1、John Wiley&Sons,Inc.Financial Accounting,5ePrepared byKurt M.Hull,MBA CPACalifornia State University,Los AngelesWeygandt,Kieso,&KimmelCHAPTER 13INVESTMENTSSTUDY OBJECTIVESAfter studying this chapter,you should understand:Why corporations invest in debt and stock securitiesConsolidated financial Stat
2、ementsAccounting for debt investmentsValuation of debt and stock investmentsAccounting for stock investmentsShort-term vs.long-term investmentsReasonTypical InvestmentTo house excess cash until neededLow-risk,high-liquidity,short-term securities such as government-issued securitiesTo generate earnin
3、gsI need 1,000 Treasury 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 enterSTUDY OBJECTIVE 1WHY CORPO
4、RATIONS INVESTDebt investments=government and corporate bonds.Entries required for acquisition,interest revenue,and sale.Kuhl Corporation acquires 50 Doan Inc.8%,10-year,$1,000 bonds on January 1,2019,for$54,000,including brokerage fees of$1,000.The entry to record the investment is:DateAccount Titl
5、es and ExplanationDebitCreditJan.1Debt Investments Cash (To record purchase of 50 Doan Inc.bonds)54,000 54,000STUDY OBJECTIVE 2ACCOUNTING FOR DEBT INVESTMENTSCost principle appliesCost includes all expenditures to acquire investment.The bonds pay$2,000 interest on July 1 and January 1($50,000 x 8%x)
6、.The July 1 entry is:It is necessary to accrue$2,000 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 on Doan Inc.bonds)2,000 2,000DateAccount Titles and ExplanationDebitCreditDec
7、.31Interest Receivable Interest Revenue (To accrue interest on Doan Inc.bonds)2,000 2,000RECORDING BOND INTERESTDateAccount Titles and ExplanationDebitCreditJan.1Cash Interest Receivable (To record receipt of accrued interest)When the interest is received on January 1,the entry is:2,000 2,000RECORDI
8、NG BOND INTERESTOn January 1,2019,Kuhl Corporation receives net proceeds of$58,000 on the sale of the Doan Inc.bonds.The entry to record the sale and recognize the gain is:DateAccount Titles and ExplanationDebitCreditJan.1Cash Debt Investments Gain on Sale of Debt Investments (To record sale of Doan
9、 Inc.bonds)58,000 54,000 4,000RECORDING SALE OF BONDSPROCEEDS COST=GAIN or LOSSREVIEW QUESTIONOn February 6,Hanes Company sells debt investments costing$26,000 for$28,000.Prepare the journal entry to record the sale.26,000 Debt Investments2,000 Gain on Sale28,000CashFeb 6CreditDebitAccountsDateProce
10、eds Cost=Gain or Loss Investors Ownership Presumed Interest in Investees Influence Accounting Common Stock on Investee Guidelines Less than 20%Insignificant Cost method Between 20%Significant Equity method and 50%More than 50%Controlling Consolidated financial statements Stock investments=capital st
11、ock of corporations.STUDY OBJECTIVE 3ACCOUNTING FOR STOCK INVESTMENTSOn July 1,2019,Sanchez Corporation acquires 1,000 shares(10%)of Beal Corporation common stock for$40 per share plus brokerage fees of$500.The entry for the purchase is:DateAccount Titles and ExplanationDebitCreditJuly 1Stock Invest
12、ments Cash (To record purchase of 1,000 shares of Beal Corporation common stock)40,500 40,500RECORDING STOCK INVESTMENTSHOLDINGS 20%COST METHOD Record investment at cost.Recognize revenue when cash dividends are received.DateAccount Titles and ExplanationDebitCreditDec.31Cash(1,000 x$2)Dividend Reve
13、nue (To record receipt of a cash dividend)2,000 2,000RECORDING DIVIDENDS HOLDINGS 20%On December 31,Sanchez Corporation receives a$2 per share cash dividend.Dividend revenue is reported on the income statement under“Other revenues and gains.”On February 10,2019,Sanchez Corporation receives net proce
14、eds of$39,500 on the sale of its Beal stock.The cost of the Beal stock was$40,500 on July 1,2019.The entry to record the sale and loss is:DateAccount Titles and ExplanationDebitCreditFeb.10CashLoss on Sale of Stock Investments Stock Investments (To record sale of Beal common stock)39,500 1,000 40,50
15、0RECORDING A SALEHOLDINGS 50%-CONSOLIDATIONSControlling 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,Inc.owns 100%of HBO common stock.The comm
16、on stockholders of Time Warner elect the BOD 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,including the HBO common stock.RECORDING STOCK INVESTMENTSMANAGEMENT PERSPECTIVETradingWell sell within ten da
17、ys.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 changes reported in net incomeAt fair value with changes reported in the stockholders equity sectionAt amortized costFair value=expected cash re
18、alizable value of the securities sold in normal market conditions.STUDY OBJECTIVE 5VALUING AND REPORTING INVESTMENTSFAIR MARKET VALUEHeld with the intention of selling them in a short period.Reported at fair value.Changes from cost are reported as unrealized gains or losses and included in NET INCOM
19、E.Pace Corporation holdings are illustrated below:Trading Securities,December 31,2019 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 TRADING SECURITIESTrading securities are adjusted to
20、 market value at the balance sheet date.DateAccount Titles and ExplanationDebitCreditDec.31Market Adjustment Trading Unrealized Gain Income (To record unrealized gain on trading securities)7,000 7,000VALUATION AND REPORTING OF TRADING SECURITIESFAIR VALUE COST =UNREALIZED GAIN(LOSS)Fair value on bal
21、ance sheetUnrealized gain/losson income statementREVIEW QUESTIONAt the end of the first year of operations,the total cost of a trading securities portfolio is$120,000.Fair value is$115,000.Prepare the journal entry to adjust the securities to fair value.Income Statement (to adjust trading portfolio
22、to market)5,000 Short-term investments5,000Unrealized loss on trading securitiesDec 31CreditDebitAccountsDateHeld with the intention of selling them in the near future.Reported at fair value.Changes from cost are reported asa component of stockholders equity.Elbert Corporation holdings are illustrat
23、ed below:Available-for-Sale Securities,December 31,200 6 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)AVAILABLE FOR SALE SECURITIESDateAccount Titles and Explanat
24、ionDebitCreditDec.31Unrealized Loss Equity Market Adjustment Available-for-Sale (To record unrealized loss on available-for-sale securities)9,537 9,537Available for sale securities are adjusted to market value at the balance sheet date.FAIR VALUE COST =UNREALIZED GAIN(LOSS)Fair value on balance shee
25、tUnrealized gain/lossin stockholders equityVALUATION AND REPORTING OF AVAILABLE FOR SALE SECURITIESvShort-term investments are readily marketable,andvIntended to be converted into cash within the next year or operating cycle,whichever is longer.vListed on balance sheet immediately below cash.vReport
26、ed at fair value.PACE CORPORATION Balance Sheet(partial)Current assets Cash$21,000 Short-term Investments at fair value 147,000 STUDY OBJECTIVE 6SHORT-TERM vs.LONG-TERM INVESTMENTSOther Revenues and GainsOther Expenses and LossesInterest RevenueLoss on Sale of InvestmentsDividend RevenueUnrealized L
27、oss IncomeGain on Sale of InvestmentsUnrealized Gain IncomeLong-term investments are reportedon the balance sheet immediately below current assets.In the income statement,the items below are reported in the non-operating section:LONG-TERM INVESTMENTSBALANCE SHEET PRESENTATION An unrealized gain or l
28、oss onavailable-for-sale securities is reported as a separate component of stockholders equity.The statement presentation of the unrealized loss is shown below.DAWSON INC.Partial Balance SheetStockholders equity Common stock$3,000,000 Retained earnings 1,500,000 Total paid-in capital and retained ea
29、rnings 4,500,000 Less:Unrealized loss on available-for-sale securities (100,000)Total stockholders equity$4,400,000UNREALIZED LOSS IN STOCKHOLDERS EQUITYPace Corporationclassified balancesheet includes:1 Short-term Investments,2 Investments of less than 20%,3 Investments of 20%-50%.PACE CORPORATION
30、Balance Sheet December 31,2019 Assets Current assets Cash$21,000 Short-term investments,at fair value 147,000 Accounts receivable$84,000 Less:Allowance for doubtful accounts 4,000 80,000 Merchandise inventory,at FIFO cost 43,000 Prepaid insurance 23,000 Total current assets 314,000 Investments Inves
31、tments in stock of less than 20%owned companies,at fair value 50,000 Investment in stock of 20%50%owned company,at equity 150,000 Total investments 200,000 Property,plant,and equipment Land 200,000 Buildings$800,000 Less:Accumulated depreciation 200,000 600,000 Equipment 180,000 Less:Accumulated dep
32、reciation 54,000 126,000 Total property,plant,and equipment 926,000 Intangible assets Goodwill(Note 1)270,000 Total intangible assets 270,000 Total assets$1,710,000 CLASSIFIED BALANCE SHEET Liabilities and Stockholders Equity Current liabilities Accounts payable$185,000 Bond interest payable 10,000
33、Federal income taxes payable 60,000 Total current liabilities 255,000 Long-term liabilities Bonds payable,10%,due 2019$300,000 Less:Discount on bonds 10,000 Total Long-term liabilities 290,000 Total liabilities 545,000 Stockholders equity Paid-in capital Common stock,$10 par value,200,000 shares aut
34、horized,80,000 issued and outstanding 800,000 Paid-in capital in excess of par value 100,000 Total paid-in capital 900,000 Retained earnings(Note 2)255,000 Total paid-in capital and retained earnings 1,155,000 Add:Unrealized gain on availablefor-sale securities 10,000 Total stockholders equity 1,165
35、,000 Total liabilities and stockholders equity$1,710,000 Note 1.Goodwill is amortized by the straight-line over 40 years.Note 2.Retained earnings of$100,000 is restricted for plant expansion.Pace Corporation balance sheet includes:Unrealized gain available-for-salesecurities1.CLASSIFIED BALANCE SHEE
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