RECORDING STOCK INVESTMENTS HOLDINGS OF MORE THAN 50%v A company that owns more than 50% of the common stock of another e

30、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

31、tock of another company, consolidated financial statements are usually prepared.RECORDING STOCK INVESTMENTS MANAGEMENT PERSPECTIVEControlling GroupHome Box Office Board of DirectorsTime Warner, Inc. Board of DirectorsHome Box Office CorporationTime Warner, Inc.Time Warner, Inc.ControlControlSeparate

32、 Legal EntitiesSingle Economic EntityTime Warner, 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 propert

33、y owned by the corporation, which includes the common stock of HBO.STUDY OBJECTIVE 4Indicate how debt and stock investments are valued and reported on the financial statements.ILLUSTRATION 17-5 VALUATION GUIDELINESTradingWell sell within ten days.Available-for-SaleWell hold the stock for a while to

34、see how it performs.Held-to-MaturityWe intend to hold these bonds until maturity.At fair value with changes 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

35、offers the best approach at investment valuation since it represents the expected cash realizable value of the securities.CATEGORIES OF SECURITIESFor purposes of valuation and reporting at a financial statement date, debt and stock investments are classified into the following THREE categories of se

36、curities:1) Trading securities are securities bought and held primarily for sale in the near term to 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

37、 the intent and ability to hold to maturity. ILLUSTRATION 17-6 VALUATION OF TRADING SECURITIESv Trading 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 inco

38、me.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 trading securities and their total fair value.v Pace Corporation has the following costs and fair values for its investments cl

39、assified 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 Company stock 90,000 99,000 9,000 Total $ 140,000 $ 147,000 $ 7,000 VALUATION AND REPORTING OF INVESTMENTS TRADING SECURI

40、TIESPace 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 financial statements are prepared. A valuation allowance account, Mar

41、ket 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 Adjustment Trading Unrealized Gain Income (To record unrealized gain on

42、 trading 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 reported on the income statement in the Other Expenses and Losses section. VAL

43、UATION AND REPORTING OF INVESTMENTS TRADING SECURITIESILLUSTRATION 17-7 VALUATION OF AVAILABLE-FOR-SALE SECURITIESv 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

44、 stockholders equity.v The changes are reported 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 f

45、air values for its investments classified 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

46、,537 $ 284,000 $ ( 9,537) VALUATION AND REPORTING OF INVESTMENTS AVAILABLE-FOR-SALE SECURITIESElbert 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 adjustin

47、g entry at the time financial statements are prepared. A valuation allowance 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 Expla

48、nationDebitCreditDec. 31Unrealized Loss Equity Market Adjustment Available-for-Sale (To record unrealized loss on9,537 9,537VALUATION AND REPORTING OF INVESTMENTS AVAILABLE-FOR-SALE SECURITIES1 The fair value of the securities is the amount reported on the balance sheet.2 The unrealized gain or loss

49、 is reported as a separate component of stockholders equity.STUDY OBJECTIVE 5Distinguish between short-term and long-term investments.SHORT-TERM INVESTMENTSvShort-term investments are securities held by a company that are (1) readily marketable and (2) intended to be converted into cash within the n

50、ext 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 convert means that management intends to sell the investment within the next year or operating cycle, whichever is longer. ILLUSTRATION 17-8 P

51、RESENTATION OF SHORT-TERM INVESTMENTSv 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 fa

52、ir value 147,000 ILLUSTRATION 17-9 NONOPERATING ITEMS RELATED TO INVESTMENTSOther Revenues and GainsOther Expenses and LossesInterest RevenueLoss on Sale of InvestmentsDividend RevenueUnrealized Loss IncomeGain on Sale of InvestmentsUnrealized Gain Incomev Long-term investments are typically reporte

53、d 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:ILLUSTRATION 17-10 UNREALIZED LOSS IN STOCKHOLDERS EQUITY SECTIONv An unrealized gain or loss on available-for-sale securities is reported

54、 as a separate component 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 SheetStockh

55、olders equity 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$ 4,400,000ILLUSTRATION 17-11 COMPREHENSIVE BALANCE SHEETThe comprehensive balance sheet

56、for Pace Corporation includes the following assets:1 Short-term Investments,2 Investments 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 L

57、ess: Allowance 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, 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