3 Investments Learning Objectives Discuss why corporations invest in debt (債券) and share (股票) securities.Explain the accounting for debt investments.Explain the accounting for share investments.Describe the use of consolidated financial statements (合併財務報表).Indicate how debt and share investments are reported in financial statements.Distinguish between short-term and long-term investments (短期與長期投資).InvestmentsChapter12
5 Temporary investments and the operating cycle Why Corporations InvestCorporations purchase investments in debt or share securities for one of three reasons.Corporation may have excess cash.To generate earnings from investment income.For strategic reasons.Illustration 12-1Temporary investments and the operating cycle
6 Why Corporations Invest QuestionPension funds and banks regularly invest in debt and share securities to:house excess cash until needed.generate earnings.meet strategic goals.avoid a takeover by disgruntled investors.
7 Accounting for Debt Investments Debt investments are investments in government and corporation bonds. In accounting for debt investments, firms make entries to recordThe acquisition,the interest revenue, andthe sale7
8 Accounting for Debt Investments Recording Acquisition of BondsCost includes all expenditures necessary to acquire these investments, such as the price paid plus brokerage fees (commissions), if any.Recording Bond InterestCalculate 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.
9 Accounting for Debt Investments Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, €1,000 bonds on January 1, 2014, for €50,000. The entry to record the investment is:Jan. 1Debt Investments 50,000Cash 50,000
10 Accounting for Debt Investments Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, €1,000 bonds on January 1, 2014, for €50,000. The bonds pay interest semiannually on July 1 and January 1. The entry for the receipt of interest on July 1 is:July 1Cash 2,000*Interest Revenue 2,000* (€50,000 x 8% x ½ = €2,000)
11 Accounting for Debt Investments Illustration: If Kuhl Corporation’s fiscal year ends on December 31, prepare the entry to accrue interest since July 1.Dec. 31Interest Receivable 2,000Interest Revenue 2,000(Other income and expenses)Kuhl reports receipt of the interest on January 1 as follows.Jan. 1Cash 2,000Interest Receivable 2,000
12 Accounting for Debt Investments Recording Sale of BondsCredit 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.Debt InvestmentsCashBonds(Investments)CashBuySaleCashDebt Investments12
13 Accounting for Debt Investments Illustration: Assume that Kuhl corporation receives net proceeds of €54,000 on the sale of the Doan Inc. bonds on January 1, 2015, after receiving the interest due. Prepare the entry to record the sale of the bonds.Jan. 1Cash 54,000Debt Investments 50,000Gain on Sale of Debt Investments 4,000(Other income and expense)
14 Accounting for Debt Investments QuestionWhen bonds are sold, the gain or loss on sale is the difference between the:sales price and the cost of the bonds.net proceeds and the cost of the bonds.sales price and the market value of the bonds.net proceeds and the market value of the bonds.
15 Accounting for Share Investments Share investments are investments in the shares of other corporations. When a company holds shares of several different corporations, the group of securities is identified as an investment portfolio.The accounting for investments in shares depends on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation (the investee).15
16 Accounting for Share Investments Investor’s Ownership Interest in Investee’s Ordinary Shares% % %insignificant influence on InvesteeSignificant influence on InvesteeControlling usually existsConsolidated financial statementsInvestment valued using Cost MethodInvestment valued using Equity MethodFair Value – next slideEquity Method -The accounting depends on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation (the Investee).
17 Accounting for Share Investments Holding of Less than 20%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).
18 Holding of Less than 20% Recording Acquisition of Share Investments Illustration: On July 1, 2014, Lee Corporation acquires 1,000 shares (10% ownership) of Beal Corporation. Lee pays HK$405 per share. The entry for the purchase is:July 1Share Investments 405,000Cash 405,000
19 Holding of Less than 20% Recording Dividends Illustration: During the time Lee owns the shares, it makes entries for any cash dividends received. If Lee receives a HK$20 per share dividend on December 31, the entry is:Dec. 31Cash 20,000Dividend Revenue 20,000(Other income and expense)
20 Holding of Less than 20% Recording Sale of Shares Illustration: Assume that Lee Corporation receives net proceeds of HK$395,000 on the sale of its Beal shares on February 10, Because the shares cost HK$405,000, Lee incurred a loss of HK$10,000. The entry to record the sale is:Feb. 10Cash ,000Loss on Sale of Share Investments 10,000(Other income and expense)Share Investments 405,000
21 Accounting for Share Investments Holding Between 20% and 50%Equity Method: Record the investment at cost and subsequently adjusts the investment account each period for theinvestor’s share of the associate’s (investee’s) net income anddividends received by the investor.If investor’s share of investee’s losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method.
22 Investor has significant influence over an investee (associate) Owns between 20% and 50% of the ordinary shares of a investeeInvestor(Time Warner)Investee(TunerBroadcasting)Proportionate share of associate’s net incomeInvestmentNet incomeDecrease the investment account for the amount of dividends receivedDividendInvestment
23 Holdings Between 20% and 50% Illustration: Milar Corporation acquires 30% of the ordinary shares of Beck Company for ₤120,000 on January 1, For 2014, Beck reports net income of ₤100,000 and paid dividends of ₤40,000. Prepare the entries for these transactions.Jan. 1Share Investments 120,000Cash 120,000Dec. 31Share Investments (₤100,000 x 30%) 30,000Revenue from Share Investments ,000Cash (₤40,000 x 30%) 12,000Dec. 31Share Investments 12,000
24 Accounting for Debt Investments QuestionUnder the equity method, the investor records dividends received by crediting:Dividend Revenue.Investment Income.Revenue from Share Investment.Share Investments.
25 Holdings Between 20% and 50% After Milar posts the transactions for the year, its investment and revenue accounts will show the following.Illustration 12-4
26 Accounting for Share Investments Holdings of More than 50%Parent Company (母公司) - When a company (investor) owns more than 50% of the ordinary shares of another entity.Subsidiary (affiliated) company (子公司) – entity whose shares are owned by the parent company.Parent generally prepares consolidated financial statements.Illustration 12-5Examples of consolidatedcompanies and theirsubsidiaries
28 Valuing and Reporting Investments Categories of SecuritiesDebt investments are classified into two categories:Trading securitiesHeld-for-collection securitiesShare investments are classified into two categories:Trading securitiesNon-trading securitiesThese guidelines apply to all debt securities and to those share investments in which the holdings are less than 20%.
29 Valuing and Reporting Investments Categories of Securities
30 Categories of Securities Trading SecuritiesCompanies hold trading securities with the intention of selling them in a short period (generally less than a month).Trading means frequent buying and selling.Companies report trading securities at fair value, and report changes from cost as part of net income.Classified as current asset.
31 Trading SecuritiesIllustration: Investments of Pace Corporation are classified as trading securities on December 31, 2014.Illustration 12-7The adjusting entry for Pace Corporation is:Fair Value Adjustment—Trading 7,000Dec. 31Unrealized Gain—Income 7,000(Other income and expense)
32 Categories of Securities Non-Trading SecuritiesThese securities can be classified as current assets or as non-current assets, depending on the intent of management (sell the securities within the next year or operating cycle).Procedure for determining fair value and the unrealized gain or loss for these securities is the same as for trading securities.Companies report securities at fair value, and report changes from cost as a component of equity.
33 Non-Trading Securities Illustration: Assume that Ingrao Corporation has two securities that it classifies as non-trading.Illustration 12-8The adjusting entry for Ingrao Corporation is:Dec. 31Unrealized Gain or Loss—Equity 9,537Fair Value Adjustment—Non-trading 9,537
34 Accounting for Debt Investments QuestionAn unrealized loss on non-trading securities is:reported under Other Revenue and Expense in the income statement.closed-out at the end of the accounting period.reported as a separate component of equity.deducted from the cost of the investment.
35 Statement of Financial Position Presentation Short-Term InvestmentsAlso called marketable securities, are securities held by a company that arereadily marketable andintended to be converted into cash within the next year or operating cycle, whichever is longer.Investments that do not meet both criteria are classified as long-term investments.Illustration 12-9Presentation of short-terminvestments
36 Statement of Financial Position Presentation Presentation of Realized and Unrealized Gain or LossIllustration 12-10Non-operating items related to investments
37 Statement of Financial Position Presentation Realized and Unrealized Gain or LossUnrealized gain or loss on non-trading securities are reported as a separate component of equity.Illustration 12-11
38 Classified Statement of Financial Position Illustration 12-12