INTERMEDIATE
ACCOUNTING
Chapter 13
Investments
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Investing for the Future
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A debt security is a financial instrument that represents a
creditor relationship with another company. Investments in debt
securities include such items as U.S. treasury securities,
municipal and corporate bonds, and convertible debt.
An equity security is a financial instrument that represents an
ownership interest in another company. Investments in equity
securities include common stock, preferred stock, stock options,
rights, and warrants,.
A portfolio of investments in debt and/or equity securities that
have a readily determinable fair value is often referred to
marketable securities (investment securities).
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Minority Passive Investments
Learning Objective #1
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An investment in another company that does not allow the
investing company to control or exert significant influence over
the other company is considered a minority passive
investment.
Generally, an investment is considered a passive investment
when a company owns less than 20% of the voting common
stock of the investee.
At acquisition, a company classifies each passive investment in
debt and equity securities into one of three categories based
on the company’s intent to hold or sell the securities.
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How Are Investments Classified? TAS 105
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The three categories are:
 Held-to-Maturity Securities: Investments in debt securities for
which the company has the positive intent and ability to hold
until maturity
 Trading Securities: Investments in debt and equity securities
that are purchased and held principally to sell in the near
term
 Available-for-Sale Securities: Investments in debt and equity
securities that are not classified as held-to-maturity or
trading
 The classification and accounting for these categories of
securities differs based on management intent.
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How Are Investments Valued?
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A company reports its held-to-maturity at amortized cost
because it is considered to be a faithful representation of the
amount invested
A company reports its investments in trading securities at fair
value on the balance sheet with any changes in fair value
reported on the income statement as part of net income.
A company reports its investments in available-for-sale
securities at fair value on the balance sheet with any changes
in fair value reported as other comprehensive income in the
shareholders’ equity section of the balance sheet.
Fair value provides users with more timely measures of
the future cash flows that could be realized from securities
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Significant Influence and Control
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Minority active investments are investments in the debt or equity
securities of other corporations to establish a long-term relationships
with suppliers or to obtain significant influence over the companies’
activities.
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Significant influence generally occurs when the investor owns between
20% and 50% of the voting common stock of the investee.
Consolidation occurs when the investor controls the investee through
an investment in equity securities. The result of consolidation is the
issuance of the combined financial statements of both companies.
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Legal control occurs when the investor owns more than 50% of the
voting common stock of the investee.
Majority active investment is where an investment in another company
allows the investor to control the investee.
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Accounting Methods for Investments
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Held-To-Maturity Securities
Learning Objective #2
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When a company has the positive ability and intent to hold a
debt security to maturity, it can be reported as a held-tomaturity security.
 The investment is initially recorded at cost.
 The investment is subsequently reported at amortized cost
on the ending balance sheet(s).
 Unrealized holding gains and losses are not recorded but
are disclosed in the notes to the financial statements.
 Interest income is recognized in net income as it is earned,
along with any realized gains and losses on sales.
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Recording Initial Cost
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Debt securities, such as bonds, that carry a stated interest rate
above the prevailing market interest rates are issued at a
premium.
Debt securities carrying a stated interest rate below the
prevailing market are issued at a discount.
Example On January 1, 2015, Drinkwitz Company invests
$99,000 in bonds that have a face value of $100,000. The
company intends to hold them to maturity.
 Drinkwitz records the purchase as follows:
Investment in Held-to-Maturity Debt Securities
Cash
99,000
99,000
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Recognition of Interest Income and Amortization
of Bond Premiums and Discounts (Slide 1 of 5)
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The amount of interest income recognized each accounting
period is based on the effective interest rate determined at
the time of acquisition using the following formula:
Interest Income = Market Interest Rate × Book Value of the Investment at
the Beginning of Period
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The effective interest method (interest method) of amortizing
bond discounts and premiums:
Amortization of
= Interest Revenue ‒ Cash Interest Payment
Discount/Premium
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Recognition of Interest Income and Amortization
of Bond Premiums and Discounts (Slide 2 of 5)
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Example Colburn Company invests in bonds that will be held
to maturity. The bonds have a face value of $100,000, and
Colburn pays $102,458.71 on January 1, 2015.
 The bonds carry a stated interest rate of 13% payable
semiannually on June 30 and December 31.
 The bonds mature on December 31, 2017 and have an
effective interest rate of 12%.
 Colburn records the acquisition on January 1, 2015, as
follows:
Investment in Held-to-Maturity Debt Securities
Cash
102,458.71
102,458.71
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Recognition of Interest Income and Amortization
of Bond Premiums and Discounts (Slide 3 of 5)
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Using the effective interest method, Colburn records the
first interest receipt on June 30, 2015 as follows:
Cash ( $100,000*13%*6/12)
Investment in Held-to-Maturity Debt
Securities ($6,500-$6,147.52)
Interest Income ($102,458.71*12%*6/12)
6,500.00
352.48
6,147.52
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Recognition of Interest Income and Amortization
of Bond Premiums and Discounts (Slide 4 of 5)
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Example Colburn Company invests in bonds that will be held
to maturity. The bonds have a face value of $100,000, and
Colburn pays $97,616.71 on January 1, 2015. Colburn uses
the effective interest method.
 The bonds carry a stated interest rate of 13% payable
semiannually on June 30 and December 31.
 The bonds mature on December 31, 2017 and have an
effective interest rate of 14%.
 Colburn records the acquisition on January 1, 2015, as
follows:
Investment in Held-to-Maturity Debt Securities
Cash
97,616.71
97,616.71
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Recognition of Interest Income and Amortization
of Bond Premiums and Discounts (Slide 5 of 5)
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Using the effective interest method, Colburn records the first
interest receipt on June 30, 2015 as follows:
Cash
Investment in Held-to-Maturity Debt Securities
Interest Income
6,500.00
333.17
6,833.17
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Amortization of Bonds Acquired
Between Interest Dates
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Example Tallen Company purchased 9% bonds with a face
value of $200,000 at par plus accrued interest on March 1,
2015. Interest on these bonds is payable June 30 and
December 31, and the bonds mature December 31, 2017 (34
months after the date of purchase).
 Talbert records the acquisition on March 1, 2015, as
follows:
Investment in Held-to-Maturity Debt Securities
Interest Income ($200,000 × 0.09 × 2/12)
Cash
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200,000
3,000
203,000
The first interest receipt on June 30, 2015 of $9,000 is
determined calculated as follows: $200,000 × 0.09 ×
6/12.
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Sale of Held-to-Maturity Investment
Prior to Maturity (Slide 1 of 2)
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Example On March 31, 2016, Colburn Company sells the
$100,000, 13% bonds classified as held-to-maturity for
$102,000 plus accrued interest. The bonds were purchased on
January 1, 2015, for $97,616.71 (effective interest, 14%) and
have a maturity date of December 31, 2017.
 Using the effective interest method, Colburn amortizes the
discount up to the date of sale.
Investment in Held-to-Maturity Debt Securities
Interest Income
190.72
190.72
($98,306.37 × 0.14 × 3/12) ‒ ($100,000 × 0.13 × 3/12) = $190.72
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In the second journal entry (next slide), Colburn collects the
sales price plus the $3,250 interest earned in the three
months since the last interest payment date.
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Sale of Held-to-Maturity Investment
Prior to Maturity (Slide 2 of 2)
Cash ($102,000 + $3,250)
105,250.00
Interest Income ($100,000 × 0.13 × 3/12)
3,250.00
Investment in Held-to-Maturity Debt Securities
98,497.09
Gain on Sale of Debt Securities
3,502.91
+ $190.72
from previous slide
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Trading Securities
Learning Objective #3
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Investments are classified as trading securities in debt and
equity securities when they are actively bought and sold with
the intention to profit on short-term changes in price.
The accounting for trading securities applies the most complete
fair value measurement approach, as follows:
 The investment is initially recorded at cost.
 The investment is subsequently reported at fair value on the
balance sheet.
 Unrealized holding gains and losses resulting from changes
in the fair value of the securities are included in the net
income of the current period.
 Interest and dividend income, as well as realized gains and
losses, are included in net income of the current period.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Available-for-Sale Securities
Learning Objective #4
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The investment is initially recorded at cost.
The investment is subsequently reported at fair value on the
balance sheet.
Unrealized holding gains and losses resulting from changes in
the fair value of the securities are reported as a component of
other comprehensive income of the current period.
Interest and dividend income are included in net income for the
current period.
When a security is sold, realized gains and losses are included in
net income for the current period, and any unrealized holding
gains or losses must be reclassified from accumulated other
comprehensive income into net income.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Recording the Initial Cost
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Example. On May 1, 2015, Kent Company purchases the
following securities:
= $ 5,000
= 24,000
= 24,000
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Kent records the purchase as follows:
Trading Securities
= 15,000
$68,000
Available-for-Sale Securities
Investment in Trading Securities 68,000
Investment in AFS Securities 68,000
Cash
68,000
Cash
68,000
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Recognition of Interest Revenue on Bonds
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Oct 31, 2015
Debit Cash (15,000x10%x6/12)
750
Credit Interest Revenue
750
(There is no amortization amount because the bonds were
bought at par value.)
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Dec 31, 2015
Debit Interest Receivable
250
(15,000x10%x2/12)
Credit Interest Revenue
250
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Recognition of Unrealized Holding
Gains and Losses (Slide 1 of 3)
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On its ending balance sheet, a company reports any investments
in trading securities at fair value.
An increase in the fair value of investment securities is an
unrealized holding gain.
A decrease in the fair value of investment securities is an
unrealized holding loss.
For investments in trading securities, the Unrealized holding
Gain/Loss account is a temporary account that is closed to
Retained Earnings.
 A debit balance represents a net unrealized loss.
 A credit balance represents a net unrealized gain.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Recognition of Unrealized Holding
Gains and Losses (Slide 2 of 3)
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On December 31, 2015, the fair value of Kent’s investment
in trading securities is $71,000 as follows:
Note ถ้าไม่ได้ซอ
ื้
At Par จะเป็น
Security
Cost
Carrying Amount
100 shares of Able Co. common stock
$ 5,000
300 shares of Baker Co. common stock
24,000
200 shares of Charlie Co. common stock 24,000
$15,000 face value of Delta Co. bonds
15,000
Total
$68,000
Trading Securities
Cumulative
12/31/15 Change in
Fair Value Fair Value
$ 6,000
$1,000
23,500
(500)
26,000
2,000
15,500
500
$71,000
$3,000
Available-for-Sale Securities
Investment in Trading Securities 3,000
Investment in AFS Securities 3,000
Unrealized Holding Gain/Loss
Unrealized Holding Gain/Loss
—Trading Securities (PL)
3,000
—AFS Securities (OCI)
3,000
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Recognition of Unrealized Holding
Gains and Losses (Slide 3 of 3)
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On December 31, 2016, the fair value of the investments in
trading securities held by Kent is $66,000 as follows:
Cumulative
12/31/15 12/31/16 Change in
Security
Fair Value Fair Value Fair Value
100 shares of Able Co. common stock
$ 6,000 $ 6,100
$ 100
300 shares of Baker Co. common stock
23,500
22,700
(800)
200 shares of Charlie Co. common stock 26,000
23,200
(2,800)
$15,000 face value of Delta Co. bonds
15,500
14,000
(1,500)
Total
$71,000 $66,000
$(5,000)
Trading Securities
Available-for-Sale Securities
Unrealized Holding Gain/Loss
—Trading Securities (PL) 5,000
Investment in Trading Securities
5,000
Unrealized Holding Gain/Loss
—AFS (OCI)
5,000
Investment in AFS Securities
5,000
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Realized Gains and Losses
on Sales of Trading Securities
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(Slide 1 of 2)
On March 1, 2017, Kent sold the 100 shares of Able
Company common stock for $6,000. The fair value at the
previous balance sheet was $6,100.
Trading Securities (Able stocks only)
Available-for-Sale Securities
(Able stocks only)
Cash
6,000
Loss on Sale of Trading Securities 100
Investment in Trading Securities
6,100
Unrealized Holding Gain/Loss
—AFS (OCI)
100
Investment in AFS Securities
100
(Mark to market before sale)
Cash
6,000
Investment in AFS Securities
6,000
Unrealized Holding Gain/Loss
—AFS (OCI)
1,000 (close AOCI)
Realized gain on sale of AFS securities 1,000
(Record sale and recycling AOCI to PL for Able
stocks)
(Note: TS ไม่ต ้อง mark to market เพราะว่า
ต่อให ้ M2M ก็รับรู ้เข ้า PL เหมือนกัน)
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Realized Gains and Losses
on Sales of Trading Securities
(Slide 1 of 2)
 At
the end of 2017, Kent reports the fair value of the
securities it still owns as follows:
Cumulative
12/31/16 12/31/17 Change in
Security
Fair Value Fair Value Fair Value
300 shares of Baker Co. common stock
22,700
23,500
$ 800
200 shares of Charlie Co. common stock 23,200
24,100
900
14,000
$15,000 face value of Delta Co. bonds
15,000
14,700
700
Total
$59,900 $62,300
$2,400
Trading Securities
Available-for-Sale Securities
Investment in Trading Securities 2,400
Investment in AFS Securities 2,400
Unrealized Holding Gain/Loss
Unrealized Holding Gain/Loss
—Trading Securities (PL)
2,400
—AFS Securities (OCI)
2,400
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Statement of Comprehensive Income
Year 2017
Trading Securities
…
Other income (expense)
Loss on sale of TS securities
Unrealized holding gain on TS
…..
Net profit
Other comprehensive income
Available-for-Sale Securities
(100)
2,400
-
…
Other income (expense)
Realized gain on sale of AFS
1,000
Net profit
Other comprehensive income
Recycling AOCI to PL (100+1,000) (1,100)
Unrealized holding gain on existing
AFS
2,400
Able stock deal 5,000 6,000 6,100  6,000
• Gain for the deal = 1,000 in total
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TFRS 9 (ร่าง)
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ในปี 2562 TAS 105 จะถูกยกเลิก และเนือ
้ หา
ี องเงินลงทุนจะแสดงอยูใ่ นสว่ น
เกีย
่ วกับการบัญชข
แรก จาก 3 ของ TFRS 9
ต่อสไลด์ IFRS 9
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