Chapter 16-1 Accounting for Invetments Session 11 (I & 2) This presentation shall be delivered by class participants collectively and those who only listen shall also be marked for class participation There may be a verbal quiz following each presentation

Chapter 16-2 Accounting for Invetments Session 11 (I & 2) Next slide contains participant wise distribution of topics to be delivered. The participants can add slides for their topics and can bring in their own material for discussion

Chapter Investment Motives (By Owais: 10 minutes: 3 to 5) 2. 2.Accounting for Debt Investments (By Shehzad: 20 to 30 minutes: 6 to 13) 3. 3.Accounting for stock investments: Less than 20% stake (Huzaifa: 10 to 15 minutes: 14 to 18) (Shahid: 10 to 20 minutes: 19 to 23) (Ali Mansoor: 10 to 20 minutes: 24 to 26) 4. 4.Accounting for stock investments: B/w 20% & 50% stake (Amjad: 30 minutes: 27 to 31) 5. 5.Balance Sheet Presentation: (Ubaid Younus: 15 to 20 minutes: 32 to 38) Study Objectives

Chapter 16-4 Chapter 16 Investments Accounting Principles, Ninth Edition

Chapter 16-5 Corporations generally invest in debt or stock securities for one of three reasons. Why Corporations Invest SO 1 Discuss why corporations invest in debt and stock securities. 1. Corporation may have excess cash Held for Trading & Debt Securities 2. To generate earnings from investment income Available For Sale & Debt Securities 3. For strategic reasons Subsidiaries & Associated Companies

Chapter 16-6 Pension funds and banks regularly invest in debt and stock securities to: a.house excess cash until needed. b.generate earnings. c.meet strategic goals. d.avoid a takeover by disgruntled investors. Question Why Corporations Invest SO 1 Discuss why corporations invest in debt and stock securities.

Chapter 16-7 Accounting for Debt Investments SO 2 Explain the accounting for debt investments. Recording Acquisition of Bonds Cost includes all expenditures necessary to acquire these investments, such as the price paid plus brokerage fees (commissions), if any. Recording Bond Interest Calculate and record interest revenue based upon the carrying value of the bond ??? times the interest rate times the portion of the year the bond is outstanding.

Chapter 16-8 Accounting for Debt Investments SO 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 16-9 Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, 2010, for $54,000, including brokerage fees of $1,000. The entry to record the investment is: Debt investments 54,000 Cash 54,000 Accounting for Debt Investments SO 2 Explain the accounting for debt investments. Jan. 1

Chapter Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, 2010, 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: Accounting for Debt Investments SO 2 Explain the accounting for debt investments. Cash 2,000 Interest revenue2,000 * ($50,000 x 8% x ½ = $2,000) * July 1 What if company closes its accounts six monthly!!! Monthly !!!

Chapter Illustration: If Kuhl Corporation’s fiscal year ends on December 31, prepare the entry to accrue interest since July 1. Accounting for Debt Investments SO 2 Explain the accounting for debt investments. Interest receivable2,000 Interest revenue2,000 Kuhl reports receipt of the interest on January 1 as follows. Cash2,000 Interest receivable2,000 Dec. 31 Jan. 1

Chapter Illustration: Assume that Kuhl corporation receives net proceeds of $58,000 on the sale of the Doan Inc. bonds on January 1, 2011, after receiving the interest due. Prepare the entry to record the sale of the bonds. Accounting for Debt Investments SO 2 Explain the accounting for debt investments. Cash58,000 Debt investments54,000 Gain on sale of investments4,000 Jan. 1

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

Chapter When bonds are sold, the gain or loss on sale is the difference between the: a.sales price and the cost of the bonds. b.net proceeds and the cost of the bonds. c.sales price and the market value of the bonds. d.net proceeds and the market value of the bonds. Question Accounting for Debt Investments SO 2 Explain the accounting for debt investments.

Chapter % % % No significant influence usually exists Significant influence usually exists Control usually exists Investment valued using Cost Method Subsequent market value adjustments Investment valued using Equity Method Investment valued on parent’s books using Cost Method or Equity Method (investment eliminated in Consolidation) Ownership Percentages Accounting for Stock Investments SO 3 Explain the accounting for stock investments. The accounting depends on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation. Strategic Motives Investment

Chapter Companies use the cost method. Under the cost method, companies record the investment at cost, and recognize revenue only when cash dividends are received. Cost includes all expenditures necessary to acquire these investments, such as the price paid plus any brokerage fees (commissions). Holdings of Less than 20% SO 3 Explain the accounting for stock investments.

Chapter July 1 SO 3 Explain the accounting for stock investments. Holdings of Less than 20% Illustration: On July 1, 2010, 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 purchase is: Stock investments40,500 Cash40,500

Chapter Dec. 31 SO 3 Explain the accounting for stock investments. Holdings of Less than 20% Illustration: During the time Sanchez owns the stock, it makes entries for any cash dividends received. If Sanchez receives a $2 per share dividend on December 31, the entry is: Cash2,000 Dividend revenue2,000 What should be the entry by Sanchez if Beal Company approved dividends but not yet paid !

Chapter Feb. 10 SO 3 Explain the accounting for stock investments. Holdings of Less than 20% Illustration: Assume that Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal stock on February 10, Because the stock cost $40,500, Sanchez incurred a loss of $1,000. The entry to record the sale is: Cash39,500 Loss on sale of stock1,000 Stock investments40,500

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%. SO 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. SO 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. SO 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 SO 5 Indicate how debt and stock investments are reported in financial statements.

Chapter Illustration: Investment of Pace classified as trading securities on December 31, Trading Securities The adjusting entry for Pace Corporation is: SO 5 Indicate how debt and stock investments are reported in financial statements. Dec. 31 Trading Invest. Valuation a/c7,000 (Balance Sheet) Unrealized gain / Loss on Trading Invest.7,000 (Income Statement) Illustration 16-7

Chapter Problem: Problem: How would the entries change if the securities were classified as available-for-sale? The entries would be the same except that the Unrealized Gain or Loss—Equity (Balance Sheet) account is used instead of Unrealized Gain or Loss—Income Statement A/c. The unrealized gain / loss would be added / deducted from the stockholders’ equity section rather than charged to the income statement. Available-for-Sale Securities SO 5 Indicate how debt and stock investments are reported in financial statements.

Chapter Illustration: Assume that Ingrao Corporation has two securities that it classifies as available-for-sale. Illustration 16-8 provides information on their valuation. The adjusting entry for Ingrao Corporation is: SO 5 Indicate how debt and stock investments are reported in financial statements. Dec. 31 Unrealized gain / loss on AFS Invest.9,537 Balance Sheet – Equity) AFS Invest. Valuation a/c9,537 (Balance Sheet) Illustration 16-8 Available-for-Sale Securities

Chapter An unrealized loss on available-for-sale securities is: a.reported under Other Expenses and Losses in the income statement. b.closed-out at the end of the accounting period. c.reported as a separate component of stockholders' equity. d.deducted from the cost of the investment. Question Available-for-Sale Securities SO 5 Indicate how debt and stock investments are reported in financial statements.

Chapter Holdings Between 20% and 50% Equity Method Record the investment at cost and subsequently adjust the amount each period for  the investor’s proportionate share of the earnings (losses) and  dividends received by the investor  The investee company is known as associated company of the investor company If investor’s share of investee’s losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method. SO 3 Explain the accounting for stock investments.

Chapter Under the equity method, the investor records dividends received by crediting: a.Dividend Revenue. b.Investment Income. c.Revenue from Investment. d.Stock Investments. Question Holdings Between 20% and 50% SO 3 Explain the accounting for stock investments.

Chapter Illustration: Illustration: Milar Corporation acquires 30% of the common shares of Beck Company for $120,000 on January 1, For 2010, Beck reports net income of $100,000 and paid dividends of $40,000. Prepare the entries for these transactions. Stock investments 120,000 Cash 120,000 Cash12,000 Stock investments12,000 Stock investments 30,000 Revenue from investments30,000 Holdings Between 20% and 50% ($40,000 x 30%) ($100,000 x 30%) SO 3 Explain the accounting for stock investments. Jan. 1 Dec. 31

Chapter After Milar posts the transactions for the year, its investment and revenue accounts will show the following. DebitCredit Stock Investments 120,000 30,000 DebitCredit Revenue from Investments Holdings Between 20% and 50% SO 3 Explain the accounting for stock investments. 30,000 12, ,000 Illustration: Illustration: Milar Corporation acquires 30% of the common shares of Beck Company for $120,000 on January 1, For 2010, Beck reports net income of $100,000 and paid dividends of $40,000. Prepare the entries for these transactions.

Chapter Exercise: Exercise: (Equity Method) On January 1, 2010, Pennington Corporation purchased 25% 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% SO 3 Explain the accounting for stock investments.

Chapter Holdings of More Than 50% Controlling Interest - When one corporation acquires a voting interest of more than 50 percent 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. SO 4 Describe the use of consolidated financial statements.

Chapter 16-34

Chapter Also called marketable securities, are securities held by a company that are (1)readily marketable and (2)intended to be converted into cash within the next year or operating cycle, whichever is longer. Short-Term Investments Balance Sheet Presentation SO 6 Distinguish between short-term and long-term investments. Investments that do not meet both criteria are classified as long-term investments.

Chapter Nonoperating items related to investments Presentation of Realized and Unrealized Gain or Loss Balance Sheet Presentation SO 6 Distinguish between short-term and long-term investments. Illustration 16-10

Chapter Realized and Unrealized Gain or Loss Balance Sheet Presentation SO 6 Distinguish between short-term and long-term investments. Unrealized gain or loss on available-for-sale securities are reported as a separate component of stockholders’ equity. Illustration 16-11

Chapter Balance Sheet Presentation SO 6 Distinguish between short-term and long-term investments. Classified Balance Sheet (partial) Illustration 16-12

Chapter “Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” CopyrightCopyright