1. Chapter 16-1 C H A P T E R 16 Investments

2. Chapter 16-2 1. 1.Discuss why corporations invest in debt and stock securities. 2. 2.Explain the accounting for debt investments. 3. 3.Explain the accounting for stock investments. 4. 4.Describe the use of consolidated financial statements. 5. 5.Indicate how debt and stock investments are reported in financial statements. 6. 6.Distinguish between short-term and long-term investments. Study Objectives

3. Chapter 16-3 Why Corporations Invest Cash management Investment income Strategic reasons Accounting for Debt Investments Accounting for Stock Investments Valuing and Reporting Investments Categories of securities Balance sheet presentation Realized and unrealized gain or loss Classified balance sheet Holdings of less than 20% Holdings between 20% and 50% Holdings of more than 50% Recording acquisition of bonds Recording bond interest Recording sale of bonds Long-Term Liabilities

4. Chapter 16-4 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. 2. To generate earnings from investment income. 3. For strategic reasons. Illustration 16-1 Temporary investments and the operating cycle

5. Chapter 16-5 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.

6. Chapter 16-6 Accounting for Debt Instruments 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.

7. Chapter 16-7 Accounting for Debt Instruments 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.

8. Chapter 16-8 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 Instruments SO 2 Explain the accounting for debt investments. Jan. 1

9. 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 bonds pay interest semiannually on July 1 and January 1. The entry for the receipt of interest on July 1 is: Accounting for Debt Instruments SO 2 Explain the accounting for debt investments. Cash 2,000 Interest revenue2,000 * ($50,000 x 8% x ½ = $2,000) * July 1

10. Chapter 16-10 Illustration: If Kuhl Corporation’s fiscal year ends on December 31, prepare the entry to accrue interest since July 1. Accounting for Debt Instruments 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

11. Chapter 16-11 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 Instruments SO 2 Explain the accounting for debt investments. Cash58,000 Debt investments54,000 Gain on sale of investments4,000 Jan. 1

12. Chapter 16-12 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 Instruments SO 2 Explain the accounting for debt investments.

13. Chapter 16-13 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.

14. Chapter 16-14 Do it Page 699 Accounting for Debt Investments SO 2 Explain the accounting for debt investments.