Investment in shares and bonds.
Corporations invest in shares & bonds due one of the 3 reasons
- Corporation may have excess cash.
- To generate earnings from investment income.
- For strategic reasons.
Types of Investments
 Investments in:
 Shares
 Bonds
 What are shares and bonds?
Shares
 Shares: Investment in the equity of a company which
gives ownership rights to the investor.
 Proof of ownership is evidenced by a share certificate
(stock certificate) which is transferable.
 The share certificate mainly shows:
 Name of the issuing company
 Name of the investor (shareholder)
 Par value of shares
 Number of shares in the name of the investor
 Date of issue/transfer
Bonds
 Bonds are a form of interest bearing notes payable.
 The issuance of bonds payable is a technique of splitting a very
large loan into many transferable units. Investment in bonds
is like giving a long-term loan with option to transfer the loan
to another party who desires to invest in bonds.
 The bond paper issued to bond holder mainly shows:
 Name of the issuing company
 Name of the investor (bond holder)
 Par value of the bond
 Number of bonds
 Date of issue/transfer of bonds
 Interest rate
 Maturity date (date of repayment)
 When bonds are purchased from the market between
interest payment dates, the purchaser pays:
Market price of bond + interest accrued since the last interest
date
 Example:
 Purchased 10 bonds on August 1, 2010 at a price of $9,900
 Par value of bond = $1,000
 Interest Date: June 1st and December 1st
 Interest Rate = 9% per year
 Paid brokerage of $50
 Interest from June 1st to August 1st (2 months)
 $10,000 x 9/100 x 2/12 = $150
Aug 1
Dec 1
Debt securities
Bond Interest receivable
Cash
Cash
9,950
150
10,100
450
Bond Interest receivable
Bond interest revenue
150
300
 The investor closes its accounts on Dec 31st:
Dec 31
Bond Interest Receivable
Bond Interest Revenue
75
75
Example: Sale of Bonds
10 bonds of EK Corporation are carried in the accounts at $9,800.
Sold at $9,400 plus interest of $90 (less brokerage of $50)
 Proceeds from sale (9400+90-50)
$9,440
 Less: proceeds representing interest revenue
90
 Sale price of bonds (excluding interest received)
$9,350
 Cost of bonds (in the books of A/Cs)
$9,800
 Loss on sale
$ 450
Journal entry to record sale of bonds
Dr
9,440
450
Cash (9400+90-50)
Loss on sale of debt securities
Debt securities (original cost)
Bond interest revenue
Cr
9,800
90
ACCOUNTING FOR STOCK
INVESTMENTS
Accounting for sale of stocks
 Recording Sale of Stock
 Sold 1000 shares for $39,500 after deducting brokerage of
$500
Cash
Loss on sale of stock investments
Stock investments
Dr
39,500
1000
Cr
40,500
 The loss is normally reported under ‘’Other expenses and
losses’’ in the income statement.
Accounting & shareholders control over company
How shareholders exercise control over a (public)
company listed on the stock exchange?
 All powers are vested in the Board of Directors of the
company. Board of Directors elects the CEO/ Managing
Director (by majority vote) who runs the company.
 The shareholders elect the Directors on Board. Voting
power of each shareholder depends on the percentage of
shares held by him.
 In Pakistan, a public company must have at least 7
directors on the board.
 In case 70% votes are cast, then any person holding 10%
shares can elect one director on the Board.
Why “significant” control with 20 to 50%
shareholding?
 In 2018 Pakistan Tehreek-e-Insaf emerged as the winner
by bagging 16.9 million votes out of total registered
voters of 107.5 million. It got about 15.7% of total
registered votes; and got 34.1% of the votes actually cast.
Some-thing similar happens in every elections. You
see the power of 34.1% votes!
 About 49.5 million citizens voted in the 2018 election
out total voters of 107.5 million. This means that less
than half (46%) of the registered citizens voted.
 Voting for directors is done in a some what similar
manner. All share-holders do not vote. So a shareholder with 20 to 50% shares can exercise significant
control over the company.
EQUITY METHOD
 Holdings between 20% and 50% (medium control)
 With such holding the investee company, in
some sense, becomes part of the investor
company due to its control and influence.
 So investor companies use ‘equity method’ i.e.
the investor records its share of net income of
the investee in the year it is earned.
Accounting when control is medium: Example
 MM Corporation acquires 30% of the common stock of Beck
Company Limited for $120,000 (including brokerage) on Jan 1, 2010.
Purchase of Stocks
Dr
Jan 1 Stock Investment
120,000
Cash
To record purchase of Beck Common Stock
Cr
120,000
 For 2010, Beck reports Net Income of $100,000. It declares and pays
cash dividend of $40,000.
 MM Corporation’s share in income is $30,000 (30% of $100,000).
To record 30% share in income
Dr
Cr
Dec 31 Stock investments
30,000
Revenue from investment in
Beck Company
30,000
To record receipt of dividend
Dec 31 Cash
Stock investments
12,000
12,000
Stock Investments
Jan 1
Dec 31
120,000
30,000
Bal.
Dec 31
12,000
138,000
Revenue from investment in Beck Company
Dec 31
30,000
Accounting: absolute control
 Holding of more than 50% shares
 A company that owns more than 50% of the common
stock of another company is known as the parent
company.
 The other company is called the subsidiary (affiliated)
company.
 The parent company usually prepares consolidated
financial statements, i.e. assets, liabilities, revenues and
expenses of the parent company are combined with
those of the subsidiary in the balance sheet, income
statement etc.
 Categories of securities for valuation and
reporting in financial statements
 Trading securities or Marketable securities are
purchased primarily for sale in the near term to generate
income on short-term price difference.
 Available for sale securities are purchased with the
intent of selling them some time in the future.
 Held to maturity securities are debt securities that the
investor has the intent and ability to hold to maturity.
Cost Principle does not apply to Investments for sale
These are valued at fair market prices
On 31 December 2009
Cost
Trading Securities
$ 93, 600
Available for Sale Securities 48,800
Fair Value
102, 800
43,050
Unrealized Gain/(Loss)$
9,200
(5,750)
31-12-2009 - Entry for Trading Securities (Marketable Securities)
Dr.
Cr.
Market Adjustment – Trading
9, 200
Unrealized Gain – Income
9, 200
31-12-2009 - Entry for Available for Sale Securities
Dr.
Unrealized Loss- Equity
5,750
Market Adjustment – Available
for SaleSecurities
Cr.
5,750
 Cost
+ Balance in the Market Adjustment A/C =
(in the stock
investment A/C)
Market Value
(in the market adjustment A/C)
 Example: For recording securities at market value (fair
value)
 As on Dec 31, 2010 PH Corporation is holding the
following securities:
Cost
$
Fair Value
$
Unrealized gain/(loss)
$
93,600
94,900
1,300
Available for sale Securities 48,800
51,400
2,600
Trading Securities
 As on Dec 31, 2009
Market Adjustment-Trading
31/12/09
9,200
Market Adjustment-Available for sale
31/12/09
5,750
 ‘Market Adjustment’ Accounts act as ‘Adjunct
Accounts’ or ‘Contra Accounts’ depending on whether
the account has a debit or credit balance.
 Many times, it may act as an ‘Adjunct Account’ (having
a debit balance) to the Investment Account.
Market Adjustment-Trading
31/12/09
Bal. (required)
9,200 31/12/10
7,900
1,300
Market Adjustment-Available for sale
31/12/10
Bal. (required)
8,350
31/12/09
2,600
Trading Securities-cost
93,600
Available for sale Securities
48,800
5,750
Entries required to get balances of $1,300 and $2,600 in the
“Market adjustment-trading” and “Market adjustment-available
for sale” accounts respectively.
 Trading Securities
Unrealized Loss-Income
7,900
Market adjustment-trading
7,900
 Available for sale Securities
Market adjustment-available for sale
Unrealized gain or loss-equity
8,350
8,350
 The unrealized gain of $8,350 is not shown in the income
statement as the shares will be sold in future by which time
the gain may not remain at $8,350. In this way, net profit for
2010 is reported correctly.
Presentation in the Balance Sheet
A) Marketable Securities (or short-term investments)
Securities that are:
 Readily marketable or saleable
 Intended to be converted into cash within one year
PACE CORPORATION
Balance Sheet (partial)
As on 31 Dec, 2010
Current Assets
Cash
Short-term investments
(or Marketable Securities) at fair value
Accounts Receivable
$55,000
147,000
900,560
B) Long term Investments
 Not intended to be converted into cash within one year
 Long term investments in available-for-sale securities
are reported at fair value
 Investment in common stock accounted for under
equity method are reported at their equity value
XY Company Ltd.
Income Statement (partial)
For the year ended 31-12-2010
Non-operating Revenue and gains:
Interest Revenue
Dividend Revenue
Gain on sale of Investment
Unrealized Gain-Income
Non-operating expenses and losses:
Loss on sale of investments
Unrealized Loss-Income
Rs. 150,500
500,000
475,000
93,600
56,200
84,125
IFRS Self-Test Questions
The following asset is not considered a financial asset
under IFRS:
a) trading securities.
b) held-for-collection securities.
c) equity securities.
d) inventories.
IFRS Self-Test Questions
Under IFRS, the equity method of accounting for long-term
investments in common stock should be used when the investor
has significant influence over an investee and owns:
a) between 20% and 50% of the investee’s common stock.
b) 30% or more of the investee’s common stock.
c) more than 50% of the investee’s common stock.
d) less than 20% of the investee’s common stock.
IFRS Self-Test Questions
Under IFRS, unrealized gains on non-trading stock investments should:
a) be reported as other revenues and gains in the income statement
as part of net income.
b) be reported as other gains on the income statement as part of net
income.
c) not be reported on the income statement or balance sheet.
d) be reported as other comprehensive income.
CORPORATE FORM OF
ORGANIZATION
 Corporation (or Limited Company) is a separate legal
entity and distinct from its owners.
 Can sue or can be sued like a person.
 Should follow laws and pay taxes.
 Publicly held or privately held corporations
 Publicly held corporations are owned by general public.
 Privately held corporations are owned by few
shareholders, not by general public.
 Characteristics of a Corporation:
 Separate legal existence
 Limited liability of stockholders
 Ownership transferable
 Ability to acquire capital
 Continuous life
An unrealized loss on available-for-sale securities is:
a.
reported under Other Expenses and Losses in the income
statement.
b.
closed-out at the end of the accounting period.
c.
reported as a separate component of stockholders' equity.
d.
deducted from the cost of the investment.
 Unrealized gains and losses related to availablefor-sale securities are reported in other
comprehensive income under GAAP and IFRS.
These gains and losses that accumulate are then
reported in the balance sheet.