Investments
Chapter
17-1
Investments
Investments in
Equity Securities
Investments in Debt
Securities
Holdings of less than
20%
Held-to-maturity
securities
Available-for-sale
securities
Trading securities
Held-to-maturity
securities
Passive Investments
Available-for-sale
securities
Trading securities
Holdings between 20%
and 50%
Holdings of more than
50%
Chapter
17-2
Investments in Debt Securities
Accounting for Debt Securities by Category
Chapter
17-3
Held-to-Maturity Securities
Classify a debt security as held-to-maturity only
if it has both
(1) the positive intent and
(2) the ability to hold securities to maturity.
Accounted for at amortized cost, not fair value.
Amortize premium or discount using the effectiveinterest method unless the straight-line method—
yields a similar result.
Chapter
17-4
Available-for-Sale Securities
Companies report available-for-sale securities at
 fair value, with
 unrealized holding gains and losses reported as
part of comprehensive income (equity).
Any discount or premium is amortized.
Chapter
17-5
Available-for-Sale Securities
Sale of Available-for-Sale Securities
If company sells bonds before maturity date:
Must make entry to remove the,
 Cost in Available-for-Sale Securities and
 Securities Fair Value Adjustment accounts.
Any realized gain or loss on sale is reported in
the “Other expenses and losses” section of the
income statement.
Chapter
17-6
LO 2 Understand the procedures for discount and
premium amortization on bond investments.
Trading Securities
Companies report trading securities at
 fair value, with
 unrealized holding gains and losses reported as
part of net income.
Any discount or premium is amortized.
Chapter
17-7
LO 2 Understand the procedures for discount and
premium amortization on bond investments.
Trading Securities
Pete Sampras Corporation purchased trading investment
bonds for $40,000 at par. At December 31, Sampras
received annual interest of $2,000, and the fair value of
the bonds was $38,400.
Instructions
(a) Prepare the journal entry for the purchase of the
investment.
(b) Prepare the journal entries for the interest received.
(c) Prepare the journal entry for the fair value
adjustment.
Chapter
17-8
LO 2 Understand the procedures for discount and
premium amortization on bond investments.
Trading Securities
BE17-4 Prepare the journal entries for (a) the purchase of
the investment, (b) the interest received, and (c) the fair
value adjustment.
(a)
Trading securities
40,000
Cash
(b)
Cash
40,000
2,000
Interest revenue
(c)
Unrealized Holding Loss - Income
Trading Securities
Chapter
17-9
2,000
1,600
1,600
Investments in Equity Securities
Represent ownership of capital stock.
Cost includes:
 price of the security, plus
 broker’s commissions and fees related to purchase.
The degree to which one corporation (investor)
acquires an interest in the common stock of another
corporation (investee) generally determines the
accounting treatment for the investment subsequent
to acquisition.
Chapter
17-10
Investments in Equity Securities
Ownership Percentages
0 --------------20% ------------ 50% -------------- 100%
Chapter
17-11
No significant
influence
usually exists
Significant
influence
usually exists
Investment
valued using
Fair Value
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)
Holdings of Less Than 20%
Accounting Subsequent to Acquisition
Market Price
Available
Market Price
Unavailable
Value and report the
investment using the
fair value method.
Value and report the
investment using the
cost method.*
* Securities are reported at cost. Dividends are recognized when
received and gains or losses only recognized on sale of securities.
Chapter
17-12
Holdings of Less Than 20%
Accounting and Reporting – Fair Value Method
Because equity securities have no maturity date, companies cannot
classify them as held-to-maturity.
Chapter
17-13
Holdings of Less Than 20%
Loxley Company has the following portfolio of securities at
September 30, 2007, its last reporting date.
Trading Securities
Dan Fogelberg, Inc. common (5,000 shares)
Petra, Inc. preferred (3,500 shares)
Tim Weisberg Corp. common (1,000 shares)
Cost
$ 225,000
133,000
180,000
Fair Value
$ 200,000
140,000
179,000
On Oct. 10, 2007, the Fogelberg shares were sold at a price
of $54 per share. In addition, 3,000 shares of Los Tigres
common stock were acquired at $59.50 per share on Nov. 2,
2007. The Dec. 31, 2007, fair values were: Petra $96,000,
Los Tigres $132,000, and the Weisberg common $193,000.
Chapter
17-14
Holdings of Less Than 20%
Portfolio at September 30, 2007
Trading Securities
Dan Fogelberg, Inc. common (5,000 shares)
Petra, Inc. preferred (3,500 shares)
Tim Weisberg Corp. common (1,000 shares)
Securities Fair Value Adjustment - credit
Unrealized holding loss - income
Trading Securities
Chapter
17-15
Cost
$ 225,000
133,000
180,000
$ 538,000
Fair Value
$ 200,000
140,000
179,000
$ 519,000
($19,000)
19,000
19,000
Holdings of Less Than 20%
Prepare the journal entries to record the sale, purchase, and
adjusting entries related to the trading securities in the last
quarter of 2007.
October 10, 2007 (Fogelberg):
Cash (5,000 x $54)
270,000
Trading securities
200,000
Gain on sale
70,000
November 2, 2007 (Los Tigres):
Trading securities (3,000 x $59.50)
Cash
Chapter
17-16
178,500
178,500
Holdings of Less Than 20%
Portfolio at December 31, 2007
Trading Securities
Petra, Inc. preferred
Tim Weisberg Corp. common
Los Tigres common
Cost
$ 140.000
179.000
178.500
$ 497.500
Fair Value
$ 96.000
193.000
132.000
$ 421.000
Unrealized
Gain (Loss)
$ (44.000)
14.000
(46.500)
(76.500)
December 31, 2007:
Unrealized holding loss - income
Trading Securities
Chapter
17-17
76,500
76,500
Holdings of Less Than 20%
How would the entries change if the securities were
classified as available-for-sale?
The entries would be the same except that the
Unrealized Holding Gain or Loss—Equity account is
used instead of Unrealized Holding Gain or Loss—
Income.
The unrealized holding loss would be deducted from
the stockholders’ equity section rather than charged
to the income statement.
Chapter
17-18
Holdings of Less Than 20%
Loxley Company has the following portfolio of securities at
September 30, 2007, its last reporting date.
Trading Securities
Dan Fogelberg, Inc. common (5,000 shares)
Petra, Inc. preferred (3,500 shares)
Tim Weisberg Corp. common (1,000 shares)
Cost
$ 225,000
133,000
180,000
Fair Value
$ 200,000
140,000
179,000
On Oct. 10, 2007, the Fogelberg shares were sold at a price
of $54 per share. In addition, 3,000 shares of Los Tigres
common stock were acquired at $59.50 per share on Nov. 2,
2007. The Dec. 31, 2007, fair values were: Petra $96,000,
Los Tigres $132,000, and the Weisberg common $193,000.
Chapter
17-19
Holdings of Less Than 20%
Portfolio at September 30, 2007
Trading Securities
Dan Fogelberg, Inc. common (5,000 shares)
Petra, Inc. preferred (3,500 shares)
Tim Weisberg Corp. common (1,000 shares)
Securities Fair Value Adjustment - credit
Unrealized holding loss - equity
Available for sale Securities
Chapter
17-20
Cost
$ 225,000
133,000
180,000
$ 538,000
Fair Value
$ 200,000
140,000
179,000
$ 519,000
($19,000)
19,000
19,000
Holdings of Less Than 20%
Prepare the journal entries to record the sale, purchase, and
adjusting entries related to the trading securities in the last
quarter of 2007.
October 10, 2007 (Fogelberg):
Cash (5,000 x $54)
270,000
Avail. For sale securities
200,000
Gain on sale
45,000
Unrealized holding loss – equity
25,000
November 2, 2007 (Los Tigres):
Avail. For sale securities(3,000 x $59.50)178,500
Cash
Chapter
17-21
178,500
Holdings of Less Than 20%
Portfolio at December 31, 2007
Trading Securities
Petra, Inc. preferred
Tim Weisberg Corp. common
Los Tigres common
Cost
$ 140.000
179.000
178.500
$ 497.500
Fair Value
$ 96.000
193.000
132.000
$ 421.000
Unrealized
Gain (Loss)
$ (44.000)
14.000
(46.500)
(76.500)
December 31, 2007:
Unrealized holding loss - income
Avail. For sale securities
Chapter
17-22
76,500
76,500
Financial Statement Presentation
Report trading securities at aggregate fair value
as current assets.
Report held-to-maturity and available-for-sale
securities as current or noncurrent.
Chapter
17-23
Holdings Between 20% and 50%
An investment (direct or indirect) of 20 percent or
more of the voting stock of an investee should lead
to a presumption that in the absence of evidence to
the contrary, an investor has the ability to exercise
significant influence over an investee.
In instances of “significant influence,” the investor
must account for the investment using the equity
method.
Chapter
17-24
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.
Chapter
17-25
Holdings Between 20% and 50%
On January 1, 2007, Pennington Corporation purchased
30% of the common shares of Edwards Company for
$180,000. During the year, Edwards earned net income
of $80,000 and paid dividends of $20,000.
Instructions
Prepare the entries for Pennington to record the
purchase and any additional entries related to this
investment in Edwards Company in 2007.
Chapter
17-26
Holdings Between 20% and 50%
Prepare the entries for Pennington to record the
purchase and any additional entries related to this
investment in Edwards Company in 2007.
Investment in Associates
180,000
Cash
180,000
Investment in Associates
Investment Revenue
24,000
($80,000 x 30%)
Cash
Investment in Associates
Chapter
17-27
24,000
6,000
($20,000 x 30%)
6,000
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
Chapter
17-28
financial statements along with its solo
financial statements.
Investments at the Date of Acquisition
Recording Investments at Cost (Parent’s Books)
Stock investment is recorded at cost as measured by
fair value of the consideration given or consideration
received, whichever is more clearly evident.
Consideration given may include cash, other assets,
debt securities, stock of the acquiring company.
Chapter
17-29
Investments at the Date of Acquisition
Exercise: On January 1, 2008, Polo Company purchased
100% of the common stock of Save Company by issuing
40,000 shares of its (Polo’s) $10 par value common stock
with a market price of $17.50 per share. The
stockholders’ equity section of the two company’s balance
sheets on December 31, 2007, were:
Common stock, $10 par value
Other contributed capital
Retained earnings
Chapter
17-30
Polo
Save
$350,000 $320,000
590,000 175,000
380,000 205,000
Investments at the Date of Acquisition
Exercise: Prepare the journal entry on the books of Polo
Company to record the purchase of the common stock of
Save Company and related expenses.
Investment in Save (40,000 x $17.50)
Chapter
17-31
700,000
Common Stock
400,000
Other Contributed Capital
300,000
Consolidated Balance Sheets: Use of Workpapers
Assets and liabilities are summed, regardless of
whether the parent owns 100% or a smaller controlling
interest.
Minority interests are reflected as a component of
owners’ equity.
Eliminations must be made to cancel the effects of
transactions among the parent and its subsidiaries.
A work-paper is frequently used to summarize the
effects of various additions and eliminations.
Chapter
17-32
Consolidated Balance Sheets: Use of Workpapers
Intercompany Accounts to Be Eliminated
Parent’s Accounts
Subsidiary’s Accounts
Investment in subsidiary
Against
Equity accounts
Intercompany receivable
(payable)
Against
Intercompany payable
(receivable)
Advances to subsidiary
(from subsidiary)
Against
Advances from parent
(to parent)
Interest revenue
(interest expense)
Against
Interest expense
(interest revenue)
Dividend revenue
(dividends declared)
Against
Dividends declared
(dividend revenue)
Management fee received from
subsidiary
Against
Management fee paid to
parent
Sales to subsidiary (purchases
of inventory from subsidiary)
Against
Purchases of inventory from
parent (sales to parent)
Chapter
17-33
Consolidated Balance Sheets: Use of Workpapers
Illustration: Assume that on January 1, 2007, P Company
acquired all the outstanding stock (10,000 shares) of S
Company for cash of $160,000. What journal entry would P
Company make to record the shares of S Company acquired?
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 40,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
160,000
$ 800,000 $ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 800,000
Chapter
17-34
$ 100,000
100,000
20,000
40,000
$ 260,000
Fair value = Book
value=Purchase Price
Price paid
% acquired
$160,000
100%
Fair value
160,000
Book value
160,000
Difference
$0
Consolidated Balance Sheets: Use of Workpapers
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 40,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
160,000
$ 800,000 $ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 800,000
$ 100,000
100,000
20,000
40,000
$ 260,000
Eliminations
Debit
Credit
Consolidated
Balances
$
80,000
380,000
320,000
120,000
160,000
$ 1,060,000
$
$
220,000
500,000
100,000
240,000
1,060,000
Adjusting and eliminating entries are made on the workpaper for the
preparation of consolidated statements.
Chapter
17-35
Consolidated Balance Sheets: Use of Workpapers
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
P Company S Company
$ 40,000 $ 40,000
280,000
100,000
240,000
80,000
80,000
40,000
160,000
$ 800,000 $ 260,000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Total Liab. and Equity
$ 120,000
400,000
80,000
200,000
$ 800,000
Chapter
17-36
$ 100,000
100,000
20,000
40,000
$ 260,000
Eliminations
Debit
Credit
160,000
Consolidated
Balances
$
80,000
380,000
320,000
120,000
$
900,000
$
100,000
20,000
40,000
$ 160,000
$ 160,000
$
220,000
400,000
80,000
200,000
900,000
Consolidated Balance Sheets: Use of Workpapers
1. The investment account and related subsidiary’s
stockholders’ equity have been eliminated and the
subsidiary’s net assets substituted for the investment
account.
2. Consolidated assets and liabilities consist of the sum
of the parent and subsidiary assets and liabilities in
each classification.
3. Consolidated stockholders’ equity is the same as the
parent company’s equity.
Chapter
17-37
Consolidated Balance Sheets: Use of Workpapers
Purchase Cost Exceeds Fair Value of Subsidiary Company’s
Equity—Partial Ownership.
Illustration: Assume that on January 1, 2007, P Company
acquired 80% (8,000 shares) of the stock of S Company for
$148,000. What journal entry would P Company make to
record the shares of S Company acquired?
Investment in S Company
Cash
Chapter
17-38
$148,000
$148,000
Consolidated Balance Sheets: Use of Workpapers
The balance sheets of both companies immediately after the
acquisition of shares is as follows:
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Total assets
Liabilities
Common stock
Other Contributed capital
Retained earnings
Noncontrolling interest
Total Liab. and Equity
Chapter
17-39
P Company S Company
$ 52.000 $ 40.000
280.000
100.000
240.000
80.000
80.000
40.000
148.000
$ 800.000
$ 260.000
$ 120.000
400.000
80.000
200.000
$ 100.000
100.000
20.000
40.000
$ 800.000
$ 260.000
Consolidated Balance Sheets: Use of Workpapers
The work-paper to consolidate the balance sheets for P and S on
Jan. 1, 2007, date of acquisition, is presented below:
Balance Sheet
Cash
Other current assets
Plant and equipment
Land
Investment in Sill
Goodwill
Total assets
P Company S Company
52.000 $ 40.000
$
100.000
280.000
80.000
240.000
40.000
80.000
148.000
$
800.000
$ 260.000
Liabilities
Common stock
Other Contributed capital
Retained earnings
Minority interest
Total Liab. and Equity
$
120.000
400.000
80.000
200.000
$ 100.000
100.000
20.000
40.000
Chapter
17-40
Eliminations
Credit
Debit
148.000
20.000
$
800.000
$ 260.000
Consolidated
Balances
92.000
$
380.000
320.000
120.000
20.000
932.000
$
$
100.000
20.000
40.000
$ 180.000
32.000
$ 180.000
$
220.000
400.000
80.000
200.000
32.000
932.000
Consolidated Statements After Acquisition
Year of Acquisition
On January 1, 2007, Parker Company purchased 95% of the
outstanding common stock of Sid Company for $160,000. At that
time, Sid’s stockholders’ equity consisted of common stock,
$120,000; other contributed capital, $10,000; and retained
earnings, $23,000.
Required:
A. Prepare a consolidated statements workpaper on Dec. 31, 2007.
Chapter
17-41
LO 3 Use of workpapers.
Consolidated Statements After Acquisition
On December 31, 2007,
the two companies’ trial
balances were as follows
at right:
Required A. Prepare a
consolidated statements
workpaper on December
31, 2007.
Chapter
17-42
Cash
Accounts receivable
Inventory
Investment in Sid
Plant and equipment
Land
Dividends declared
Cost of goods sold
Operating expenses
Total debits
Accounts payable
Other liabilities
Common stock
Other contributed capital
Retained earnings
Sales
Dividend income
Total credits
Parker
$ 62,000
32,000
30,000
160,000
105,000
29,000
20,000
130,000
20,000
$ 588,000
Sid
$ 30,000
29,000
16,000
82,000
34,000
20,000
40,000
14,000
$ 265,000
$
$
19,000
10,000
180,000
60,000
40,000
260,000
19,000
$ 588,000
12,000
20,000
120,000
10,000
23,000
80,000
$ 265,000
LO 5 Workpapers eliminating entries.
Consolidated Statements After Acquisition
Sales
COGS
Operating Expenses
Dividend Income
Minority Interest
Net Income
Chapter
17-43
Parker
260.000
- 130.000
- 20.000
19.000
129.000
Sid
80.000
- 40.000
- 14.000
26.000
Elimination Consolidated
340.000
- 170.000
- 34.000
- 19.000
- 1.300
1.300
- 20.300
134.700
Consolidated Statements After Acquisition
Chapter
17-44
Cash
Accounts Receivable
Inventory
Investments
PP&E
Goodwill
Total Assets
Parker
62.000
32.000
30.000
160.000
134.000
418.000
Sid
30.000
29.000
16.000
116.000
191.000
Accounts Payable
Other Liabilities
Share Capital
Other Capital
Retained Earnings
Net Income
Minority Interest
Total Liab. &SHEquity
19.000
10.000
180.000
60.000
20.000
129.000
418.000
12.000
20.000
120.000
10.000
3.000
26.000
191.000
Elimination Consolidated
92.000
61.000
46.000
- 160.000
250.000
14.650
14.650
-145.350
463.650
- 120.000
- 10.000
- 3.000
- 20.300
7.950
-145.350
31.000
30.000
180.000
60.000
20.000
134.700
7.950
463.650