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1、Accounting Principles, 6e Weygandt, Kieso, & KimmelPrepared byMarianne Bradford, Ph.D.Bryant CollegeJohn Wiley & Sons, Inc.蝸牛之家網(wǎng) httpwnzj365After studying this chapter, you should be able to:1 Discuss why corporations invest in debt and stock securities.2 Explain the accounting for debt investments.

2、3 Explain the accounting for stock investments.4 Describe the use of consolidated financial statements.5 Indicate how debt and stock investments are valued and reported on the financial statements.6 Distinguish between short-term and long-term investments.CHAPTER 17 INVESTMENTSPREVIEW OF CHAPTER 17I

3、nvestmentsWhy Corporations InvestAccounting for Debt InvestmentsRecording acquisition of bondsRecording bond interestRecording sale of bonds PREVIEW OF CHAPTER 17InvestmentsAccounting for Stock InvestmentsHoldings less than 20%Holdings between 20% and 50%Holdings of more than 50%Valuation and Report

4、ing of InvestmentsCategories of securitiesBalance sheet presentationRealized and unrealized gain or lossComprehensive balance sheetSTUDY OBJECTIVE 1Discuss why corporations invest in debt and stock securities.ILLUSTRATION 17-1 TEMPORARY INVESTMENTS AND THE OPERATING CYCLECashTemporary InvestmentsAcc

5、ounts ReceivableInventoryInvestSellAt the end of their operating cycles, many companies may have temporarily idle cash on hand until the start of the next operating cycle.These companies may invest the excess funds to earn a greater return.The relationship of temporary investments to the operating c

6、ycle is depicted below. ILLUSTRATION 17-2 WHY CORPORATIONS INVESTReasonTypical InvestmentTo house excess cash until neededLow-risk, high-liquidity, short-term securities such as government-issued securitiesTo generate earningsI need 1,000 Treasury bills by tonight!Debt securities (banks and other fi

7、nancial institutions); and stock securities (mutual funds and pension funds)To meet strategic goalsStocks of companies in a related industry or in an unrelated industry that the company wishes to enterSTUDY OBJECTIVE 2Explain the accounting for debt investments.ACCOUNTING FOR DEBT INVESTMENTS RECORD

8、ING AQUISITION OF BONDSDebt investments are investments in government and corporation bonds. In accounting for debt investments, entries are required to record the 1 acquisition, 2 interest revenue, and 3 sale. At acquisition the cost principle applies. Cost includes all expenditures necessary to ac

9、quire these investments. Kuhl Corporation acquires 50 Doan Inc. 12%, 10-year, $1,000 bonds on January 1, 2002, for $54,000, including brokerage fees of $1,000. The entry to record the investment is:54,000 54,000ACCOUNTING FOR DEBT INVESTMENTS RECORDING BOND INTERESTThe bonds pay $3,000 interest on J

10、uly 1 and January 1 ($50,000 x 12% x ). The July 1 entry is:It is necessary to accrue $3,000 interest earned since July 1 at year-end. The December 31 entry is:3,000 3,000DateAccount Titles and ExplanationDebitCreditDec. 31Interest Receivable Interest Revenue (To accrue interest on Doan Inc. bonds)3

11、,000 3,000ACCOUNTING FOR DEBT INVESTMENTS RECORDING BOND INTERESTWhen the interest is received on January 1, the entry is: 3,000 3,000ACCOUNTING FOR DEBT INVESTMENTS RECORDING SALE OF BONDSAny difference between the net proceeds from the sale (sales price less brokerage fees) and the cost of the bon

12、ds is recorded as a gain or loss. Kuhl Corporation receives net proceeds of $58,000 on the sale of the Doan Inc. bonds on January 1, 2003, after receiving the interest due. Since the securities cost $54,000, a gain of $4,000 has been realized. The entry to record the sale is: 58,000 54,000 4,000STUD

13、Y OBJECTIVE 3Explain the accounting for stock investments.ILLUSTRATION 17-3 ACCOUNTING GUIDELINES FOR STOCK INVESTMENTSStock investments are investments in the capital stock of corporations. When a company holds stock or debt of various corporations, the group of securities is identified as an inves

14、tment portfolio.RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20%In accounting for stock investments of less than 20%, the cost method is used. Under the cost method, the investment is recorded at cost, and revenue is recognized only when cash dividends are received. On July 1, 2002, Sanchez Corpor

15、ation acquires 1,000 shares (10% ownership) of Beal Corporation common stock. Sanchez pays $40 per share plus brokerage fees of $500. The entry for the purchase is:40,500 40,500RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20%Entries are required for any cash dividends received during the time the

16、stock is held. If a $2 per share dividend is received by Sanchez Corporation on December 31, the entry is:Dividend Revenue is reported under Other Revenue and Gains in the income statement. Since dividends do not accrue, adjusting entries are not made to accrue dividends. 2,000 2,000RECORDING STOCK

17、INVESTMENTS HOLDINGS LESS THAN 20%When stock is sold, the difference between the net proceeds from the sale and the cost of the stock is recognized as a gain or loss. Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal Corporation common stock on February 10, 2003. Because t

18、he stock cost $40,500, a loss of $1,000 has been incurred. The entry to record the sale is:DateAccount Titles and ExplanationDebitCreditFeb. 10CashLoss on Sale of Stock Investments Stock Investments (To record sale of Beal common stock) 39,500 1,000 40,500ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BE

19、TWEEN 20% AND 50%When an investor owns between 20% and 50% of the common stock of a corporation, the investor has significant influence over the financial and operating activities of the investee. Under the equity method, the investment in common stock is initially recorded at cost, and the investme

20、nt account is adjusted annually to show the investors equity in the investee. Each year, the investor 1) debits the investment account and credits revenue for its share of the investees net income and 2) credits dividends received to the investment account. ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS

21、BETWEEN 20% AND 50%Milar Corporation acquires 30% of the common stock of Beck Company for $120,000 on January 1, 2002. The entry to record this transaction is:120,000 120,000ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%Beck reports 2002 net income of $100,000 and declares and pays a

22、$40,000 cash dividend. Milar is required to record 1) its share of Becks net income, $30,000 (30% X $100,000) and 2) the reduction in the investment account for the dividends received, $12,000 ($40,000 X 30%). The entries are:30,000 30,00012,000 12,000ILLUSTRATION 17-4 INVESTMENT AND REVENUE ACCOUNT

23、S AFTER POSTINGAfter posting the transactions for the year, the investment and revenue accounts will show the above results. During the year, the investment account has increased by $18,000 which represents Milars 30% equity in the $60,000 increase in Becks retained earnings ($100,000 - $40,000). Mi

24、lar will also report $30,000 of revenue from its investment, which is 30% of Becks net income of $100,000. Milar would report only $12,000 (30% X $40,000) of dividend revenue if the cost method were used.RECORDING STOCK INVESTMENTS HOLDINGS OF MORE THAN 50% A company that owns more than 50% of the c

25、ommon stock of another entity is known as a parent company. The entity whose stock is owned by the parent company is called the subsidiary (affiliated) company. The parent company is perceived to have a controlling interest in the subsidiary due to its stock ownership. When one company owns more tha

26、n 50% of the common stock of another company, consolidated financial statements are usually prepared.RECORDING STOCK INVESTMENTS MANAGEMENT PERSPECTIVEControlling GroupHome Box Office Board of DirectorsTime Warner, Inc. Board of DirectorsHome Box Office CorporationTime Warner, Inc.Time Warner, Inc.C

27、ontrolControlSeparate Legal EntitiesSingle Economic EntityTime Warner, Inc. own 100% of the common stock of Home Box Office (HBO). The common stockholders of Time Warner elect the board of directors of the company, who, in turn, select the officers and managers of the company. The Board of Directors

28、 controls the property owned by the corporation, which includes the common stock of HBO.STUDY OBJECTIVE 4Indicate how debt and stock investments are valued and reported on the financial statements.ILLUSTRATION 17-5 VALUATION GUIDELINESTradingWell sell within ten days.Available-for-SaleWell hold the

29、stock for a while to see how it performs.Held-to-MaturityWe intend to hold these bonds until maturity.At fair value with changes reported in net incomeAt fair value with changes reported in the stockholders equity sectionAt amortized costFair value is the amount for which a security could be sold in

30、 a normal market and offers the best approach at investment valuation since it represents the expected cash realizable value of the securities.CATEGORIES OF SECURITIESFor purposes of valuation and reporting at a financial statement date, debt and stock investments are classified into the following T

31、HREE categories of securities:1) Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.2) Available-for-sale securities are securities that may be sold in the future.3) Held-to-maturity securities are debt securities

32、that the investor has the intent and ability to hold to maturity. ILLUSTRATION 17-6 VALUATION OF TRADING SECURITIESTrading securities are 1) held with the intention of selling them in a short period (generally less than a month), and 2) are reported at fair value, and changes from cost are reported

33、as part of net income. The changes are reported as unrealized gains or losses since the securities have not been sold. The unrealized gain or loss is the difference between the total cost of trading securities and their total fair value. Pace Corporation has the following costs and fair values for i

34、ts investments classified as trading securities:VALUATION AND REPORTING OF INVESTMENTS TRADING SECURITIESPace Corporation has an unrealized gain of $7,000 because total fair value ($147,000) is $7,000 greater than total cost ($140,000). Fair value and the unrealized gain or loss are recorded through

35、 an adjusting entry at the time financial statements are prepared. A valuation allowance account, Market Adjustment - Trading, is used to record the difference between the total cost and the total fair value of the securities. The adjusting entry for Pace Corporation is: 7,000 7,0001 The fair value

36、of the securities is the amount reported on the balance sheet.2 The unrealized gain is reported on the income statement in the Other Revenues and Gains section.3 The unrealized loss is reported on the income statement in the Other Expenses and Losses section. VALUATION AND REPORTING OF INVESTMENTS T

37、RADING SECURITIESILLUSTRATION 17-7 VALUATION OF AVAILABLE-FOR-SALE SECURITIESAvailable-for-sale securities are 1) held with the intention of selling them in the near future, and 2) are reported at fair value, and changes from cost are reported as a component of stockholders equity.The changes are re

38、ported as unrealized gains or losses since the securities have not been sold.The unrealized gain or loss is the difference between the total cost of the securities in the category and their total fair value.Elbert Corporation has the following costs and fair values for its investments classified as

39、available-for-sale securities:VALUATION AND REPORTING OF INVESTMENTS AVAILABLE-FOR-SALE SECURITIESElbert Corporation has an unrealized loss of $9,537 because total fair value ($284,000) is $9,537 less than total cost ($293,537). Fair value and the unrealized gain or loss are recorded through an adju

40、sting entry at the time financial statements are prepared. A valuation allowance account, Market Adjustment - Available-for-Sale, is used to record the difference between the total cost and the total fair value of the securities. The adjusting entry for Elbert Corporation is:9,537 9,537VALUATION AND

41、 REPORTING OF INVESTMENTS AVAILABLE-FOR-SALE SECURITIES1 The fair value of the securities is the amount reported on the balance sheet.2 The unrealized gain or loss is reported as a separate component of stockholders equity.STUDY OBJECTIVE 5Distinguish between short-term and long-term investments.SHO

42、RT-TERM INVESTMENTSShort-term investments are securities held by a company that are (1) readily marketable and (2) intended to be converted into cash within the next year or operating cycle, whichever is longer.An investment is readily marketable when it can be sold easily whenever the need for cash

43、 arises.Intent to convert means that management intends to sell the investment within the next year or operating cycle, whichever is longer. ILLUSTRATION 17-8 PRESENTATION OF SHORT-TERM INVESTMENTS Short Term investments are listed immediately below cash in the current asset section of the balance s

44、heet due to their liquidity.They are reported at fair value.ILLUSTRATION 17-9 NONOPERATING ITEMS RELATED TO INVESTMENTS Long-term investments are typically reported in a separate section of the balance sheet immediately below current assets. In the income statement, the items below are reported in t

45、he nonoperating section:ILLUSTRATION 17-10 UNREALIZED LOSS IN STOCKHOLDERS EQUITY SECTION An unrealized gain or loss on available-for-sale securities is reported as a separate component of stockholders equity. Dawson Inc. has common stock of $3,000,000, retained earnings of $1,500,000, and an unreal

46、ized loss on available-for-sale securities of $100,000. The statement presentation of the unrealized loss is shown below.ILLUSTRATION 17-11 COMPREHENSIVE BALANCE SHEETThe comprehensive balance sheet for Pace Corporation includes the following assets:1 Short-term Investments,2 Investments of less than 20%, and3 Investments of 20% - 50%. PACE CORPORATION Balance Sheet December 31, 2002 Assets Current assets Cash $ 21,000 Short-term investments, at fair value 147,000 Acc