1、YE SUN AccountingEnglish20092Type of long-term assetsnInvestmentnPP&EnNatural resourcesnIntangible assetsnOther assetsYE SUN AccountingEnglish20093Investments in debt securitiesYE SUN AccountingEnglish20094Debt Securities:Types and Reported AmountsDebt Instruments representing a CREDITOR relationshi
2、p M.V.changes recorded as part of incomeM.V.changesrecorded as otherincome or as part of equityM.V.changesnot recognizedTRADINGSecuritiesAvailablefor Sale Held-to-MaturityRecord at fair valueRecord atfair valueRecord at Amortized costYE SUN AccountingEnglish20095Trading SecuritieslTrading securities
3、 are used to generate profits from short term differences in prices.lThe holding period is usually less than 3 monthslThe securities are reported at fair valuelUnrealized gains and losses are reported as part of net incomelAny discount or premium is not amortized.YE SUN AccountingEnglish20096Availab
4、le-for-Sale Debt SecuritieslThese investments are reported at fair value in the balance sheet.lDifferences between the fair value and amortized cost are reported as unrealized holding gains and losses(part of equity)lWhen realized,gains and losses in fair value are reported as part of net income YE
5、SUN AccountingEnglish20097Held-to-Maturity Debt SecuritieslThe operating entity has both:a positive intent to hold the securities,andthe ability to hold them to maturitylThese securities are accounted for at amortized cost,not fair value.YE SUN AccountingEnglish20098Investments in Debt Securities:Ex
6、amplenInvestment in debt security:(Issue at a discount)nCost to investing entity:$924,183n Par value:$1,000,000n Discount$75,817n Effective rate of interest:10%n Stated(contractual)rate:8%n Fair value of security:n End of year 1$1,000,000n End of year 2$975,000 nCompute gains or losses for the three
7、 types of debt securitiesYE SUN AccountingEnglish20099Investments in Debt Securities:Example Given:Investment in Debt Security Amortization Schedule(Discount Issue)Carrying Interest Cash Received Amortized Value(beg)Revenue for Interestcost(end)924,183 924,18392,418 80,000936,601 936,60193,660 80,00
8、0 950,262End of year Fair Value (in mil)1,000,000 975,000Effective rate=10%;Stated Rate=8%;Par=$1,000,000 YE SUN AccountingEnglish200910 Investments in Debt Securities:Trading SecurityCompute gain:FMV less Acquisition cost$1,000,000 less$924,183 =$75,817 Securities Fair Value(Trading)75,817 Unrealiz
9、ed Holding Gain or Loss-Income75,817Add to TradingSecurities inbalance sheetReport as incomeYE SUN AccountingEnglish200911Determining Unrealized gain or loss:FMV end of year 1:$1,000,000Amortized cost end of year 1$936,601Unrealized gain(year 1):$63,399Securities Fair Value Adjustment 63,399 Unreali
10、zed Holding Gain or Loss 63,399Investments in Debt Securities:Available-for-Sale Security(year 1)Add to Available-for-Sale Securities inbalance sheetReport as partof equityYE SUN AccountingEnglish200912Determining Unrealized gain or loss:FMV end of year 2:$975,000Amortized cost end of year 2$950,262
11、Unrealized gain(year 2):$24,738Unrealized Holding Gain or Loss 38661 Securities Fair Value Adjustment 38661Investments in Debt Securities:Available-for-Sale Security(year 2)Unreal.g&L:End of year 1:$63,399 credit End of year 2:$24,738 credit Reverse$38661 debit YE SUN AccountingEnglish200913Investme
12、nts in Debt Securities:Held-to-Maturity SecurityuNo entry is needed for fair value adjustment.uFair value changes are not recognized at balance sheet dateuShow security at amortized costYE SUN AccountingEnglish200914Investment in equity securitiesYE SUN AccountingEnglish200915Equity SecuritiesnEquit
13、y securities represent ownership interests such as common,preferred,or other capital stock.nThey include rights to buy and sell the ownership interestsnConvertible debt and redeemable preferred stock are not equity securities for this purposenThe extent of ownership in common stock by an investor in
14、 an investee determines the accounting treatment for equity securities.YE SUN AccountingEnglish200916Investments in Equity Interests:Control0%20%50%100%Ownership PercentageLittle SignificantCONTROLor noneLevel of InfluenceYE SUN AccountingEnglish200917Investment in Equity Securities:Available for Sa
15、le Securities lSecurities when acquired are recorded at costlSubsequent to acquisition,the investments are valued and reported at fair valuelInvestor does not recognize its proportionate share of investees net income,unless dividends are declared by investee.lUnrealized holding gains and losses are
16、reported as:part of comprehensive income,and a component of stockholders equity YE SUN AccountingEnglish200918When market value not available,use cost methodn1.Under the cost method,an equity security investment is carried at its acquisition cost,including brokerage fees and other incidental costs.n
17、2.Under the cost method,dividends received from investee are recognized as revenue when it was declared.YE SUN AccountingEnglish200919Cost methodn3.Under the cost method,the investment account must be reduced if the investor receives dividends in excess of the investors percentage share of earnings.
18、Since the amount of investment income recognized by the investing enterprise should be limited to the amount distributed out of accumulated net profits of the investee enterprise that arose after the investment was made.YE SUN AccountingEnglish200920Cost methodn4.When an investor owns less than 20%o
19、f the common stock of another corporation,it is presumed that the investor has relatively little influence on the investee.As a result,net income earned by the investee is not considered a proper basis for recognizing income from the investment by the investor.The reason is that the investee may cho
20、ose to retain for use in the business increased net assets resulting from profitable operations.Therefore,net income is not considered earned by the investor until cash dividends are declared by the investee.YE SUN AccountingEnglish200921Investments in Equity Securities:Equity MethodlA substantive e
21、conomic relationship is acknowledged between the investor and the investeelThe investments carrying value is increased by investors proportionate share of earningslThe investments carrying value is decreased by:investors proportionate share of losses dividends received by investee YE SUN AccountingE
22、nglish200922Investments in Equity Securities:ConsolidationnA voting interest of more than 50%results in a controlling interestnThe investor is the parent corporation;the investee is the subsidiary corporation.nThe investor prepares consolidated financial statements for the parent and the subsidiaryn
23、The investor accounts for the investment on its books by fair value or cost method in the individual financial statementsYE SUN AccountingEnglish200923Investments in Equity Securities:SummaryOwnership in Capital Stockless than 20%of voting20-50%ofvotingmore than 50%votingTradingAvailablefor SaleEqui
24、tymethodConsolidationFairvalueFairvalueFV or cost methodIn individual BS NoConsolidationYE SUN AccountingEnglish200924Equity Securities:Accounting by CategoryCategoryValuationUnrealized HoldingOther IncomeGains and LossesEffects20%Fair valueOther income andDividends andAvail for saleEquityG&L(sale)5
25、0%ConsolidateNot recognizedNot applicableYE SUN AccountingEnglish200925Property,Plant,and Equipment(PP&E)*PP&E include:land,building,structures and equipment machinery,furniture and tools*They are not held for resale*They are long term and are subject to depreciation(except land)*They are tangibleYE
26、 SUN AccountingEnglish200926Acquisition CostnHistorical cost is the basis for determining costnHistorical cost includes:the assets cash or cash equivalent price,and the cost of readying the asset for usen Costs incurred after acquisition are:added to assets cost,if they provide future service potent
27、ial,or expensed,if they do not add to service potentialYE SUN AccountingEnglish200927Costs subsequent to AcquisitionnIf cost incurred increase future benefits,capitalize costsnIf costs maintain a given level of services,expense costsnCosts incurred after acquisition can be:additions improvements and
28、 replacements rearrangements and reinstallation repairsYE SUN AccountingEnglish200928Acquisition through leasingnCapital leasenOperating lease is off-balance sheet financingYE SUN AccountingEnglish200929Exchange of nonmonetary exchange nThe basic rule is that the exchange must be based on:the fair v
29、alue of the asset given up,or the fair value of the asset received whichever is clearly more evident.nThe rules for gain/loss recognition depend upon whether the assets exchanged are:nonmonetary or monetaryYE SUN AccountingEnglish200930Exchange examplenAmber company exchanges a number of trucks for
30、land from Becktel company.nFair value of trucks:$49,000.nBook value of trucks:$42,000 (Cost,$64,000;Accu.Depr,$22,000)nCash paid to Becktel:$17,000nRecord the purchase in Ambers books.YE SUN AccountingEnglish200931AmberBecktelLand,FMV=$66,000Cash,$17,000plusTrucks,FMV=$49,000Amber recognizes gain=FM
31、V less Book value=$7,000YE SUN AccountingEnglish200932 Land Dr.$66,000 Accu.Dep(Trucks)Dr.$22,000 Trucks$64,000 Cash$17,000 Gain on disposal$7,000YE SUN AccountingEnglish200933Depreciation-Concept*Depreciation is a means of cost allocation.*It is not a method of valuation.*Depreciation involves:allo
32、cating the cost of tangible assets to expense in a systematic and rational manner to periods expected to benefit from use of assetsYE SUN AccountingEnglish200934Factors in the Depreciation Process*Questions to be answered:What is the depreciable base of the asset?What is the assets useful life?What
33、method of cost apportionment is best for the asset in question?YE SUN AccountingEnglish200935Depreciable BasevDepreciable base is the amount subject to depreciation.vIt is determined as:Original cost of the asset less Estimated salvage or disposal valueYE SUN AccountingEnglish200936Estimated Service
34、 Lives*An assets service life and physical life are not the same.*Assets are retired(from productive life)due to:physical factors(such as casualty),or economic factors(such as obsolescence)*Economic factors in turn include Inadequacy(asset can not meet current demand)Super cession(by a better asset)
35、Obsolescence(other factors)YE SUN AccountingEnglish200937Depreciation MethodswDepreciation methods can be classified as follows:Financial accounting Depreciation methodswFinancial accounting methods are:straight-line accelerated methods,orYE SUN AccountingEnglish200938Depreciation Methods:OverviewDe
36、preciationMethodsActivitymethod1.Declining Balance2.Sum-of-the-years digitsFinancial AccountingDepreciation MethodsTaxDepreciationStraight-linemethodAcceleratedmethodsYE SUN AccountingEnglish200939Depreciation Methods:ExampletAmber corporation buys a truck on January 1,2000.Information relating to t
37、he truck is as follows:w Cost,$34,000w Estimated service life,5 years(or 60,000 miles)w Salvage value end of five years or use,$4,000w Actual miles driven:w 20,000 miles(in 2000);15,000 miles(in 2001)YE SUN AccountingEnglish200940Straight-line method1.Depreciable base=$34,000 less$4,000=$30,000 2.An
38、nual depreciation=$30,000/5 years=$6,000 3.Depreciation Schedule:(years 1 and 2)YearBookDepreciationAccumulated Book value(beg)Depreciation end of year1$34,000$6,000$6,000$28,0002$28,000$6,000$12,000$22,000YE SUN AccountingEnglish200941Activity method(unit=mile)1.Depreciable base=$34,000 less$4,000=
39、$30,000 2.Depreciation per mile=$30,000/60,000 =$0.50 4.Depreciation Schedule:(years 1 and 2)YearBookDepreciationAccumulated Book value(beg)Depreciation end of year1$34,000$10,000$10,000$24,0002$24,000$7,500$17,500$16,5003.Depreciation(2000)=$0.50*20,000 miles=$10,000 YE SUN AccountingEnglish200942S
40、um-of-the-years-digits(SYD)method1.Depreciable base=$34,000 less$4,000=$30,000 2.SYD fraction=(1+2+3+4+5)=15 3.Depreciation(2000)=$30,000*(5/15)=$10,000 Depreciation(2001)=$30,000*(4/15)=$8,000 Depreciation(2002)=$30,000*(3/15)=$6,000 Depreciation(2003)=$30,000*(2/15)=$4,000 Depreciation(2004)=$30,0
41、00*(1/15)=$2,000Decreasing FractionsYE SUN AccountingEnglish200943Sum-of-the-years-digits(SYD)method 4.Depreciation Schedule YearBookDepreciationAccumulated Book value(beg)Depreciation end of year1$34,000$10,000$10,000$24,0002$24,000$8,000$18,000$16,0003$16,000$6,000$24,000$10,0004$10,000$4,000$28,0
42、00$6,0005$6,000$2,000$30,000$4,000YE SUN AccountingEnglish200944Double Declining balance method1.Rate of depreciation=2*(1/5)=0.40 2.Depreciation(2000)=$34,000*0.40 =$13,600 Depreciation(2001)=$20,400*0.40 =$8,160 Depreciation(2002)=$12,240*0.40 =$4,896 Depreciation(2003)=$3,344/2 =$1,672 Depreciati
43、on(2004)=$3,344/2 =$1,672Total depreciation taken =$30,000YE SUN AccountingEnglish200945Double declining balance method 3.Depreciation Schedule YearBookDepreciationAccumulated Book value(beg)Depreciation end of year1$34,000$13,600$13,600$20,4002$20,400$8,160$21,760$12,2403$12,240$4,896$26,656$7,3444
44、$7,344$1,672$28,328$5,6725$5,672$1,672$30,000$4,000YE SUN AccountingEnglish200946Revision of Depreciation EstimatesvDetermination of depreciation involves initial estimates(life,salvage value.)vWhen these estimates are revised,we re-compute depreciation.vThese revised depreciation expenses apply pro
45、spectively to the remaining life of assetvThese changes do not affect prior periods.YE SUN AccountingEnglish200947Revision of Depreciation Estimates:ExampleuAmber corporation buys a depreciable asset on January 1,2000 for$95,000.uEstimated life was 20 years.uEstimated salvage value was$5,000.uOn Jan
46、uary 1,2006,estimates were revised as follows:salvage value,$2,000 estimated life:24 years(years 2000 through 2023)Determine depreciation for 2006 based on straight line method of depreciation.YE SUN AccountingEnglish200948Revision of Depreciation Estimates:ExampletAccumulated depreciation to date o
47、f revision of estimates:($95,000-$5,000)/20 years=$4,500 dep$4,500*6 years=$27,000 accumulated depr.tAmount to be depreciated(years 2006 through 2023=18 years)($95,000-$27,000-$2,000)/18 years =$3,667(rounded)annual depreciationYE SUN AccountingEnglish200949Dispositions of PP&EnPlant assets may be:n
48、 retired voluntarily,orn disposed of by sale,exchange,involuntaryconversionnDepreciation is recorded up to the date of disposal before determining gain or lossnGains or losses from involuntary conversion are often reported as gain or loss.YE SUN AccountingEnglish200950Depletion:TerminologywDepletion
49、 refers to the cost basis write-off of natural resourceswNatural resources are characterized by:complete removal of the asset,and replacement of the asset only by an act of nature YE SUN AccountingEnglish200951Accounting for Exploration CostsExploration costs are usually expensed as incurredThese co
50、sts are capitalized when:they are substantial,and uncertainty exists regarding finding the natural resourceTwo competing approaches are employed in practice to account for exploration costs(next slide)YE SUN AccountingEnglish200952Accounting for Exploration CostsuThe two approaches are:Successful ef
