Financial
Accounting,
Seventh Edition
Chapter
12
Investments
Slide
12-1
A Corporation’s Balance Sheet shows the following Assets:
(all amounts in millions of dollars)
Sept. 29, 2012
Current Assets:
Cash and Cash Equivalents
$10,746
Short-Term Marketable Securities
18,383
Accounts Receivable, net
10,930
Inventories
791
Deferred Tax Assets
2,583
Vendor Non-Trade Receivables
7,762
Other Current Assets
6,458
Total Current Assets
57,653
Long Term Marketable Securities
92,122
Property, Plant and Equipment, net
15,452
Goodwill
1,135
Acquired Intangible Assets, net
4,224
Other Assets
5,478
Slide
TOTAL ASSETS
12-2
$176,064
Why Corporations Invest
Corporations generally invest in debt or stock
securities for one of three reasons.
1.
Corporation may have excess cash.
2.
To generate earnings from investment income.
3.
For strategic reasons.
Temporary
investments
and the
operating cycle
Slide
12-3
How have Stock Prices changed over the years?
Slide
12-4
Accounting for Debt Instruments
Recording Acquisition of Bonds
Cost includes all expenditures necessary to acquire
these investments, such as the price paid plus
brokerage fees (commissions), if any.
Recording Bond Interest
Calculate and record interest revenue based upon the
carrying value of the bond times the interest rate
times the portion of the year the bond is outstanding.
Slide
12-5
Accounting for Debt Instruments
Recording Acquisition of Bonds
On November 15, 2012, Panda Company purchased
120 Microsoft Corporation’s 3.5% senior unsecured
bonds (maturity date - November 15, 2042), with a
par value of $1,000 each, at par, plus a total
brokerage fee of $1,000. The bonds pay interest
May 15 and November 15, and Panda Company’s
accounting period ends on December 31. Record all
journal entries for Panda Company thru May 15,
2013.
Slide
12-6
Accounting for Debt Instruments
Slide
12-7
Accounting for Debt Instruments
Sale of Bond Investments
On May 16, 2013, Panda Company sold 30 out of
the 120 Company A bonds (which were purchased
for $121,000) at a market price of 102, less
brokerage fees of $200. Record the transaction.
Slide
12-8
Knowledge Check Question 1:
A company paid $37,800 plus a broker's fee of $525
to acquire 8% bonds with a $40,000 maturity value.
The company intends to hold the bonds to maturity.
The cash proceeds the company will receive upon the
maturity of the bond is:
A.
B.
C.
D.
Slide
12-9
$37,800
$38,325
$40,000
$40,525
Knowledge Check Question 2:
A company purchased $60,000 of 5% bonds on
May 1. The bonds pay interest on February 1
and August 1. The amount of interest accrued
on December 31 (the company's year-end)
would be:
A. $500
B. $1,000
C. $1,250
D. $2,000
Slide
12-10
Knowledge Check Question 3:
When bonds are sold, the gain or loss on sale is the
difference between the:
a. sales price and the cost of the bonds.
b. net proceeds and the cost of the bonds.
c. sales price and the market value of the bonds.
d. net proceeds and the market value of the
bonds.
Slide
12-11
Accounting for Stock Investments
Ownership Percentages
0 --------------20% ------------ 50% -------------- 100%
No significant
influence
usually exists
Significant
influence
usually exists
Investment
valued using
Cost
Method
Investment
valued using
Equity
Method
Control
usually exists
Investment valued on
parent’s books using Cost
Method or Equity Method
(investment eliminated in
Consolidation)
The accounting depends on the extent of the investor’s influence
over the operating and financial affairs of the issuing corporation.
Slide
12-12
Accounting for Stock Investments
Holdings of Less than 20%
Companies use the cost method. Under the cost
method, companies record the investment at cost, and
recognize revenue only when cash dividends are
received.
Cost includes all expenditures necessary to acquire
these investments, such as the price paid plus any
brokerage fees (commissions).
Slide
12-13
Holdings of Less than 20%
On September 5, 2012, Panda Company purchased 2,000
shares of Microsoft Corporation at $30.39 per share,
plus a brokerage fee of $400. Microsoft paid a dividend
of $0.20 per share on September 13, 2012. Record the
appropriate entries for Panda Company.
Slide
12-14
Holdings of Less than 20%
On November 20, 2012, Panda Company sold
1,000 shares of Microsoft Corporation (which
were purchased on September 5) for $26.95 per
share, and paid brokerage fees of $200. Record
the transaction.
Slide
12-15
Knowledge Check Question 4:
On January 26, 2012, Bill Gates purchased 500 shares
of Microsoft Company’s stock for $29.50 a share
(classified as Trading Securities), and paid brokerage
fees of $200. On August 23, 2012, he sold 200 of
these share at $30.25 per share and paid brokerage
fees of $80. What is the realized gain/loss on the sale?
a. Gain of $150
b. Loss of $10
c. Gain of $70
d. Loss of $80
Slide
12-16
Accounting for Stock Investments
Holdings Between 20% and 50% (Equity Method)
Record the investment at cost and subsequently
adjust the amount each period for
 the investor’s proportionate share of the earnings
(losses) and
 dividends received by the investor.
If investor’s share of investee’s losses exceeds the carrying
amount of the investment, the investor ordinarily should
discontinue applying the equity method.
Slide
12-17
Holdings Between 20% and 50%
On January 1, 2012, Panda Company acquired 4,000 shares of Koala Company for
$50 per share (all cash). Koala Company has 10,000 shares of outstanding stock.
On June 30, 2012, Koala Company reports Net Income of $60,000, and on July
31, 2012, Koala declares and pays dividends of $1.00 per share. Record all
relevant journal entries for Panda Company.
Slide
12-18
Holdings Between 20% and 50%
On January 1, 2012, Panda Company acquired 4,000 shares of Koala Company for
$50 per share (all cash). Koala Company has 10,000 shares of outstanding stock.
On June 30, 2012, Koala Company reports Net Income of $60,000, and on July
31, 2011, Koala declares and pays dividends of $1.00 per share. Record all
relevant journal entries for Panda Company.
After Panda Company posts the transactions for the year, its
investments and revenue accounts will show the following.
Slide
12-19
Knowledge Check Question 5:
Under the equity method, the investor records
dividends received by crediting:
a. Dividend Revenue.
b. Investment Income.
c. Revenue from Investment.
d. Stock Investments.
Slide
12-20
Knowledge Check Question 6:
Celtics Company purchased 40% of Lakers Company for
$100,000 on January 1, 2012. On November 17, 2012,
Lakers Company declared total cash dividends of
$12,000. At 2012 year-end, Lakers Company reported
net income of $60,000. The balance in Celtics Company's
Investment in Lakers Company account on December 31,
2012 should be:
a. $95,200
b. $112,000
c. $119,200
d. $148,000
Slide
12-21
Accounting for Stock Investments
Holdings of More Than 50%
Controlling Interest - When one corporation acquires a
voting interest of more than 50 percent in another
corporation
 Investor is referred to as the parent.
 Investee is referred to as the subsidiary.
 Investment in the subsidiary is reported on the parent’s
books as a long-term investment.
 Parent generally prepares consolidated financial
statements.
Slide
12-22
Slide
12-23
Valuing and Reporting Investments
Categories of Securities
Companies classify debt and stock investments into
three categories:
 Trading securities
 Available-for-sale securities
 Held-to-maturity securities
These guidelines apply to all debt securities and all stock
investments in which the holdings are less than 20%.
Slide
12-24
Valuing and Reporting Investments
Trading Securities
Companies hold trading securities with the intention
of selling them in a short period.
Trading means frequent buying and selling. (actively
managed)
Companies report trading securities at fair value,
and report changes from cost as part of net income.
Slide
12-25
Valuing and Reporting Investments
Available-for-Sale Securities
Companies hold available-for-sale securities with the
intent of selling these investments sometime in the
future.
These securities can be classified as current assets
or as long-term assets, depending on the intent of
management.
Companies report securities at fair value, and report
changes from cost as a component of the
stockholders’ equity section.
Slide
12-26
Valuing and Reporting Investments
Knowledge Check Question 7:
Marketable securities bought and held primarily for
sale in the near term are classified as:
a. available-for-sale securities.
b. held-to-maturity securities.
c. stock securities.
d. trading securities
Slide
12-27
Trading Securities
Panda Company holds the following portfolio of investments
in securities, which are classified as trading securities on
December 31, 2012.
Investments
1. Microsoft
2. Google
Cost
Market Value
Unrealized Gain (Loss)
$10,000
$15,000
$5,000
5,000
3,000
(2,000)
Record the adjusting entry for Panda Company (assuming trading):
Slide
12-28
Available-for-Sale Securities
Question: How would the entries change if the securities
were classified as available-for-sale securities?
The entries would be similar, except that the
Unrealized Gain or Loss—Equity account is used instead of
Unrealized Gain or Loss—Income.
The unrealized loss would be deducted from the stockholders’
equity section rather than charged to the income statement.
Record the adjusting entry for Panda Company (assuming AFSS):
Slide
12-29
Available-for-Sale Securities
Illustration: Assume that Panda Company has two securities
that it classifies as available-for-sale.
Investments
1. Microsoft
2. Google
Cost
Market Value
Unrealized Gain (Loss)
$10,000
$7,000
$(3,000)
15,000
16,000
1,000
Record the adjusting entry for Panda Company:
Slide
12-30
Available-for-Sale Securities
Knowledge Check Question 8:
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.
Slide
12-31
Knowledge Check Question 9:
Spurs Company purchased some investments and classified them as
Available for Sale on October 1, 2012. The proper adjusting entry on
December 31, 2012 included a credit to Market Adjustment –
Available for Sale Securities for $1,300. From this information, we
can conclude that:
A. Assets and stockholder’s equity both decreased by $1,300.
B. Assets decreased and stockholder’s equity increased by $1,300.
C. Assets and stockholder’s equity both increased by $1,300.
D. Assets increased and stockholder’s equity decreased by $1,300.
Slide
12-32
Knowledge Check Question 10:
An investment in common stock (classified as
Available for Sale Securities) acquired during 2012 at
a cost of $45,000 has a market value on December
31, 2012, of $45,725. The year-end adjusting entry
will require a
A.
Debit to Market Adjustment - AFSS for $725
B.
Debit to Unrealized Gain - Equity for $725
C.
Debit to Investment in AFSS for $725
D.
Credit to Market Adjustment - AFSS for $725
Slide
12-33
Slide
12-34
Valuing and Reporting Investments
Balance Sheet Presentation
Short-Term Investments
Also called marketable securities, 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.
Investments that do not meet both criteria are
classified as long-term investments.
Slide
12-35
Balance Sheet Presentation
Presentation of Realized and Unrealized Gain
or Loss
Nonoperating items related to investments
Slide
12-36
Balance Sheet Presentation
Realized and Unrealized Gain or Loss
Unrealized gain or loss on available-for-sale securities are
reported as a separate component of stockholders’
equity.
Slide
12-37
Classified
Balance
Sheet
(partial)
Illustration 12-12
Slide
12-38
Classification of Investments - Summary
Debt Investments
(Bonds)
Held-toMaturity
Slide
12-39
Trading
Securities
Equity Investments
(Stocks)
Available
for Sale
Securities
Classification of Investments - Summary
Debt Investments
(Bonds)
Trading
Securities
(<20%)
Slide
12-40
Available
for Sale
Securities
(<20%)
Equity Investments
(Stocks)
Significant
Influence
(20 to 50%)
- Equity Method
Controlling
Influence (>50%) –
Consolidated
Financial
Statements
Balance Sheet Presentation
Identify where each of the following items would
be reported in the financial statements.
Use the following possible categories:
Current assets
Investments
Property, plant, and equipment
Intangible assets
Other expenses and losses
Slide
12-41
Current liabilities
Long-term liabilities
Stockholders’ equity
Other revenues and gains
End of Chapter 12
Slide
12-42