Ch17 Reviewed

8/9/2019 Ch17 Reviewed

1/61

Investments in

Debt Securities

Investments in

Equity Securities

Other Reporting

Issues

Held-to-maturity

securities

Available-for-sale

securities

Trading securities

Holdings of less than

20%

Holdings between 20%

and 50%

Holdings of more than

50%

Fair value option

mpairment of value

!eclassification

ad"ustments

Investments

Investments


2/61

Different motivations for investing:

To earn a high rate of return#

To secure certain operating or financing arrangements

with another company#

Investment Accounting Approaches



3/61

$ompanies account for investments based on

the type of security &debt or e'uity(

their intent with respect to the investment#




4/61

)ebt securities &creditor relationship(

Investments in Debt Securities


* +#,# governmentsecurities

* unicipal securities

* $orporate bonds

* $onvertible debt

* $ommercial paper

Type

* Held-to-maturity* Trading

* Available-for-sale

Accounting $ategory


5/61



Accounting for )ebt ,ecurities by $ategory


6/61

Heldto!aturity Securities

Heldto!aturity Securities

$lassify a debt security as heldtomaturityonly if it has

both

&.( the positive intent and

&2( the abilityto hold securities to maturity#

Accounted for atamorti"ed cost/ not fair value#

Amortie premium or discount using the effectiveinterestmethod unless the straight-line method yields a similar

result#


7/61

!obinson $ompany purchased1.00/000 of percent bonds

of 3vermaster $orporation on 4anuary ./ 20.5/ at a discount/

paying 12/26# The bonds mature 4anuary ./ 2020 and yield

.0%7 interest is payable each 4uly . and 4anuary .# !obinsonrecords the investment as follows

#anuary $% &'$(

)ebt investments 2/26

$ash 2/26

Heldto!aturity SecuritiesHeldto!aturity Securities


8/61LO 2


Effective Interest Calculation

8% bond, 10% yield, 100,000 face, semi-annual

Date Cash Rec'v Interest RevDisc

!morti"ation Carryin# !mt

1$1$01& ,(8(

($1$01& ),00000 ),*1+1 *1+1 ,818

1$1$01* ),00000 ),*))*1 *))*1 +,&+*(

($1$01* ),00000 ),*(*8) *(*8) ),1+*+

1$1$01( ),00000 ),(10*8 (10*8 ),)+1

($1$01( ),00000 ),()* ()* &,*(0&

1$1$018 ),00000 ),(8+&+ (8+&+ *,)&)0&($1$018 ),00000 ),8(0 8(0 (,(*(&

1$1$01 ),00000 ),8*+8) 8*+8) 8,1)0&

($1$01 ),00000 ),0(0+ 0(0+ ,0)(*

1$1$00 ),00000 ),&+8 &+8 100,00000

)0,00000 )(,(1(+ (,(1(+ 100,00000


9/61

!obinson $ompany records the receiptof the first semiannualinterest payment on 4uly ./ 20.5/ as follows

$ash 8/000

)ebt nvestments 9.8

nterest !evenue 8/9.8



10/61

!obinson is on a calendar-year basis/ it accrues interest andamorties the discount at )ecember :./ 20.5/ as follows

nterest !eceivable 8/000

)ebt nvestments 985

nterest !evenue 8/985



11/61


Assume that !obinson $ompany sells its investment in

3vermaster bonds on ;ovember ./ 20./ at < plus accrued

interest# !obinson records this discount amortiation as

follows

)ebt nvestments 9:5

nterest !evenue 9:5

)*(& + ,-. / ).0(


12/61


LO 2

$omputation of gain on sale of bonds

Cash 10,)1( (&0.**(/Interest Revenue )$* ),000/ ,**(

Debt Investments ,*8+

2ain on 3ale of 3ecurities *(

3ellin# 4rice of bonds ,(&000

5ess6 7oo 9alue of 7onds on 11$1$1

!morti"ed cost ($1$1 ,0)800

!dd6 Discount amorti"ed from ($1 - 11$1$1 *+&00 ,*8+002ain on 3ale of 7onds *(00


13/61

YOU TRY #1

3ateboardin# :ee4s, 55:, 4urchased &0,000 of 10% bonds from ;ot Rod:ee4s on


14/61

Debt Investment )*,+1*

Cash )*,+1*

Cash ,&0000Debt Investment (0

Interest Revenue ,((0


10% bond, 1% yield, &0,000 face, semi-annual

Date Cash Rec'v Interest Rev Disc !morti"ation Carryin# !mt

1$1$01& )*,+1*

($1$01& ,&0000 ,((0 (0 )*,&1&

1$1$01* ,&0000 ,(&& && )*,8&10

($1$01* ,&0000 ,81+(1 +1+(1 )(,0881

1$1$01( ,&0000 ,8+&+ ++&+ )(,&)1+)

($1$01( ,&0000 ,8&)8 +&)8 )(,8+8

1$1$018 ,&0000 ,8(+*+ +(+*+ )8,*()&

($1$018 ,&0000 ,8*0& +*0& )8,**+)

1$1$01 ,&0000 ,181 )181 ),08++0

($1$01 ,&0000 ,)&00 ))&00 ),&8+0

1$1$00 ,&0000 ,(1(0 )(1(0 &0,00000 &,00000 8,*800) +,*800) &0,00000


15/61

YT #1, CONT.

>o? 4resume 3ateboard :ee4s sells its investment in ;ot Rod at&, 4lus accrued interest on @ctober 1, 01

Record the discount and the sale


16/61

YT# 1 CONCLUSION

3ellin# :rice of 7onds &0A &/ ),(&000

5ess6 7oo 9alue of 7onds on 10$1$1

!morti"ed cost ($1$1 ),&8+0

Discount ($1 to 10$1 )(1(0 B +$*// +&8& ),(*)1&

5oss on 3ale of 7onds 1)1&/

Cash &1,00000

5oss on 3ale 1)1&

Debt Investment ),&8+0 +&8&/ ),(*)1&

Interest Revenue ,&00 +$*// 1,&000

&1,01)1& &1,01)1&


17/61

$ompanies report available-for-sale securities at

* fair value/ with

* unrealied holding gains and losses reported as part

of comprehensive income &e'uity(#

* Any discount or premium is amortied#

AvailableforSale SecuritiesAvailableforSale SecuritiesDebtSecurities


18/61

=raff $orporation purchases 1.00/000/ .0 percent/ five-year

bonds on 4anuary ./ 20.5/ with interest payable on 4uly . and

4anuary .# The bonds sell for 1.0/..0#0/ which results in a

bond premium of 1/..0#0 and an effective interest rate of percent# =raff records the purchase of the bonds on 4anuary ./

20.5/ as follows#

)ebt nvestments .0/..0#0

$ash .0/..0#0



19/61



10% bond, 8% yield, 100,000 face, semi-annual

Date Cash Rec'v Interest RevDisc

!morti"ation Carryin# !mt

1$1$01& 108,1100

($1$01& &,00000 ),+))) *(&&* 10(,)+&++1$1$01* &,00000 ),()1 (0& 10*,(+()

($1$01* &,00000 ),*+1 (+0* 10*,000&

1$1$01( &,00000 ),)008 (& 10&,)1)

($1$01( &,00000 ),0* (0+1 10),)&18

1$1$018 &,00000 ),1(80( 81+ 10+,*8($1$018 &,00000 ),1)&0 8&)80 10,((&0

1$1$01 &,00000 ),11100 8800 101,88*0

($1$01 &,00000 ),0(&)) )&* 100,*1&)

1$1$00 &,00000 ),0+8)* *1&) 100,00000

&0,00000 )1,8810 8,1100 100,00000


20/61


21/61

At )ecember :./ 20.5/ =raff ma>es the following entry to

recognie interest revenue#

nterest !eceivable 5/000)ebt nvestments 60:

nterest !evenue 8/26

=raff reports revenue of 1/92. for 20.5 &18/:28 ? 18/26(#



22/61

To apply the fair value method to these debt securities/ assumethat at year-end the fair value of the bonds is 1.05/000 and that

the carrying amount of the investments is 1.09/6:2# =raff

ma>es the following entry#

+nrealied Holding =ain or @oss3'uity ./6:2

Fair Balue Ad"ustment &AF,( ./6:2



23/61

Cebb $orporation has two debt securities classified as

available-for-sale# The following illustration identifies the

amortied cost/ fair value/ and the amount of the unrealied gain

or loss#


!3 Debt 3ecurity :ortfolio

1$+1$01*

Investments !morti"ed Cost air 9alue R 2ain$5oss

atson Cor4 8% 7onds +,&+(00 10+,*0000 10,0*+00!nacom4 Cor4 10% 7onds 00,00000 180,)0000 1,*0000/

=otal +,&+(00 8),00000 ,&+(00/

7alance in 9 adFustment account -

9 !dFustment Credit/ ,&+(00/


24/61

Cebb ma>es an ad"usting entry to a valuation allowance on

)ecember :./ 20.9 to record the decrease in value and to

record the loss as follows#

+nrealied Holding =ain or @oss3'uity /5:6

Fair Balue Ad"ustment &AF,( /5:6

Cebb reports the unrealied holding loss of 1/5:6 as other

comprehensive income and a reduction of stoc>holdersD e'uity#



25/61

PETER COTTONTAIL

In his first year in business, :eter Cottontail Enter4rises has + debt securities

classified as !3 =he follo?in# details these holdin#s6

Investment !morti"ed Cost air 9alue R 2ain$5oss

;i44ity ;o4 ;a44enin#s &0,00000 *1,00000 11,00000Chicadee Cheesy 4oufs 1*&,00000 1&8,00000 (,00000/


26/61

PETER, CONCLUDED

9 !dFustment !3/ ,&0000

nreali"ed ;oldin# 2ain EHuity/ ,&0000


27/61

Sale of AvailableforSale Securities

f company sells bonds before maturity date

* ust ma>e entry to remove the/

* $ost in Available-for-,ale ,ecurities and

* ,ecurities Fair Balue Ad"ustment accounts#

* Any realied gain or loss on sale is reported in the

Ether eGpenses and losses section of the income

statement#



28/61

Cebb $orporation sold the Catson bonds on 4uly ./ 20.6/ for10/000/ at which time it had an amortied cost of 18/2.8#

$ash 0/000

@oss on ,ale of nvestments 8/2.8

)ebt nvestments 8/2.8



29/61

Cebb reports this realied loss in the Ether eGpenses andlosses section of ther $omprehensive ncome# Assuming no

other purchases and sales of bonds in 20.6/ Cebb on

)ecember :./ 20.6/ prepares the information


!3 Debt 3ecurity :ortfolio

1$+1$01(


!nacom4 Cor4 10% 7onds 00,00000 1&,00000 &,00000/=otal 00,00000 1&,00000 &,00000/

7alance in 9 adFustment account ,&+(00/

9 !dFustment Debit/ ),&+(00


30/61


31/61

3rading Securities3rading Securities

$ompanies report trading securities at

fair value/ with

unrealied holding gains and losses reported as part

of net income#

Any discount or premium is amortied#

DebtSecurities


32/61

n )ecember :./ 20.5/ Cestern Iublishing $orporationdetermined its trading securities portfolio to be as follows

3rading Securities3rading SecuritiesDebtSecurities

=3 Debt 3ecurity :ortfolio1$+1$01&


7urlin#ton >orth 10% bonds )+,8*000 &1,&0000 (,*)000

2 Cor4 11% bonds 18),+000 1(&,0000 ,0+000/

=ime arner 8% bonds 8*,+*000 1,&0000 &,1)000

=otal )+,8*000 &1,&0000 +,(&000


9 !dFustment Debit/ +,(&000


33/61

At )ecember :./ Cestern Iublishing ma>es an ad"usting entry

Fair Balue Ad"ustment &Trading( :/650

+nrealied Holding =ain or @ossncome :/650


=3 Debt 3ecurity :ortfolio

1$+1$01&


7urlin#ton >orth 10% bonds )+,8*000 &1,&0000 (,*)000

2 Cor4 11% bonds 18),+000 1(&,0000 ,0+000/

=ime arner 8% bonds 8*,+*000 1,&0000 &,1)000

=otal )+,8*000 &1,&0000 +,(&000


9 !dFustment Debit/ +,(&000


34/61

Hendric>s $orporation purchased trading investment bonds for150/000 at par# At )ecember :./ Hendric>s received annual

interest of 12/000/ and the fair value of the bonds was 186/800#

&a( Irepare the "ournal entry for the purchase of the

investment#

&b( Irepare the "ournal entry for the interest received#

&c( Irepare the "ournal entry for the fair value ad"ustment#



35/61

Irepare the "ournal entries for &a( the purchase of the investment/&b( the interest received/ and &c( the fair value ad"ustment#

&a( )ebt investments 50/000

$ash 50/000

&b( $ash 2/000

nterest revenue 2/000

&c( +nrealied Holding @oss - ncome 2/900

Fair Balue Ad"ustment &Trading( 2/900



36/61

Investments in Equity SecuritiesInvestments in Equity Securities

!epresent ownership of capital stoc>#

$ost includes

price of the security/ plus

bro>erDs commissions and fees related to purchase#

The degree to which one corporation 1investor2ac'uires an

interest in the common stoc> of another corporation 1investee2

generally determines the accounting treatment for the investment

subse'uent to ac'uisition#


37/61


38/61

Investments in Equity SecuritiesInvestments in Equity Securities

Accounting and !eporting for 3'uity ,ecurities by $ategory


39/61

Holdings of 9ess 3han &'Holdings of 9ess 3han &'

AvailableforSale Securities+pon ac'uisition/ companies record available-for-sale securities

at cost#

n ;ovember :/ 20.5 !epublic $orporation purchased common

stoc> of three companies/ each investment representing less than

a 20 percent interest#

Cost

>orth?est Industries, Inc &,(0000

Cam4bell 3ou4 Co +1(,&0000

3t Re#is :ul4 Co 1)1,+&000

(18,&&000


40/61


!epublic records these investments on ;ovember :/ 20.5/ as

follows#

3'uity nvestments 6./550$ash 6./550

n )ecember 9/ 20.5/ !epublic receives a cash dividend of

18/200 from $ampbell ,oup $o#$ash 8/200

)ividend revenue 8/200

AvailableforSale Securities


41/61


!epublicDs available-for-sale e'uity security portfolio on )ecember :./ 20.5


Cost air 9alue nreali"ed 2$5

>orth?est Industries, Inc &,(0000 (&,00000 1&,+0000

Cam4bell 3ou4 Co +1(,&0000 +0),00000 1+,&0000/

3t Re#is :ul4 Co 1)1,+&000 10),00000 +(,+&000/

(18,&&000 *8+,00000 +&,&&000/

:revious 9 !dFustment 7al -

9 !dFustment - CR6 +&,&&000/


42/61


n )ecember :./ 20.5/ !epublic records the net unrealied

gains and losses related to changes in the fair value of available-

for-sale e'uity securities in an +nrealied Holding =ain or @oss

3'uity account#

+nrealied Holding =ain or @oss3'uity :5/550

Fair Balue Ad"ustment &AF,( :5/550



43/61


n 4anuary 2:/ 20.9/ !epublic sold all of its ;orthwest

ndustries/ nc# common stoc> receiving net proceeds of

126/220#


>et :roceeds from 3ale 8(,000

Cost of >orth?est 3toc &,(0000

2ain on 3ale (,&000

Cash 8(,000

EHuity Investment - !3 (&,00000

9 !dFustment - !3 1&,+0000

2ain on 3ale (,&000


44/61


n February .0/ 20.9/ !epublic purchased 20/000 shares of

$ontinental Truc>ing at a price of 1.2#65 per share plus

bro>erage commissions of 1./50 &total cost/ 1259/50(#



Continental =rucin# &*,8&000 (8,+&000 1,&0000

Cam4bell 3ou4 Co +1(,&0000 +*,&&000 )&,0&000

3t Re#is :ul4 Co 1)1,+&000 1+,0&000 ,+0000/

(1&,(0000 ((,&000 *),&000

:revious 9 !dFustment 7al - CR &0,8&000/

9 !dFustment - DR6 11&,10000


45/61



Continental =rucin# &*,8&000 (8,+&000 1,&0000Cam4bell 3ou4 Co +1(,&0000 +*,&&000 )&,0&000

3t Re#is :ul4 Co 1)1,+&000 1+,0&000 ,+0000/

(1&,(0000 ((,&000 *),&000

:revious 9 !dFustment 7al - CR &0,8&000/9 !dFustment - DR6 11&,10000

9 !dFustment - !3 11&,10000

nreali"ed ;oldin# 2$5 - EHuity 11&,10000

>ote6 Endin# 7alance in 9 !dFustment account &0,8&0/ .11&,100 *),&000

-+&,&&0 - 1&,+00 -&0,8&0


46/61

c3lroy $ompany has the following portfolio of securities at

,eptember :0/ 20.5/ its last reporting date#


Date =radin# 3ecurities Event Cost 9 $+0$1& 1$+1$1& 9

$+0$01&;orton &,000 c/ 1&,00000 00,00000 >$!

$+0$01&onty +,&00 4/ 1++,00000 1)0,00000 10*,00000

$+0$01&@a?ood 1,000 c/ 180,00000 1(,00000 1+,00000

10$10$01&;orton &,000 c/ 3ales &)00 4er share (0,00000 >$!

11$$01&:atriot +,000 c/:urchase &)&0 4ershare

1*+,&0000 1+,00000


47/61

Irepare the "ournal entries to record the sale/ purchase/ and

ad"usting entries related to the trading securitiesin the last

'uarter of 20.5#


8ortfolio at September 0'% &'$(

Date =radin# 3ecurities Cost 9 $+0$1& nreali"ed 2$5

$+0$01& ;orton &,000 c/

1&,00000 00,00000 1&,00000/

$+0$01& onty +,&00 4/

1++,00000 1)0,00000 (,00000

$+0$01& @a?ood 1,000 c/

180,00000 1(,00000 1,00000/

=otal &8,00000 &1,00000 ,00000/

:revious 9 adFustment balance -

9 adFustment - CR ,00000/


48/61

Irepare the "ournal entries to record the sale/ purchase/ and

ad"usting entries related to the trading securitiesin the last

'uarter of 20.5#


10$10$1& - ;orton

Cash (0,00000

9 !dFustment - I3 1&,00000

EHuity Investment 00,00000

2ain on 3ale 8&,00000

11$$1& - :atriot

EHuity Investment 1*+,&0000

Cash 1*+,&0000


49/61


Date =radin# 3ecurities Cost 1$+1$1& 9 nreali"ed 2$5

$+0$01& onty +,&00 4/

1++,00000 10*,00000 (,00000/

$+0$01& @a?ood 1,000 c/

180,00000 1+,00000 1+,00000

11$$01& :atriot +,000 c/

1*+,&0000 1+,00000 +1,&0000/

)&,&0000/

:revious 7alance 9 !dFustment -,000 . 1&,000/ *,00000

&1,&0000/

nreali"ed ;oldin# 5oss - I3

&1,&0000

9 adFustment =3 &1,&0000


50/61

How would the entries change if the securities were classified as

availableforsaleJ


The entries would be the same eGcept that the

+nrealied Holding =ain or @oss3'uity account is used

instead of +nrealied Holding =ain or @ossncome#

The unrealied holding loss would be deducted from the

stoc>holdersD e'uity section rather than charged to the

income statement#


51/61

Holdings ;et7een &' and ('Holdings ;et7een &' and ('

An investment &direct or indirect( of 20 percent or more of thevoting stoc> of an investee should lead to a presumption that

in the absence of evidence to the contrary/ an investor has the

ability to eGercise significant influenceover an investee#

n instances of Esignificant influence/ the investor must

account for the investment using the equity method#


52/61


Equity !ethod!ecord the investment at cost and subse'uently ad"ust

the amount each period for

the investorDs proportionate share of the earnings&losses( and

dividends received by the investor#


53/61

n 4anuary ./ 20.5/ eredith $orporation purchased 25% of thecommon shares of Iirates $ompany for 1200/000# )uring the

year/ Iirates earned net income of 10/000 and paid dividends of

120/000#

Irepare the entries for eredith to record the purchase and any

additional entries related to this investment in Iirates $ompany

in 20.5#

Holdings ;et7een &' and (': Equity !ethodHoldings ;et7een &' and (': Equity !ethod


54/61

Irepare the entries for eredith to record the purchase and any

additional entries related to this investment in Iirates $ompany in

20.5#


&10/000 G 25%(

EHuity Investment - :irates 00,00000

Cash 00,00000

Purchase

EHuity Investment - :irates 0,00000

Investment Revenue 0,00000

Income

Cash &,00000

EHuity Investment - :irates &,00000

Dividends


55/61

YT3: EQUITY METHOD

@n


56/61


57/61

Holdings of !ore 3han ('Holdings of !ore 3han ('

6ontrolling Interest- Chen one corporation ac'uires a

voting interest of more than 50 percent in another

corporation

* nvestor is referred to as the parents as a long-term investment#

* Iarent generally prepares consolidated financial

statements#


58/61

Impairment of 5alueImpairment of 5alue

,tric>ler $ompany holds available-for-sale bond securities with apar value and amortied cost of 1. million# The fair value of these

securities is 100/000# ,tric>ler has previously reported an

unrealied loss on these securities of 1200/000 as part of other

comprehensive income# n evaluating the securities/ ,tric>ler nowdetermines that it probably will not collect all amounts due# t

records this impairment as follows#

@oss on impairment 200/000)ebt investments 200/000


59/61

Reclassification Ad=ustmentsReclassification Ad=ustments

The reporting of changes in unrealied gains or losses incomprehensive income is straightforward unless a company sells

securities during the year#

n that case/ double counting results when the company reports

realied gains or losses as part of net income but also shows theamounts as part of other comprehensive income in the current

period or in previous periods#

To ensure that gains and losses are not counted twice when a sale

occurs/ a reclassification ad=ustmentis necessary#


60/61

3ransfers ;et7een 6ategories3ransfers ;et7een 6ategories

Illustration $>0'

K Assumes that ad"usting entries to report changes in fair value for the current period are not yetrecorded#


61/61

3ransfers ;et7een 6ategories3ransfers ;et7een 6ategories

Illustration $>0'

KKAccording to =AAI/ these types of transfers should be rare#

Ch17 Reviewed

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Transcript of Ch17 Reviewed