1. Click to edit Master title style 1 1 1 Investments in Stocks 14

2. Click to edit Master title style 2 2 2 14-5 Accounting for Investments in Stocks Like individuals, businesses have a variety of reasons for investing in stocks, called equity securities. A business may purchase stocks as a means of earning a return on excess cash that it does not need for its normal operations.

3. Click to edit Master title style 3 3 3 Trading securities are securities that management intends to actively trade for profit. 14-5 Available-for-sale securities are securities that management expects to sell in the future, but which are not actively traded for profit.

4. Click to edit Master title style 4 4 4 14-5 When a business invests in available-for-sale securities, such investments are classified as temporary investments or marketable securities.

5. Click to edit Master title style 5 5 5 14-5 Marketable securities must meet two conditions: 1.The securities must be readily marketable, and can be sold for cash at any time. 2.Management must intend to sell the securities when the business needs cash for operations.

6. Click to edit Master title style 6 6 6 62 On June 1, Crabtree Company purchased 2,000 shares of Inis Corporation common stock at $89.75 per share plus a brokerage fee of $500. The firm paid $180,000 [($89.75 x 2,000 shares) + $500]. June 1Marketable Securities180 000 00 Purchased 2,000 shares of Inis Corporation common stock. Cash 180 000 00 14-5

7. Click to edit Master title style 7 7 7 63 Nov 30Cash1 800 00 Received dividends on Inis Corporation common stock (2,000 shares x $0.90). Dividend Revenue 1 800 00 14-5 On October 1, Inis declared a $0.90 per share dividend payable on November 30.

8. Click to edit Master title style 8 8 8 On the balance sheet, temporary investments are reported at their fair market value. Any difference between the fair market value and their cost is an unrealized holding gain or loss. 14-5 Unrealized Holdings Gain or Loss

9. Click to edit Master title style 9 9 9 65 Unrealized Common Stock Cost Market Gain (Loss) Edwards Inc.$150,000$190,000$40,000 SWS Corp.200,000200,000— Inis Corporation180,000210,00030,000 Bass Co. 160,000 150,000(10,000) Total$690,000$750,000$60,000 The Crabtree Co.’s portfolio of temporary investments was purchased during 2008 and has the following fair market values and unrealized gains and losses on December 31, 2008. 14-5

10. Click to edit Master title style 10 14-5 Temporary Investments on the Balance Sheet 66

11. Click to edit Master title style 11 Long-term investments are not intended as a source of cash in the normal operations of the business. Rather, such investments are often held for their income, long-term gain potential, or influence over another business entity. 14-5 Long-Term Investments in Stocks

12. Click to edit Master title style 12 Account for the investment by using the equity method 14-5 Accounting for Long-Term Stock Investments Is there a significant influence over the investee? NoYes Account for the investment as an available-for-sale security 70

13. Click to edit Master title style 13 71 14-5 Jan. 2Investment in Brock Corp. Stock 350 000 00 Purchased 40% of Brock Corp. common stock. Cash 350 000 00 On January 2, Hally Inc. pays cash of $350,000 for 40% of the common stock and net assets of Brock Corporation.

14. Click to edit Master title style 14 72 14-5 Dec. 31Investment in Brock Corp. Stock 42 000 00 Recorded 40% share of Brock Corp. net income of $105,000. Income of Brock Corp.42 000 00 For the year ending December 31, Brock Corporation reports net income of $105,000.

15. Click to edit Master title style 15 73 14-5 Dec. 31Cash18 000 00 Recorded 40% share of Brock Corp. dividends. Investment in Brock Corp.Stock18 000 00 On December 31, Brock Corporation pays $45,000 in dividends.

16. Click to edit Master title style 16 74 14-5 Investments and Dividends

17. Click to edit Master title style 17 75 14-5 Mar. 1Cash17 500 00 Investment in Drey Inc. Stock15 700 00 Gain on Sale of Investments1 800 00 Sale of Investments in Stocks On March 1, an investment in Drey Inc. stock that had a carrying amount of $15,700 is sold for $17,500.

18. Click to edit Master title style 18 Example Exercise 14-6 14-5 Phillips Company purchased 30% of the outstanding stock of Singh Company on January 1, 2008. Singh reported net income of $90,000 and declared dividends of $15,000 during 2008. How much would Phillips adjust their investment in Singh Company under the equity method? 76