1. Investments

2. Investments in Debt Securities Investments in Equity Securities
Holdings of less than 20%
Held-to-maturity securities
Available-for-sale securities
Trading securities
Holdings between 20% and 50%
Holdings of more than 50%
Held-to-maturity securities
Available-for-sale securities
Trading securities
Passive Investments
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

3. Investments in Debt Securities
Accounting for Debt Securities by Category

4. Held-to-Maturity Securities
Classify a debt security as held-to-maturity only if it has both
the positive intent and
the ability to hold securities to maturity.
Accounted for at amortized cost, not fair value.
Amortize premium or discount using the effective-interest method unless the straight-line method—yields a similar result.

5. Available-for-Sale Securities
Companies report available-for-sale securities at
fair value, with
unrealized holding gains and losses reported as part of comprehensive income (equity).
Any discount or premium is amortized.

6. Available-for-Sale Securities
Sale of Available-for-Sale Securities
If company sells bonds before maturity date:
Must make entry to remove the,
Cost in Available-for-Sale Securities and
Securities Fair Value Adjustment accounts.
Any realized gain or loss on sale is reported in the “Other expenses and losses” section of the income statement.
LO 2 Understand the procedures for discount and premium amortization on bond investments.

7. Trading Securities Companies report trading securities at
fair value, with
unrealized holding gains and losses reported as part of net income.
Any discount or premium is amortized.
LO 2 Understand the procedures for discount and premium amortization on bond investments.

8. Trading Securities
Pete Sampras Corporation purchased trading investment bonds for $40,000 at par. At December 31, Sampras received annual interest of $2,000, and the fair value of the bonds was $38,400.
Instructions
Prepare the journal entry for the purchase of the investment.
Prepare the journal entries for the interest received.
Prepare the journal entry for the fair value adjustment.
LO 2 Understand the procedures for discount and premium amortization on bond investments.

9. Trading Securities
BE17-4 Prepare the journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment.
(a) Trading securities 40,000
Cash 40,000
(b) Cash 2,000
Interest revenue 2,000
(c) Unrealized Holding Loss - Income 1,600
Trading Securities 1,600

10. Investments in Equity Securities
Represent ownership of capital stock.
Cost includes:
price of the security, plus
broker’s commissions and fees related to purchase.
The degree to which one corporation (investor) acquires an interest in the common stock of another corporation (investee) generally determines the accounting treatment for the investment subsequent to acquisition.

11. Investments in Equity Securities Ownership Percentages
% % %
No significant influence usually exists
Significant influence usually exists
Control usually exists
Fair Value – next slide
Equity Method -
Investment valued using Fair Value Method
Investment valued using Equity Method
Investment valued on parent’s books using Cost Method or Equity Method (investment eliminated in Consolidation)

12. Holdings of Less Than 20% Accounting Subsequent to Acquisition
Market Price Available
Market Price Unavailable
Value and report the investment using the fair value method.
Value and report the investment using the cost method.*
* Securities are reported at cost. Dividends are recognized when received and gains or losses only recognized on sale of securities.

13. Holdings of Less Than 20% Accounting and Reporting – Fair Value Method
Because equity securities have no maturity date, companies cannot classify them as held-to-maturity.

14. Holdings of Less Than 20%
Loxley Company has the following portfolio of securities at September 30, 2007, its last reporting date.
On Oct. 10, 2007, the Fogelberg shares were sold at a price of $54 per share. In addition, 3,000 shares of Los Tigres common stock were acquired at $59.50 per share on Nov. 2, The Dec. 31, 2007, fair values were: Petra $96,000, Los Tigres $132,000, and the Weisberg common $193,000.

15. Holdings of Less Than 20% Portfolio at September 30, 2007
Securities Fair Value Adjustment - credit ($19,000)
Unrealized holding loss - income 19,000
Trading Securities 19,000

16. Holdings of Less Than 20%
Prepare the journal entries to record the sale, purchase, and adjusting entries related to the trading securities in the last quarter of 2007.
October 10, 2007 (Fogelberg):
Cash (5,000 x $54) 270,000
Trading securities 200,000
Gain on sale 70,000
November 2, 2007 (Los Tigres):
Trading securities (3,000 x $59.50) 178,500
Cash 178,500

17. Holdings of Less Than 20% Portfolio at December 31, 2007
Unrealized holding loss - income 76,500
Trading Securities 76,500

18. Holdings of Less Than 20%
How would the entries change if the securities were classified as available-for-sale?
The entries would be the same except that the
Unrealized Holding Gain or Loss—Equity account is used instead of Unrealized Holding Gain or Loss—Income.
The unrealized holding loss would be deducted from the stockholders’ equity section rather than charged to the income statement.

19. Holdings of Less Than 20%
Loxley Company has the following portfolio of securities at September 30, 2007, its last reporting date.
On Oct. 10, 2007, the Fogelberg shares were sold at a price of $54 per share. In addition, 3,000 shares of Los Tigres common stock were acquired at $59.50 per share on Nov. 2, The Dec. 31, 2007, fair values were: Petra $96,000, Los Tigres $132,000, and the Weisberg common $193,000.

20. Holdings of Less Than 20% Portfolio at September 30, 2007
Securities Fair Value Adjustment - credit ($19,000)
Unrealized holding loss - equity 19,000
Available for sale Securities 19,000

21. Holdings of Less Than 20%
Prepare the journal entries to record the sale, purchase, and adjusting entries related to the trading securities in the last quarter of 2007.
October 10, 2007 (Fogelberg):
Cash (5,000 x $54) 270,000
Avail. For sale securities 200,000
Gain on sale 45,000
Unrealized holding loss – equity ,000
November 2, 2007 (Los Tigres):
Avail. For sale securities(3,000 x $59.50) 178,500
Cash 178,500

22. Holdings of Less Than 20% Portfolio at December 31, 2007
Unrealized holding loss - income 76,500
Avail. For sale securities 76,500

23. Financial Statement Presentation
Report trading securities at aggregate fair value as current assets.
Report held-to-maturity and available-for-sale securities as current or noncurrent.

24. Holdings Between 20% and 50%
An investment (direct or indirect) of 20 percent or more of the voting stock of an investee should lead to a presumption that in the absence of evidence to the contrary, an investor has the ability to exercise significant influence over an investee.
In instances of “significant influence,” the investor must account for the investment using the equity method.

25. 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.
If investor’s share of investee’s losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method.

26. Holdings Between 20% and 50%
On January 1, 2007, 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 2007.

27. Holdings Between 20% and 50%
Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2007.
Investment in Associates 180,000
Cash 180,000
Investment in Associates 24,000
Investment Revenue 24,000
($80,000 x 30%)
Cash 6,000
Investment in Associates 6,000
($20,000 x 30%)

28. 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 along with its solo financial statements.

29. Investments at the Date of Acquisition
Recording Investments at Cost (Parent’s Books)
Stock investment is recorded at cost as measured by fair value of the consideration given or consideration received, whichever is more clearly evident.
Consideration given may include cash, other assets, debt securities, stock of the acquiring company.

30. Investments at the Date of Acquisition
Exercise: On January 1, 2008, Polo Company purchased 100% of the common stock of Save Company by issuing 40,000 shares of its (Polo’s) $10 par value common stock with a market price of $17.50 per share. The stockholders’ equity section of the two company’s balance sheets on December 31, 2007, were:
Common stock, $10 par value $350,000 $320,000
Other contributed capital 590, ,000
Retained earnings 380, ,000
Polo
Save

31. Investments at the Date of Acquisition
Exercise: Prepare the journal entry on the books of Polo Company to record the purchase of the common stock of Save Company and related expenses.
Investment in Save (40,000 x $17.50) ,000
Common Stock ,000
Other Contributed Capital 300,000

32. Consolidated Balance Sheets: Use of Workpapers
Assets and liabilities are summed, regardless of whether the parent owns 100% or a smaller controlling interest.
Minority interests are reflected as a component of owners’ equity.
Eliminations must be made to cancel the effects of transactions among the parent and its subsidiaries.
A work-paper is frequently used to summarize the effects of various additions and eliminations.

33. Consolidated Balance Sheets: Use of Workpapers
Intercompany Accounts to Be Eliminated
Parent’s Accounts
Subsidiary’s Accounts
Investment in subsidiary
Against
Equity accounts
Intercompany receivable (payable)
Against
Intercompany payable (receivable)
Advances to subsidiary
(from subsidiary)
Against
Advances from parent
(to parent)
Interest revenue
(interest expense)
Against
Interest expense
(interest revenue)
Dividend revenue
(dividends declared)
Against
Dividends declared
(dividend revenue)
Management fee received from subsidiary
Against
Management fee paid to parent
Sales to subsidiary (purchases of inventory from subsidiary)
Against
Purchases of inventory from parent (sales to parent)

34. Consolidated Balance Sheets: Use of Workpapers
Illustration: Assume that on January 1, 2007, P Company acquired all the outstanding stock (10,000 shares) of S Company for cash of $160,000. What journal entry would P Company make to record the shares of S Company acquired?
Fair value = Book value=Purchase Price
Price paid $160,000
% acquired 100%
Fair value 160,000
Book value 160,000
Difference $0

35. Consolidated Balance Sheets: Use of Workpapers
Adjusting and eliminating entries are made on the workpaper for the preparation of consolidated statements.

36. Consolidated Balance Sheets: Use of Workpapers

37. Consolidated Balance Sheets: Use of Workpapers
The investment account and related subsidiary’s stockholders’ equity have been eliminated and the subsidiary’s net assets substituted for the investment account.
Consolidated assets and liabilities consist of the sum of the parent and subsidiary assets and liabilities in each classification.
Consolidated stockholders’ equity is the same as the parent company’s equity.

38. Consolidated Balance Sheets: Use of Workpapers
Purchase Cost Exceeds Fair Value of Subsidiary Company’s Equity—Partial Ownership.
Illustration: Assume that on January 1, 2007, P Company acquired 80% (8,000 shares) of the stock of S Company for $148,000. What journal entry would P Company make to record the shares of S Company acquired?
Investment in S Company $148,000
Cash $148,000

39. Consolidated Balance Sheets: Use of Workpapers
The balance sheets of both companies immediately after the acquisition of shares is as follows:

40. Consolidated Balance Sheets: Use of Workpapers
The work-paper to consolidate the balance sheets for P and S on Jan. 1, 2007, date of acquisition, is presented below:

41. Consolidated Statements After Acquisition
Year of Acquisition
On January 1, 2007, Parker Company purchased 95% of the outstanding common stock of Sid Company for $160,000. At that time, Sid’s stockholders’ equity consisted of common stock, $120,000; other contributed capital, $10,000; and retained earnings, $23,000.
Required:
A. Prepare a consolidated statements workpaper on Dec. 31, 2007.
LO 3 Use of workpapers.

42. Consolidated Statements After Acquisition
On December 31, 2007, the two companies’ trial balances were as follows at right:
Required A. Prepare a consolidated statements workpaper on December 31, 2007.
LO 5 Workpapers eliminating entries.

43. Consolidated Statements After Acquisition

44. Consolidated Statements After Acquisition