1. Investments in Debt and Equity Securities Investments in Debt and Equity Securities C H A P T E R 13

2. Learning Objective 1 Understand why companies invest in other companies.

3. A Cash Flow Pattern Companies often need cash flow from sources other than their own operations because the company’s own cash flow might vary greatly over the course of a year. Average Cash Needs 1/16/3012/31 Actual Cash on Hand Excess cash (used for short- term investments) Insufficient cash (relieved by short-term borrowing)

4. What Are Some Other Reasons Companies Invest Their Excess Cash?

5. Learning Objective 2 Understand the different classifications for securities.

6. Define Two Classifications for Securities. Debt Securities Equity Securities (Stock)

7. Classifying Securities Investments DebtEquity

8. Securities—Matching Method used to account for an investment in the stock of another company when significant influence can be imposed (presumed when 20 to 50 percent of the outstanding voting stock is owned). Equity Method Securities Held-to-Maturity Securities Debt securities purchased by an investor with the intent of holding the securities until they mature.

9. Securities—Matching Debt and equity securities not classified as trading, held-to-maturity, or equity method securities. Debt and equity securities purchased with the intent of selling them should the need for cash arise or to realize short-term gains. Trading Securities Available-for-Sale Securities

10. Classifying Securities Held-to- Maturity Available- for-Sale Equity Method DebtEquity Trading Investments

11. Classifying Securities DebtEquity Held-to- Maturity Trading Available- for-Sale Equity Method Investments

12. Classifying Securities— Fill in the Chart Held-to- Maturity Trading Available- for-Sale Equity Method Classification Disclosed at Reporting of Changes in FMV

13. Learning Objective 3 Account for the purchase, recognition of revenue, and sale of trading and available- for-sale securities.

14. Purchase of Securities Caribou Corp. purchased the following securities on January 1, 2006. Record the appropriate entry. 1DebtTrading$ 3,000 2EquityTrading15,500 3DebtAvailable-for-sale10,000 4EquityAvailable-for-sale7,300 TypeClassification Cost (including broker’s fees)

15. Purchase of Securities 1DebtTrading$ 3,000 2EquityTrading15,500 3DebtAvailable-for-sale10,000 4EquityAvailable-for-sale7,300 TypeClassification Cost (including broker’s fees)

16. Accounting for Return Earned on an Investment Buffalo Corp. earned the following return on their owned securities. Record the journal entry. 1Debt$270 2Equity$895 3Debt920 4Equity560 SecurityInterest Dividends

17. Accounting for the Sale of Securities Buffalo Corp. sold Security 2 for $17,000. The historical cost was $15,500. Record the entry. 1DebtTrading$ 3,000 2EquityTrading15,500 3DebtAvailable-for-sale10,000 4EquityAvailable-for-sale7,300 TypeClassification Cost (including broker’s fees)

18. What Are Realized Gains and Losses?

19. Learning Objective 4 Account for changes in the value of securities.

20. What Are Unrealized Gains and Losses?

21. Accounting for Changes in Value — Trading Securities The following market values were recorded for Buffalo Corp.’s portfolio on December 31, 2006. Record the changes in the values of the securities. 1Trading$ 3,000$ 2,800 3Available-for-sale 10,00010,500 4Available-for-sale 7,3009,250 Type Historical Cost Market Value 12/31/06

22. Accounting for Changes in Value — Available-for-Sale 1Trading$ 3,000$ 2,800 3Available-for-sale10,00010,500 4Available-for-sale7,3009,250 Type Historical Cost Market Value 12/31/06

23. The following market values were recorded for Buffalo Corp.'s portfolio on December 31, 2007. Record the subsequent change in the trading security. Subsequent Changes in Value 1Trading$ 3,000$ 3,100 3Available-for-sale10,00010,300 4Available-for-sale7,3009,500 Type Historical Cost Market Value 12/31/07

24. Expanded Material Learning Objective 5 Account for held-to- maturity securities.

25. The Moose Company purchased a 5- year, $500,000 bond and received interest payments of 10 percent, payable semiannually. Assume the effective rate is 12 percent. Record the investment. Initial Purchase of Held-to- Maturity Securities

26. 1.Semiannual interest payments$ 25,000 Present value of interest annuity$184,002 2.Principal of bonds$500,000 Present value of bonds 279,197 3.Present value of investment$463,199

27. Bonds Purchased Between Interest Dates Assume the bond purchased by the Moose Company paid interest on July 1 and January 1 of each year. If the Moose Company purchased the bond on April 31, 2006, how will the purchase be recorded?

28. Define Amortization Methods for Bond Premiums and Discounts Straight-Line Amortization Effective-Interest Amortization

29. Straight-Line Amortization The Rhinoceros Company purchased a 12 percent, 5-year, $10,000 bond for $8,658 on the issuance date. The interest payments are made semiannually. Using the straight-line method, record the first interest payment received.

30. Effective-Interest Amortization The Rhinoceros Company purchased a 12 percent, 5-year, $10,000 bond for $8,658 on the issuance date. The interest payments are made semiannually and the market rate is 16 percent. Using the effective-interest method, record the first interest payment received. Hint: Won’t you need an amortization table?

31. CashInterest Amortized Investment PaymentReceived EarnedAmount Balance Effective-Interest Amortization

32. The Rhinoceros Company purchased a 12 percent, 5-year, $10,000 bond for $8,658 on the issuance date. The interest payments are made semiannually and the market rate is 16 percent. Using the effective-interest method, record the first interest payment received.

33. Sale or Maturity of Bonds The Rhinoceros Company holds the bond until maturity. Record the entry for the receipt of the bond principal.

34. Sale or Maturity of Bonds What journal entry is required if the Rhinoceros Company sells the bond for $9,900 before maturity when the balance in the bond account is $9,800?

35. Expanded Material Learning Objective 6 Understand the Basics of Consolidated Financial Statements

36. When Should the Equity Method Be Used?

37. Illustrating the Equity Method Brown Tree Co. purchased 100 shares of Koala Corp. common shares at $2 per share, representing a 20 percent ownership in the company. Record Brown Tree’s transactions using the equity method.

38. Illustrating the Equity Method Brown Tree Co. purchased 100 shares of Koala Corp. common shares at $2 per share, representing a 20 percent ownership in the company. Record the $0.80 per share dividend. Record the entry.

39. Illustrating the Equity Method Brown Tree Co. purchased 100 shares of Koala Corp. common shares at $2 per share, representing a 20 percent ownership in the company. Koala Corp. announces a $10,000 earnings for the year. Record the appropriate entries.

40. What is the Objective of Consolidated Financial Statements?

41. What are Notable Items Concerning the Statements?

42. You Have Completed Chapter 13