2 Investments in Debt Securities Investments in Equity Securities Holdings of less than 20%Held-to-maturity securitiesAvailable-for-sale securitiesTrading securitiesHoldings between 20% and 50%Holdings of more than 50%Held-to-maturity securitiesAvailable-for-sale securitiesTrading securitiesPassive InvestmentsService 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 boththe positive intent andthe 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 atfair value, withunrealized 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 SecuritiesIf company sells bonds before maturity date:Must make entry to remove the,Cost in Available-for-Sale Securities andSecurities 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, withunrealized 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 SecuritiesPete 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.InstructionsPrepare 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 SecuritiesBE17-4 Prepare the journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment.(a) Trading securities 40,000Cash 40,000(b) Cash 2,000Interest revenue 2,000(c) Unrealized Holding Loss - Income 1,600Trading Securities 1,600
10 Investments in Equity Securities Represent ownership of capital stock.Cost includes:price of the security, plusbroker’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 existsSignificant influence usually existsControl usually existsFair Value – next slideEquity Method -Investment valued using Fair Value MethodInvestment valued using Equity MethodInvestment 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 AvailableMarket Price UnavailableValue 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 19,000Trading 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) 270,000Trading securities 200,000Gain on sale 70,000November 2, 2007 (Los Tigres):Trading securities (3,000 x $59.50) 178,500Cash 178,500
17 Holdings of Less Than 20% Portfolio at December 31, 2007 Unrealized holding loss - income 76,500Trading 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 theUnrealized 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 19,000Available 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) 270,000Avail. For sale securities 200,000Gain on sale 45,000Unrealized holding loss – equity ,000November 2, 2007 (Los Tigres):Avail. For sale securities(3,000 x $59.50) 178,500Cash 178,500
22 Holdings of Less Than 20% Portfolio at December 31, 2007 Unrealized holding loss - income 76,500Avail. 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 MethodRecord the investment at cost and subsequently adjust the amount each period forthe investor’s proportionate share of the earnings (losses) 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.
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.InstructionsPrepare 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 180,000Cash 180,000Investment in Associates 24,000Investment Revenue 24,000($80,000 x 30%)Cash 6,000Investment 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 corporationInvestor 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 $320,000Other contributed capital 590, ,000Retained earnings 380, ,000PoloSave
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) ,000Common Stock ,000Other 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 EliminatedParent’s AccountsSubsidiary’s AccountsInvestment in subsidiaryAgainstEquity accountsIntercompany receivable (payable)AgainstIntercompany payable (receivable)Advances to subsidiary(from subsidiary)AgainstAdvances from parent(to parent)Interest revenue(interest expense)AgainstInterest expense(interest revenue)Dividend revenue(dividends declared)AgainstDividends declared(dividend revenue)Management fee received from subsidiaryAgainstManagement fee paid to parentSales to subsidiary (purchases of inventory from subsidiary)AgainstPurchases 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 PricePrice paid $160,000% acquired 100%Fair value 160,000Book value 160,000Difference $0
35 Consolidated Balance Sheets: Use of Workpapers Adjusting and eliminating entries are made on the workpaper for the preparation of consolidated statements.
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 $148,000Cash $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 AcquisitionOn 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.