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Investments in Equity Securities Presentations for Chapter 8 by Glenn Owen.

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Presentation on theme: "Investments in Equity Securities Presentations for Chapter 8 by Glenn Owen."— Presentation transcript:

1 Investments in Equity Securities Presentations for Chapter 8 by Glenn Owen

2 Key Points Criteria that must be met before a security can be listed in the current assets section of the balance sheet. Trading and available-for-sale securities and how the mark- to-market rule is used to account for them. Why companies make long-term investments in equity securities. The mark-to-market method, the cost method, and the equity method of accounting for long-term equity investments, and the conditions under which each method is used. Consolidated financial statements, when they are prepared, and how they differ from financial statements that account for equity investments using the equity method.

3 Equity Securities Classified as Current Existence of a ready market – Readily marketable meaning that a security can be sold and converted into cash on demand Intention to convert

4 Trading and Available-For-Sale Securities Purchasing trading and available-for-sale securities Declaration and receipt of cash dividends Sale of securities Price changes of securities on hand at the end of the accounting period Reclassifications and permanent market value declines Mark-to-market accounting and comprehensive income

5 Purchasing Trading and Available-for-sale Securities Dr. Cr. Trading Securitiesxxx Available-for Sale Securitiesxxx Cashxxx Purchased trading and available-for-sale securities for cash.

6 Declaration and Receipt of Cash Dividends Dr. Cr. Dividends Receivablexxx Dividend Incomexxx Recognize declaration of dividend. Cashxxx Dividend Receivablexxx Recognize declaration of dividend.

7 Sale of Trading Securities Dr. Cr. Cash xxx Trading Securitiesxxx Realized Gain on Sale of Trading Securitiesxxx Sold trading securities for a gain or Cash xxx Realized Loss on Sale of Trading Securitiesxxx Trading Securitiesxxx Sold trading securities sold for a loss

8 Sale of Available-for-Sale Securities Dr. Cr. Cash xxx Available-for-Sale Securitiesxxx Realized Gain on Sale of Available-for-Sale Securities xxx Sold available-for-sale securities for a gain or Cash xxx Realized Loss on Sale of Available-for-Sale Securities xxx Sold available-for-sale securities for a loss

9 Price Changes of Securities On Hand at the End of the Period Dr. Cr. Trading Securitiesxxx Unrealized Gain on Trading Securities xxx Revalued trading securities to market or Unrealized Loss on Trading Securities xxx Trading Securitiesxxx Revalued trading securities to market

10 Price Changes of Securities On Hand at the End of the Period Dr. Cr. Available-for-Sale Securitiesxxx Unrealized Gain on Available-for-Sale Securities xxx Revalued available-for-sales securities to market or Unrealized Loss on Available-for-Sale Securities xxx Revalued available-for-sales securities to market

11 Long-Term Equity Investments The cost method – Market value is indeterminable – Ownership is less than 20 percent – No change is made in the carrying value of the investment The equity method – Significant influence ( percent ownership) – Periodically increase(decrease) the carrying value of the investment by the investors proportionate share of the net income (loss) of the investee. – Decrease the carrying value of the investment by dividends received.

12 Equity method cautions – This method will give rise to a difference between reported net income (loss) and cash flow from operations. – It ignores market price. – percent is not always a valid indication of significant influence. – It generates off-balance sheet financing Consolidated financial statements – Greater than 50 percent ownership – Purchase or pooling methods Long-Term Equity Investments

13 Accounting for Equity Securities Intend to liquidate within time period of current assets? Marketable? Proportion of voting shares Accounting Treatment Yes Mark-to- Market Equity Method Consoli- date No >50%20-50%<20%

14 Accounting for Equity Securities Intend to liquidate within time period of current assets? Marketable? Proportion of voting shares Accounting Treatment No No (implied) Cost Method Equity Method Consoli- date No >50%20-50%<20%

15 Goodwill Accounting Controversy Goodwill is defined as the excess amount paid for a corporation over the fair market value of the acquired companys assets and liabilities. Goodwill appears on the balance sheet. Until recently, goodwill was amortized over a future period not to exceed forty years. In July 2001, the FASB passed an accounting standard with removes the requirement to amortize goodwill.

16 SecuritiesCostMarket ValueMV - Cost *AAA$140$170$30 *BBB375350(25) **CCC Mark-to-market journal entry on 12/31/xx for AAA: * Trading security ** Available-for-sale security Trading Securities (AAA) (+A)30 Unrealized Gain on Trading Securities(R, +SE)30 Trading Securities (AAA) (+A)30 Unrealized Gain on Trading Securities(R, +SE)30 Review Problem I (a)

17 SecuritiesCostMarket ValueMV - Cost *AAA$140$170$30 *BBB375350(25) **CCC Mark-to-market journal entry on 12/31/xx for BBB: * Trading security ** Available-for-sale security Unrealized Loss on Trading Securities (Lo, -SE)25 Trading Securities (BBB) (-A) 25 Unrealized Loss on Trading Securities (Lo, -SE)25 Trading Securities (BBB) (-A) 25

18 SecuritiesCostMarket ValueMV - Cost *AAA$140$170$30 *BBB375350(25) **CCC Mark-to-market journal entry on 12/31/99 for CCC: * Trading security ** Available-for-sale security Available-for-Sale Securities (CCC) (+A)30 Unrealized Loss on Available-for-Sale Securities (+SE)30 Available-for-Sale Securities (CCC) (+A)30 Unrealized Loss on Available-for-Sale Securities (+SE)30 Review Problem I (a)

19 Review Problem I (b) SecuritiesCostMarket ValueMV - Cost *AAA$140$170$30 *BBB375350(25) **CCC Sold all of AAA in 2000 for $180: * Trading security ** Available-for-sale security Cash (+A)180 Trading Securities (-A)170 Realized Gain on Trading Securities (Ga, +SE)10 Cash (+A)180 Trading Securities (-A)170 Realized Gain on Trading Securities (Ga, +SE)10

20 SecuritiesCostMarket ValueMV - Cost *AAA$140$170$30 *BBB375350(25) **CCC Sold 20% of BBB in 2000 for $65: * Trading security ** Available-for-sale security Cash (+A)65 Realized Loss on Trading Securities (Lo, -SE5 Trading Securities (-A)70 Cash (+A)65 Realized Loss on Trading Securities (Lo, -SE5 Trading Securities (-A)70 20% Review Problem I (b)

21 SecuritiesCostMarket ValueMV - Cost *AAA$140$170$30 *BBB375350(25) **CCC Received $60 in BBB dividends and $30 in dividends were declared on CCC stock: * Trading security ** Available-for-sale security Cash (+A)60 Dividends Receivable (+A)30 Dividend Revenue (R, +SE)90 Cash (+A)60 Dividends Receivable (+A)30 Dividend Revenue (R, +SE)90 Review Problem I (b)

22 SecuritiesCostMarket ValueMV - Cost *AAA$140$170$30 *BBB375350(25) **CCC Revalued BBB shares to market 12/31/00: * Trading security ** Available-for-sale security Unrealized Loss on Trading Securities (Lo, -SE)40 Trading Securities (BBB) (-A) 40 $2 per share x 20 shares. Unrealized Loss on Trading Securities (Lo, -SE)40 Trading Securities (BBB) (-A) 40 $2 per share x 20 shares. Review Problem I (b)

23 SecuritiesCostMarket ValueMV - Cost *AAA$140$170$30 *BBB375350(25) **CCC Revalued CCC shares to market 12/31/00: * Trading security ** Available-for-sale security Unrealized Price Increase on Available-for-Sale Securities (-SE)15 Available-for-Sale Securities (CCC) (-A) 15 $1 per share x 15 shares. Unrealized Price Increase on Available-for-Sale Securities (-SE)15 Available-for-Sale Securities (CCC) (-A) 15 $1 per share x 15 shares. Review Problem I (b)

24 Review Problem I (c) SecuritiesCostMarket ValueMV - Cost *AAA$140$170$30 *BBB375350(25) **CCC Sold 20 shares of BBB stock during 2001: * Trading security ** Available-for-sale security Cash (+A)260 Trading Securities (BBB) (-A) 240 Realized Gain on Trading Securities (R, +SE)20 Gain of $1 per share x 20 shares. Cash (+A)260 Trading Securities (BBB) (-A) 240 Realized Gain on Trading Securities (R, +SE)20 Gain of $1 per share x 20 shares.

25 SecuritiesCostMarket ValueMV - Cost *AAA$140$170$30 *BBB375350(25) **CCC Sold 15 shares of CCC stock during 2001: * Trading security ** Available-for-sale security Cash (+A)165 Unrealized Gain on Available-for-Sale Securities (-SE)15 Available-for-Sale Securities (CCC) (-A)135 Realized Gain on Available-for-Sale Securities (Ga, +SE)45 Cash (+A)165 Unrealized Gain on Available-for-Sale Securities (-SE)15 Available-for-Sale Securities (CCC) (-A)135 Realized Gain on Available-for-Sale Securities (Ga, +SE)45 Review Problem I (c)

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