1. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen University College Chapter 16 Investments Chapter 16 Investments

2. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Investments Classification of investments Classification of investments Short-term versus long-termShort-term versus long-term Accounting for debt investments Accounting for debt investments Short-term and long-term debt investmentsShort-term and long-term debt investments Accounting for equity investments Accounting for equity investments Cost and equity methodsCost and equity methods Valuation of passive investments Valuation of passive investments Trading, available-for-sale, held-to-maturityTrading, available-for-sale, held-to-maturity Reporting of investments Reporting of investments

3. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Classification of Investments Corporations can invest in: Corporations can invest in: Debt securities: money-market, bonds, commercial paperDebt securities: money-market, bonds, commercial paper Equity securities: preferred and common sharesEquity securities: preferred and common shares Reasons to invest: Reasons to invest: Passive investments: use excess cash, generate investment incomePassive investments: use excess cash, generate investment income Strategic investments: to influence or control another companyStrategic investments: to influence or control another company

4. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Short-Term Investments Debt or equity securities that either: Debt or equity securities that either: Are readily marketable: can be easily sold whenever cash is needed, orAre readily marketable: can be easily sold whenever cash is needed, or Mature within the next yearMature within the next year Can be classified as either: Can be classified as either: Trading securities: purchased and held for resale in the short term, hopefully at a gainTrading securities: purchased and held for resale in the short term, hopefully at a gain Available-for-sale securities: not trading securities or held-to-maturity securitiesAvailable-for-sale securities: not trading securities or held-to-maturity securities Intention to sell them at some time in the futureIntention to sell them at some time in the future Can be short or long-term based on criteria metCan be short or long-term based on criteria met

5. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Long-Term Investments Investments that are both: Investments that are both: Not readily marketable, andNot readily marketable, and Do not mature within one yearDo not mature within one year Classified as either: Classified as either: Available-for-sale securities: not trading securities or held-to-maturity securitiesAvailable-for-sale securities: not trading securities or held-to-maturity securities Intention to sell them at some time in the futureIntention to sell them at some time in the future Can be short or long-term based on criteria metCan be short or long-term based on criteria met Held-to-maturity securities: intention to hold debt security until it maturesHeld-to-maturity securities: intention to hold debt security until it matures

6. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting for Short-Term Debt Investments If actively managed and traded: trading securities If actively managed and traded: trading securities Otherwise: available-for-sale securities Otherwise: available-for-sale securities Money-market instruments Usually pay a fixed interest rate on maturity Usually pay a fixed interest rate on maturity Purchase: Purchase:

7. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting for Short-Term Debt Investments 2 Money-market instruments Accruing interest revenue: Accruing interest revenue: Maturity: Maturity:

8. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting for Short-Term Debt Investments 3 Bonds Recording of investments in bonds differs in three ways: Recording of investments in bonds differs in three ways: Cost: may include a discount or premiumCost: may include a discount or premium Timing of interest: usually received semi-annuallyTiming of interest: usually received semi-annually Sale of bond: may be before maturity, with gain or lossSale of bond: may be before maturity, with gain or loss Purchase: Purchase:

9. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting for Short-Term Debt Investments 4 Bonds Recording interest revenue: Recording interest revenue: Sale of bonds before maturity: Sale of bonds before maturity:

10. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting for Long-Term Debt Investments Purchase: Purchase: Recording is similar to short-term investmentsRecording is similar to short-term investments Any discount or premium on purchase is not recorded separatelyAny discount or premium on purchase is not recorded separately Recording interest revenue: Recording interest revenue: Any discount or premium is amortized to interest revenue over the remaining term of the bondsAny discount or premium is amortized to interest revenue over the remaining term of the bonds

11. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting for Equity Investments Based on how much influence investor has over the issuing corporation: Based on how much influence investor has over the issuing corporation: Short-term investments: investment is accounted for using the cost methodShort-term investments: investment is accounted for using the cost method Long-term investments:Long-term investments: < 20% ownership – little influence – use cost method to account for investment< 20% ownership – little influence – use cost method to account for investment ≥ 20% ownership – significant influence – use equity method to account for investment≥ 20% ownership – significant influence – use equity method to account for investment

12. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting for Equity Investments: Cost Method Investment is recorded at purchase price (cost) Investment is recorded at purchase price (cost) Revenue recognized when cash dividends are received Revenue recognized when cash dividends are received When shares are sold, difference between proceeds of sale and cost or carrying value of shares is recognized as a gain or loss When shares are sold, difference between proceeds of sale and cost or carrying value of shares is recognized as a gain or loss

13. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Accounting for Equity Investments: Equity Method Investment is recorded at cost (same as cost method) Investment is recorded at cost (same as cost method) Investor’s share of investee’s net income is recognized as an increase in the value of the investment Investor’s share of investee’s net income is recognized as an increase in the value of the investment Dividends received are recognized as a decrease in the value of the investment Dividends received are recognized as a decrease in the value of the investment

14. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Valuation of Passive Investments Depends upon classification of investment: Depends upon classification of investment: Trading securities and available-for-sale securities:Trading securities and available-for-sale securities: Valued at market valueValued at market value Changes in market value are reported as an unrealized gain or lossChanges in market value are reported as an unrealized gain or loss Held-to-maturity securities:Held-to-maturity securities: Valued at amortized cost (premiums and discounts are amortized)Valued at amortized cost (premiums and discounts are amortized) Value is not adjusted for changes in market value unless permanent impairment occursValue is not adjusted for changes in market value unless permanent impairment occurs

15. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Valuation at Market Value: Unrealized Gains & Losses Changes in market value of trading and available-for- sale securities are treated as unrealized gains or losses Changes in market value of trading and available-for- sale securities are treated as unrealized gains or losses Allowance account is used to record difference between cost and market and is reported on the balance sheet Allowance account is used to record difference between cost and market and is reported on the balance sheet Unrealized gain is reported: Unrealized gain is reported: For trading securities: in the income statementFor trading securities: in the income statement For available-for-sale securities: as other comprehensive incomeFor available-for-sale securities: as other comprehensive income

16. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Reporting of Investments: Balance Sheet Short-Term Investments Highly liquid investments with a maturity < three months are included in “Cash and Cash Equivalents”Highly liquid investments with a maturity < three months are included in “Cash and Cash Equivalents” Trading securities and available-for-sale securities (if short-term) are listed nextTrading securities and available-for-sale securities (if short-term) are listed next Valuation adjustment to market may be listed separately on the balance sheet or in the notesValuation adjustment to market may be listed separately on the balance sheet or in the notes Long-Term Investments Available-for-sale (if long-term) at marketAvailable-for-sale (if long-term) at market

17. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Reporting of Investments: Balance Sheet 2 Long-Term Investments (continued) Held-to-maturity at amortized costHeld-to-maturity at amortized cost Maturities within one year are classified as short- termMaturities within one year are classified as short- term Equity investments where significant influenceEquity investments where significant influence Accumulated Other Comprehensive Income Presented in the shareholders’ equity sectionPresented in the shareholders’ equity section The cumulative total of all comprehensive income (loss) from available-for-sale securities and other sourcesThe cumulative total of all comprehensive income (loss) from available-for-sale securities and other sources

18. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Reporting of Investments: Income Statement Income Statement Other revenue/expense includes:Other revenue/expense includes: Realized gains/losses on investmentsRealized gains/losses on investments Unrealized gains/losses on trading securitiesUnrealized gains/losses on trading securities Other investment income: interest, dividendsOther investment income: interest, dividends Statement of Comprehensive Income Unrealized gains/losses on available-for-sale securitiesUnrealized gains/losses on available-for-sale securities

19. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. Consolidated Financial Statements When a company (parent) controls another company (subsidiary): When a company (parent) controls another company (subsidiary): Owns more than 50% of another company, orOwns more than 50% of another company, or Other factors that indicate controlOther factors that indicate control Consolidated financial statements are also required Consolidated financial statements are also required Present the total assets and liabilities controlled by the parent companyPresent the total assets and liabilities controlled by the parent company In addition to financial statements of each separate companyIn addition to financial statements of each separate company

20. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd. COPYRIGHT Copyright © 2007 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.