Accounting Principles, Ninth Edition Chapter 16 Investments Accounting Principles, Ninth Edition

Accounting for Debt Instruments- COPY DOWN JOURNALS Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, for $54,000, including brokerage fees of $1,000. The entry to record the debt investment (purchase) is: Jan. 1 SO 2 Explain the accounting for debt investments.

Accounting for Debt Instruments COPY DOWN JOURNALS Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, for $54,000, including brokerage fees of $1,000. The bonds pay interest semiannually on July 1 and January 1. The entry for the receipt of interest on July 1 is: July 1

Accounting for Debt Instruments COPY DOWN JOURNALS Illustration: If Kuhl Corporation’s fiscal year ends on December 31, prepare the entry to accrue interest since July 1. (Hint- accrue means you will receive in future) Dec. 31 Kuhl reports receipt of the interest on January 1 as follows. Jan. 1

Accounting for Debt Instruments Question An event related to an investment in debt securities that does not require a journal entry is: acquisition of the debt investment. receipt of interest revenue from the debt investment. a change in the name of the firm issuing the debt securities. sale of the debt investment. SO 2 Explain the accounting for debt investments.

Accounting for Debt Instruments-COPY DOWN JOURNALS Illustration: Assume that Kuhl corporation receives net proceeds of $58,000 (you paid $54,000) on the sale of the Doan Inc. bonds on January 1, after receiving the interest due. Prepare the entry to record the sale of the bonds. (GAIN ON SALE) Jan. 1

Accounting for Debt Instruments-COPY DOWN JOURNALS Illustration: Assume that Kuhl corporation receives net proceeds of $50,000 (you paid $54,000) on the sale of the Doan Inc. bonds on January 1, after receiving the interest due. Prepare the entry to record the sale of the bonds. (LOSS ON SALE) Jan 1

Debt Investments- PRACTICE ABC Corporation had the following transactions pertaining to debt investments. Jan. 1 Purchased 30, $1,000 Hillary Co. 10% bonds for $30,000, plus brokerage fees of $900. Interest is payable semiannually on July 1 and January 1. July 1 Received semiannual interest on Hillary Co. bonds. July 1 Sold 15 Hillary Co. bonds for $15,000, less (minus) $400 brokerage fees. Journalize the 3 transactions above Prepare the adjusting entry for the accrual of interest on 12/31. (hint: were any bonds sold?)

Cost of bonds Ross Corporation purchased 7,000 bonds at $100 plus $8,200 brokerage fees as a short-term investment. The bonds were subsequently sold at $105 per share less $8,400 brokerage fees. The cost of the bonds purchased and gain or loss on the sale were Cost Gain or Loss a. $708,200 $26,000 gain b. $700,000 $26,400 gain c. $708,200 $18,400 gain d. $702,800 $18,400 loss

COMPLETE BE 16-1 You purchased debt investments for $52,000 on 1/1/12. (Face Value of $50,000 and 6% interest) Interest payments are made semi-annually- (on 7/1 & 1/1) Journalize the debt investment purchase & the receipt of the interest on 7/1. (assume no interest has accrued) Jan.  1 July  1

1. You bought 100 bonds for a total cost of $53,000 on 4/1 1. You bought 100 bonds for a total cost of $53,000 on 4/1. On 6/1 you sold your 100 bonds for $49,000. Journalize the sale to show a gain/loss 2. You bought 100 bonds for a total cost of $53,000 on 4/1. On 6/1 you sold your 100 bonds for $59,000. Journalize the sale to show a gain/loss

Accounting for Stock Investments Ownership Percentages 0 --------------20% ------------ 50% -------------- 100% No significant influence usually exists Significant influence usually exists Control usually exists Investment valued using Cost Method Investment valued using Equity Method Investment valued on parent’s books using Cost Method or Equity Method (investment eliminated in Consolidation) Fair Value – next slide Equity Method - The accounting depends on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation. SO 3 Explain the accounting for stock investments.

Holdings of Less than 20% - COPY DOWN JOURNALS Illustration: On July 1, Sanchez Corporation acquires 1,000 shares (10% ownership) of Beal Corporation common stock. Sanchez pays $40 per share plus brokerage fees of $500. The entry for the stock purchase (< 20% ownership) is: July 1 SO 3 Explain the accounting for stock investments.

Holdings of Less than 20% - COPY DOWN JOURNALS Illustration: During the time Sanchez owns 1,000 shares stock & it makes entries for any cash dividends received. If Sanchez receives a $2 per share dividend on December 31, the entry is to record the receipt of the dividend (< 20% ownership) is: Dec. 31 SO 3 Explain the accounting for stock investments.

Holdings of Less than 20% - COPY DOWN JOURNALS Illustration: Assume that Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal stock on February 10. Because the stock’s originally costs $40,500. The entry to record the sale (< 20% ownership) is:(LOSS ON STOCK) Feb. 10

Holdings of Less than 20% - COPY DOWN JOURNALS Illustration: Assume that Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal stock on February 10. Because the stock’s originally costs $38,500. The entry to record the sale (< 20% ownership) is: (GAIN ON STOCK) Feb. 10

Review On 10/1, ABC buys 2000 shares of common stock for $40,000 (< 20%), plus brokerage fees of $1,700. On 11/1, ABC receives a $2 cash dividend per share. On 12/1, ABC sells the stock for $30,000. Journalize the stock purchase, dividend receipt & sale of the stock.

Cost of Securities Ross Corporation purchased 6,000 shares of Hunter common stock at $60 per share plus $7,200 brokerage fees as a short-term investment. The shares were subsequently sold at $65 per share less $8,400 brokerage fees. The cost of the securities purchased and gain or loss on the sale were Cost Gain or Loss a. $360,000 $30,000 gain b. $360,000 $14,400 gain c. $367,200 $14,400 gain d. $367,200 $14,400 loss

Balance Sheet Presentation Realized and Unrealized Gain or Loss The unrealized gain or loss is calculated based on how much you would gain or lose IF you sold the investment. NOTE- the investment isn’t sold (PAPER LOSS/GAIN) Unrealized gain or loss on available-for-sale securities are reported as a separate component of stockholders’ equity.

Unrealized gain/loss At the end of its first year, the trading securities portfolio consisted of the following securities: Cost Market Value Magnum Corp. $38,000 $40,000 Spencer Inc. 49,000 43,000 $87,000 $83,000 The unrealized loss to be recognized is a. $2,000. b. $6,000. c. $4,000. d. none of the above.

Debt & Stock Review You purchased debt investments for $52,000. (Face Value of $50,000 and 6% interest) Journalize the debt investment purchase & the receipt of the interest on 7/1. You buy 5000 shares of common stock for $54,000, plus brokerage fees of $1,700. You receive a $2 cash dividend per share. Journalize the stock purchase & dividend receipt

ONLINE ASSESSMENT: Financial Statement Review USE THE FINANCIAL STATEMENT REVIEW FORMULAS ON THE LAST PAGE OF THE CH 16 OUTLINE TO HELP YOU WITH THIS ASSESSMENT. STOP