Adapted by Sheila Elworthy Neta PowerPoint presentations to accompany Volume 2 Accounting Second Canadian Edition by Warren/Reeve/Duchac/Elworthy/Kristjanson/Tober Adapted by Sheila Elworthy and Tana Kristjanson Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Chapter 15 Investments Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Investments Describe why companies invest in debt and equity securities. Describe and illustrate the accounting for non-strategic investments. Describe and illustrate the accounting for strategic investments. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Describe why companies invest in debt and equity securities. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Why Companies Invest Most companies generate cash from their operations. This cash can be used for the following purposes: Investing in current operations Investing to earn additional revenue Investing for strategic reasons Copyright © 2014 by Nelson Education Ltd.

Investing Cash in Current Operations Cash may be used to Replace worn-out equipment or to purchase new, more efficient, and productive equipment. Reinvest in the company to expand its current operations. Pay suppliers or other creditors. Pay interest on bonds/notes or pay dividends. Copyright © 2014 by Nelson Education Ltd.

Investing Cash to Earn Additional Revenue Instead of letting excess cash remain idle in a chequing account, most companies invest excess cash in temporary investments such as ... Copyright © 2014 by Nelson Education Ltd.

Investing Cash to Earn Additional Revenue Debt securities are notes and bonds that pay interest and have a fixed maturity date. Equity securities are preferred and common shares that represent ownership in a company and do not have a fixed maturity date. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Describe and illustrate the accounting for non-strategic investments. Copyright © 2014 by Nelson Education Ltd.

Accounting for Non-Strategic Investments Under IFRS, non-strategic investments are classified as follows: Held-for-Trading investments Held-to-Maturity investments Loans and Receivables Available-for-Sale investments Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Trading Investments Trading investments are debt and equity securities that are purchased and sold to earn short-term profits from changes in their market prices. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Trading Investments Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Trading Investments Reported as current assets. Valued as a portfolio (group). Valued at fair value through profit and loss method, the market price. Changes in fair value are recognized as unrealized holding gain or loss in net income. Brokerage fees are expensed. Copyright © 2014 by Nelson Education Ltd.

Example—Trading Investments On December 1, 2014, Maggie Inc. purchases 400 Armour Ltd. shares for $4,900, 500 Maven Ltd. shares for $10,700, and Polaris Corp. bonds with a $8,000 face value for $7,900, paying $23,500 plus a brokerage commission of $500. Maggie Inc. intends to report these securities as held-for-trading investments. Copyright © 2014 by Nelson Education Ltd.

The journal entry to record the purchase is as follows: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. On December 31, 2014, the cost and fair values of the investments were as follows: Name Total Cost Total Fair Value Armour Ltd. $ 4,900 $ 7,600 Maven Ltd. 10,700 9,400 Polaris Corp. Bonds 7,900 7,950 Total $23,500 $24,950 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. On December 31, 2014, the cost and fair values of the investments were as follows: Name Total Cost Total Fair Value Change in Value Armour Ltd. $ 4,900 $ 7,600 $ 2,700 Maven Ltd. 10,700 9,400 (1,300) Polaris Corp. Bonds 7,900 7,950 50 Total $23,500 $24,950 $1,450 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. The adjusting entry on December 31, 2014, to record the change in value of the investments is as follows: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-1 Valuing Held-for-Trading Investments at Fair Value On December 31, 2015, Complete Car Care Ltd. had the following costs and fair values for its held-for-trading investments: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-1 Valuing Held-for-Trading Investments at Fair Value Journalize the adjusting entry required on December 31, 2015, to recognize these investments at fair value. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 15-1 Valuing Held-for-Trading Investments at Fair Value For Practice: PE 15-1 Copyright © 2014 by Nelson Education Ltd.

Receipt of Additional Revenue The Polaris Corp. bonds have an $8,000 face value and pay 5% semi-annual interest on November 30 and May 31. On December 31, 2014, Maggie Inc. will recognize the future receipt of interest as follows: Copyright © 2014 by Nelson Education Ltd.

Receipt of Additional Revenue Copyright © 2014 by Nelson Education Ltd.

Receipt of Additional Revenue The Armour Ltd. shareholders received a $1.50 dividend on January 31, 2015. The journal entry to record receipt of the dividends on January 31, 2015, would be as follows: Copyright © 2014 by Nelson Education Ltd.

Receipt of Additional Revenue Copyright © 2014 by Nelson Education Ltd.

Accounting for Sale of Held-for-Trading Investments On February 24, 2015, Maggie Inc. sold 200 of the Maven Ltd. shares for $12 per share. The shares are valued at $18.80 ($9,400/500 shares). Assuming a brokerage fee of $200 on the sale, the transaction will be recorded as follows: Copyright © 2014 by Nelson Education Ltd.

Accounting for Sale of Held-for-Trading Investments Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-2 Journalizing the Sale of Held-for-Trading Investments Using the information from Example Exercise 15-1, journalize the entry required to record the sale on January 18, 2016, of one-half of the investment in Amber Woods Inc. for $5,000 less a $300 brokerage fee. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 15-2 Journalizing the Sale of Held-for-Trading Investments For Practice: PE 15-2 Copyright © 2014 by Nelson Education Ltd.

Held-To-Maturity Investments, Loans, and Receivables Held-to-maturity investments are debt investments, such as notes or bonds, that a company intends to hold until their maturity date. Copyright © 2014 by Nelson Education Ltd.

Held-to-Maturity Investments Reported as noncurrent assets unless the investment will mature within a year. Brokerage commissions may be expensed or capitalized. Reported on the balance sheet at their amortized cost. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Purchase of Bonds Homer Inc. purchases $18,000 of Sakata Ltd. bonds at their par value on April 14, 2015 (73 days after the last interest payment date). The bonds have an interest rate of 6%, payable on July 31 and January 31. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Purchase of Bonds $18,000 × 6% × (73/365) Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Interest Revenue On July 31, Homer Inc. receives a semiannual interest payment of $540 ($18,000 × 6% × ½). Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Interest Revenue ($540 – $216) Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Accrued Interest Homer Inc.’s accounting period ends on December 31. The following adjusted entry is required to record the accrued interest: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Accrued Interest Homer Inc. would report Interest Revenue on its 2015 income statement at $774 ($324 + $450). Copyright © 2014 by Nelson Education Ltd.

Reporting of Held-to-Maturity Investments Homer Inc. will report its investment in Sakata Ltd. Bonds as follows: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-3 Held-to-Maturity Transactions Journalize the entries to record the following selected held-to-maturity investment transactions for Tristan Ltd.: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-3 Held-to-Maturity Transactions Oct. 24. Purchased for cash, $80,000 of Arcon Corp. 7% bonds at 100 plus 146 days of accrued interest and $450 of brokerage fees. Tristan capitalizes brokerage fees on held-to-maturity investments. Nov. 30. Received the semiannual interest payment on the Arcon Corp. bonds. Dec. 31. Accrued interest on the Arcon Corp. bonds. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 15-3 Held-to-Maturity Transactions For Practice: PE 15-3 Copyright © 2014 by Nelson Education Ltd.

Purchase of Bonds at a Discount or Premium As discussed in Chapter 14, bond investments may be purchased at premium or a discount. If the bond rate of interest is more than the market rate, bonds are purchased at a premium. Copyright © 2014 by Nelson Education Ltd.

Purchase of Bonds at a Discount or Premium If the bond rate of interest is less than the market rate, bonds are purchased at a discount. Normally, the investment is recorded net, in one account, rather than at the face amount with a separate account for the premium or discount. Copyright © 2014 by Nelson Education Ltd.

Amortization of a Premium or Discount Any premium or discount should be amortized over the remaining life of the bond. Copyright © 2014 by Nelson Education Ltd.

Amortization of a Premium or Discount Bond Premium Amortization: Decreases Bond Investment and decreases Interest Revenue. Copyright © 2014 by Nelson Education Ltd.

Amortization of a Premium or Discount Bond Discount Amortization: Increases Bond Investment and increases Interest Revenue. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. On April 1, 2015, Crenshaw Ltd. purchases 10-year semiannual 8% bonds on their issuance date directly from XPS Corporation as a held-to-maturity investment. The bonds were purchased at 88. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Face amount of bonds $50,000 Less discount on bonds (6,000) Purchase price ($50,000 × 88%) $44,000 IFRS require the amortization to be computed using the effective interest method, but the straight-line method is acceptable under ASPE. Copyright © 2014 by Nelson Education Ltd.

Amortization Using the Effective Interest Method Purchase of bonds on April 1, 2015. Copyright © 2014 by Nelson Education Ltd.

Amortization Using the Effective Interest Method Receipt of semiannual interest, and amortization of discount using the effective interest method on October 1. Copyright © 2014 by Nelson Education Ltd.

Amortization Using the Effective Interest Method Adjusting entry for accrued interest and amortization of discount on December 31, Crenshaw Ltd.’s year-end. Copyright © 2014 by Nelson Education Ltd.

Amortization Using the Straight-Line Method Accounting for the Crenshaw Ltd. purchase of the XPS Corporation bonds, using the straight-line method acceptable under ASPE: Receipt of semiannual interest, and amortization of discount using the straight-line method on October 1. Copyright © 2014 by Nelson Education Ltd.

Amortization Using the Straight-Line Method Adjusting entry for accrued interest and amortization of discount on December 31, Crenshaw Ltd.’s year-end. Copyright © 2014 by Nelson Education Ltd.

Receipt of Maturity Value of Bond At the maturity date of the bonds, any premium or discount will be fully amortized and the book value (carrying value) of the bond investment account will equal the face amount of the bond. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. The XPS Corporation bonds mature on April 1, 2025. At that time, the discount will be totally amortized and the investment will have a balance of $50,000. The receipt of the face value of the bonds on April 1, 2025 is recorded as follows: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-4 Held-to-Maturity Transactions Journalize the entries to record the following selected held-to-maturity investment transactions for Cooper Ltd., using the effective interest method of amortization: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-4 Held-to-Maturity Transactions Purchased for cash $3,000,000 of XYZ Corp. 10‑year, 6% bonds at 102.25 on their issuance date, January 1. The market rate was 5.7%. The bonds pay interest on July 1 and January 1. Recorded receipt of the first semiannual interest payment and amortization of the premium on July 1. Recorded the adjusting entry for accrued interest and amortization of the premium on December 31, Cooper Ltd.’s year-end. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 15-4 Held-to-Maturity Transactions For Practice: PE 15-4 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-5 Held-to-Maturity Transactions Using the information from Example Exercise 15-4, journalize the following transactions using the straight-line method of amortization: receipt of the first semiannual interest payment and amortization of the premium on July 1. adjusting entry for accrued interest and amortization of the premium on December 31, Cooper Ltd.’s year-end. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 15-5 Held-to-Maturity Transactions For Practice: PE 15-5 Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments Available-for-sale Investments are debt and equity investments that are not classified as held-for-trading or held-to-maturity investments. Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments Available-for-sale investments are also valued at fair value, similar to the accounting for held-for-trading investments, with the following differences: Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments Brokerage fees can be capitalized. Reported as current or noncurrent assets. Changes in fair value are recognized as unrealized gain or loss in other comprehensive income. Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments On June 21, 2015, Montrose Inc., a publicly traded corporation using IFRS, purchased the following securities as available-for-sale investments, paying $200,000 plus a brokerage fee of $2,500. Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments Name Shares Cost Carmon Ltd. 1,000 $ 60,000 Rasscom Inc. 1,500 66,000 Normandy Corp. 3,000 74,000 $200,000 Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments The brokerage fees can be allocated to the investments proportionately, and are allocated as follows: Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments Name Shares Cost Fees Total Cost Carmon Ltd. 1,000 $ 60,000 $ 750 $ 60,750 Rasscom Inc. 1,500 66,000 825 66,825 Normandy Corp. 3,000 74,000 925 74,925 $200,000 $2,500 $202,500 Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments The journal entry to record the purchase is as follows: Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments On December 31, 2015, the cost and fair values of the securities are as follows: Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments Name Shares Total Cost Total Fair Value Change Carmon Ltd. 1,000 $ 60,750 $ 70,250 $9,500 Rasscom Inc. 1,500 66,825 67,250 425 Normandy Corp. 3,000 74,925 70,500 (4,425) $202,500 $208,000 $5,500 Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments The adjusting entry on December 31, 2015, to revalue the securities directly is as follows: Copyright © 2014 by Nelson Education Ltd.

Available-for-Sale Investments The unrealized holding gain (loss) is recognized as other comprehensive income. Copyright © 2014 by Nelson Education Ltd.

Other Comprehensive Income Other comprehensive income is defined as revenues, expenses, gains and losses that are recognized in comprehensive income but excluded from net income. Comprehensive income is closed into Accumulated other comprehensive income, a shareholders’ equity account. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-6 Valuing Available-for-Sale Investments at Fair Value On December 31, 2015, Rockin’ Lizards Ltd., a publicly traded corporation using IFRS, had the following costs and fair values for its available-for-sale investments: Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-6 Valuing Available-for-Sale Investments at Fair Value Journalize the adjusting entry required on December 31, 2015, to recognize these investments at fair value. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 15-6 Valuing Available-for-Sale Investments at Fair Value For Practice: PE 15-6 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. 3 Describe and illustrate the accounting for strategic investments. Copyright © 2014 by Nelson Education Ltd.

Accounting for Strategic Investments Strategic investments involve the purchase of a significant portion of the shares of another company and are usually for a specific purpose, such as: Reduction of costs Replacement of management Expansion Integration Copyright © 2014 by Nelson Education Ltd.

Accounting for Equity Investments A company may invest in the common or preferred shares of another company. The company investing in another company’s shares is the investor. The company whose shares are purchased is the investee. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. The percentages given are general rules only. Other factors could also play a role in the relationship between the two companies. Copyright © 2014 by Nelson Education Ltd.

Accounting for Strategic Investments Under IFRS, strategic investments are categorized into one of three classifications: Investment in associate Joint venture Business combination Copyright © 2014 by Nelson Education Ltd.

Investments in Associates If the investor purchases between 20% and 50% of the outstanding voting shares of the investee, the investor is usually considered to have significant influence over the investee and the investment is accounted for using the equity method. Copyright © 2014 by Nelson Education Ltd.

Purchase of Shares (Equity Method) Under the equity method, shares are recorded at cost including any brokerage commissions. Simpson Inc. purchased a 40% interest in Flanders Corporation’s common shares on January 2, 2015, for $350,000. Copyright © 2014 by Nelson Education Ltd.

Purchase of Shares (Equity Method) Copyright © 2014 by Nelson Education Ltd.

Recording Investee Net Income (Equity Method) For the year ending on December 31, 2015, Flanders Corporation reported net income of $105,000. Copyright © 2014 by Nelson Education Ltd.

Recording Investee Net Income (Equity Method) Investment Revenue, if significant, is reported as Other Income on Simpson Inc.’s income statement. Copyright © 2014 by Nelson Education Ltd.

Recording Investee Dividends (Equity Method) During the year, Flanders declared and paid cash dividends of $45,000. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Reporting of Investments in Associates Investments in associates are reported as noncurrent assets on the balance sheet. On December 31, 2015, Simpson Inc. would report its investment in Flanders Corporation as follows: Copyright © 2014 by Nelson Education Ltd.

Reporting of Investments in Associates Copyright © 2014 by Nelson Education Ltd.

Sale of Shares (Equity Method) On January 1, 2016, Simpson Inc. sold Flanders Corporation’s shares for $400,000, a gain of $26,000, calculated as follows: Copyright © 2014 by Nelson Education Ltd.

Sale of Shares (Equity Method) Proceeds from sale $400,000 Carrying value of share investment 374,000 Gain on sale $ 26,000 Copyright © 2014 by Nelson Education Ltd.

Sale of Shares (Equity Method) Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-7 Equity Method On January 2, Olson Ltd. acquired 35% of the outstanding common shares of Bryant Corp. for $140,000. For the year ended December 31, Bryant Corp. earned income of $44,000 and paid dividends of $20,000. Using the equity method, prepare the entries for Olson Ltd. for the purchase of the shares, Olson’s share of Bryant income, and the dividends received from Bryant Corp. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 15-7 Equity Method For Practice: PE 15-7 Copyright © 2014 by Nelson Education Ltd.

Accounting for Joint Ventures A joint venture is formed when two or more corporations enter into a contractual obligation for the purpose of a special project. Decisions are made jointly, with equal votes for the venturers, regardless of shareholding percentages. Copyright © 2014 by Nelson Education Ltd.

Accounting for Joint Ventures IFRS requires joint ventures to be accounted for by either the proportionate consolidation method or the equity method. Copyright © 2014 by Nelson Education Ltd.

Accounting for Business Combinations If the investor purchases more than 50% of the outstanding voting shares of the investee, the investor is considered to have control over the investee. The purchase is termed a business combination. Copyright © 2014 by Nelson Education Ltd.

Accounting for Business Combinations A corporation owning all or a majority of the voting shares of another company is called a parent company. The corporation that is controlled is called the subsidiary company. Copyright © 2014 by Nelson Education Ltd.

Accounting for Business Combinations Parent and subsidiary corporations often continue to maintain separate accounting records and prepare their own financial statements. In such cases, at the end of the year, the financial statements of the parent and subsidiary are combined in consolidated financial statements and reported as a single company. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. Summary of Valuing and Reporting of Investments Exhibit 2 (cont.) Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.

Dividend Yield Annual Dividends per Share Market Price per Share Copyright © 2014 by Nelson Education Ltd.

Shaw Communications Inc. Dividend Yield = $0.90 $19.37 = 4.65% Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. EXAMPLE EXERCISE 15-8 Dividend Yield On September 25, 2015, Lucas Corporation had a market price per common share of $8. For the previous year, Lucas paid an annual dividend of $0.16. Compute the dividend yield for Lucas Corporation. Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd. FOLLOW MY EXAMPLE 15-8 Dividend Yield For Practice: PE 15-8 Copyright © 2014 by Nelson Education Ltd.

Copyright © 2014 by Nelson Education Ltd.