Chapter 16-1 CHAPTER 16 INVESTMENTS Accounting Principles, Eighth Edition

Chapter 16-2 Why Corporations Invest LO 1 Discuss why corporations invest in debt and stock securities. WE are investing!!! We are not borrowing funds or issuing bonds!!!

Chapter 16-3 Corporations generally invest in debt or stock securities for one of three reasons. Why Corporations Invest LO 1 Discuss why corporations invest in debt and stock securities. 1. Corporation may have excess cash. 2. To generate earnings from investment income. 3. For strategic reasons.

Chapter 16-4 LO 1 Discuss why corporations invest in debt and stock securities.

Chapter 16-5 Accounting for Debt Instruments LO 2 Explain the accounting for debt investments. Three entries required: 1) acquisition- the cost principle applies 2) interest revenue 3) sale

Chapter 16-6 Accounting for Debt Instruments LO 2 Explain the accounting for debt investments. Recording Acquisition of Bonds Recording Bond Interest

Chapter 16-7 Accounting for Debt Instruments LO 2 Explain the accounting for debt investments. Sale of Bonds Credit the investment account for the cost of the bonds and… record as a gain or loss any difference between the net proceeds from the sale (sales price less brokerage fees) and the cost of the bonds.

Chapter 16-8 Exercise: Issel Corporation had the following transactions pertaining to debt investments. Jan. 1 Purchased 60, 8%, $1,000 Hollis Co. bonds for $60,000 cash plus brokerage fees of $900. Interest is payable semiannually on July 1 and January 1. July 1 Received semiannual interest on Hollis Co. bonds. July 1 Sold 30 Hollis Co. bonds for $34,000 less $500 brokerage fees. Instructions (a) Journalize the transactions. (b) Prepare the adjusting entry for the accrual of interest at December 31. Accounting for Debt Instruments LO 2 Explain the accounting for debt investments.

Chapter 16-9 Exercise: Jan. 1 Purchased 60, 8%, $1,000 Hollis Co. bonds for $60,000 cash plus brokerage fees of $900. Interest is payable semiannually on July 1 and January 1. Jan 1 * ($60,000 + $900 = $60,900) * Accounting for Debt Instruments LO 2 Explain the accounting for debt investments.

Chapter Exercise: July 1 Received semiannual interest on Hollis Co. bonds. July 1 Sold 30 Hollis Co. bonds for $34,000 less $500 brokerage fees. July 1 * ($60,000 x 8% x ½ = $2,400) *** ($60,900 x ½ = $30,450) * *** ** ($34,000 - $500 = $33,500) ** Accounting for Debt Instruments LO 2 Explain the accounting for debt investments.

Chapter Exercise: (b) Prepare the adjusting entry for the accrual of interest at December 31. Dec 31 * ($30,000 x 8% x ½ = $1,200) * Accounting for Debt Instruments LO 2 Explain the accounting for debt investments.

Chapter 16-12

Chapter Companies use the cost method. Under the cost method, companies record the stock investment at cost, and recognize revenue only when cash dividends are received. Remember!: Holdings of Less than 20% LO 3 Explain the accounting for stock investments.

Chapter Exercise: Dossett Company had the following transactions pertaining to stock investments. Feb. 1 Purchased 800 shares of Hippo common stock (2%) for $8,000 cash, plus brokerage fees of $200. July 1 Received cash dividends of $1 per share on Hippo common stock. Sept. 1 Sold 300 shares of Hippo common stock for $4,400, less brokerage fees of $100. Instructions Journalize the transactions. LO 3 Explain the accounting for stock investments. Holdings of Less than 20%

Chapter Exercise: Feb. 1 Purchased 800 shares of Hippo common stock (2% of the company) for $8,000 cash, plus brokerage fees of $200. July 1 Received cash dividends of $1 per share on Hippo common stock. LO 3 Explain the accounting for stock investments. Stock investments 8,200 Feb. 1 Cash8,200 * ($8,000 + $200 = $8,200) Cash 800 Dividend revenue800 ** (800 x $1 = $800) * ** July 1 Holdings of Less than 20%

Chapter Exercise: Sept. 1 Sold 300 shares of Hippo common stock for $4,400, less brokerage fees of $100. LO 3 Explain the accounting for stock investments. Sept. 1 * ($4,400 - $100 = $4,300) ** ($8,200 x 3/8 = $3,075) * ** Holdings of Less than 20%

Chapter Holdings Between 20% and 50% Equity Method Record the investment at cost and subsequently adjust the amount each period for If investor’s share of investee’s losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method. LO 3 Explain the accounting for stock investments.

Chapter Exercise: Exercise: (Equity Method) On January 1, 2011, Pennington Corporation purchased 30% of the common shares of Edwards Company for $180,000. During the year, Edwards earned net income of $80,000 and paid dividends of $20,000. Instructions Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in Holdings Between 20% and 50% LO 3 Explain the accounting for stock investments.

Chapter Exercise: Exercise: Pennington purchased 30% of the common shares of Edwards for $180,000. Edwards earned net income of $80,000 and paid dividends of $20,000. Holdings Between 20% and 50% ($20,000 x 30%) ($80,000 x 30%) LO 3 Explain the accounting for stock investments. Purchase Income Dividends

Chapter After Pennington posts the transactions for the year, its investment and revenue accounts will show the following. DebitCredit Stock Investments 180,000 24,000 DebitCredit Investment Revenue Holdings Between 20% and 50% LO 3 Explain the accounting for stock investments. Exercise: Exercise: Pennington purchased 30% of the common shares of Edwards for $180,000. Edwards earned net income of $80,000 and paid dividends of $20, ,000 6, ,000

Chapter Holdings of More Than 50% Controlling Interest - When one corporation acquires 50%+ in another corporation  Investor is referred to as the parent.  Investee is referred to as the subsidiary.  Investment in the subsidiary is reported on the parent’s books as a long-term investment.  Parent generally prepares consolidated financial statements. LO 4 Describe the use of consolidated financial statements.

Chapter Valuing and Reporting Investments Categories of Securities Companies classify debt and stock investments into three categories:  Trading securities  Available-for-sale securities  Held-to-maturity securities These guidelines apply to all debt securities and all stock investments in which the holdings are less than 20%. LO 5 Indicate how debt and stock investments are reported in financial statements.

Chapter Valuing and Reporting Investments Trading Securities Companies hold trading securities with the intention of selling them in a short period. Trading means frequent buying and selling. Companies report trading securities at fair value, and report changes from cost as part of net income. LO 5 Indicate how debt and stock investments are reported in financial statements.

Chapter Valuing and Reporting Investments Available-for-Sale Securities Companies hold available-for-sale securities with the intent of selling these investments sometime in the future. These securities can be classified as current assets or as long-term assets, depending on the intent of management. Companies report securities at fair value, and report changes from cost as a component of the stockholders’ equity section. LO 5 Indicate how debt and stock investments are reported in financial statements.

Chapter Marketable securities bought and held primarily for sale in the near term are classified as: a.available-for-sale securities. b.held-to-maturity securities. c.stock securities. d.trading securities Question Valuing and Reporting Investments LO 5 Indicate how debt and stock investments are reported in financial statements.