NETA POWERPOINT PRESENTATIONS TO
ACCOMPANY
VOLUME 2
Accounting
Second Canadian Edition
BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER
Adapted by Sheila Elworthy
and Tana Kristjanson
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CHAPTER 15
Investments
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Investments
After studying this chapter, you should be able to:
1. Describe why companies invest in debt
and equity securities.
2. Describe and illustrate the accounting
for non-strategic investments.
3. Describe and illustrate the accounting
for strategic investments.
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1
Describe why companies
invest in debt and equity
securities.
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Why Companies Invest
Most companies generate cash from
their operations. This cash can be
used for the following purposes:
• Investing in current operations
• Investing to earn additional
revenue
• Investing for strategic reasons
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Investing Cash in Current Operations
Cash may be used to
• Replace worn-out equipment or to
purchase new, more efficient, and
productive equipment.
• Reinvest in the company to expand its
current operations.
• Pay suppliers or other creditors.
• Pay interest on bonds/notes or pay
dividends.
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Investing Cash to Earn Additional
Revenue
Instead of letting excess cash remain
idle in a chequing account, most
companies invest excess cash in
temporary investments such as ...
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Investing Cash to Earn Additional
Revenue
• Debt securities are notes and
bonds that pay interest and have a
fixed maturity date.
• Equity securities are preferred and
common shares that represent
ownership in a company and do
not have a fixed maturity date.
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2
Describe and illustrate the
accounting for non-strategic
investments.
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Accounting for Non-Strategic
Investments
Under IFRS, non-strategic
investments are classified as follows:
1. Held-for-Trading investments
2. Held-to-Maturity investments
3. Loans and Receivables
4. Available-for-Sale investments
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Trading Investments
Trading investments are debt and
equity securities that are purchased
and sold to earn short-term profits
from changes in their market prices.
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Trading Investments
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Trading Investments
• Reported as current assets.
• Valued as a portfolio (group).
• Valued at fair value through profit and
loss method, the market price.
• Changes in fair value are recognized as
unrealized holding gain or loss in net
income.
• Brokerage fees are expensed.
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Example—Trading Investments
On December 1, 2014, Maggie Inc.
purchases 400 Armour Ltd. shares for
$4,900, 500 Maven Ltd. shares for
$10,700, and Polaris Corp. bonds with a
$8,000 face value for $7,900, paying
$23,500 plus a brokerage commission of
$500.
Maggie Inc. intends to report these
securities as held-for-trading investments.
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The journal entry to record the
purchase is as follows:
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On December 31, 2014, the cost and
fair values of the investments were
as follows:
Name
Armour Ltd.
Maven Ltd.
Polaris Corp.
Bonds
Total
Total Cost
$ 4,900
10,700
7,900
Total Fair
Value
$ 7,600
9,400
7,950
$23,500
$24,950
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On December 31, 2014, the cost and
fair values of the investments were
as follows:
Name
Total Total Fair Change
Cost
Value in Value
Armour Ltd. $ 4,900 $ 7,600 $ 2,700
Maven Ltd.
10,700
9,400 (1,300)
Polaris Corp. 7,900
7,950
50
Bonds
Total
$23,500 $24,950 $1,450
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The adjusting entry on December 31,
2014, to record the change in value
of the investments is as follows:
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EXAMPLE EXERCISE 15-1
Valuing Held-for-Trading Investments at Fair Value
On December 31, 2015, Complete Car Care
Ltd. had the following costs and fair values for
its held-for-trading investments:
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EXAMPLE EXERCISE 15-1
Valuing Held-for-Trading Investments at Fair Value
Journalize the adjusting entry required on
December 31, 2015, to recognize these
investments at fair value.
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FOLLOW MY EXAMPLE 15-1
Valuing Held-for-Trading Investments at Fair Value
For Practice: PE 15-1
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Receipt of Additional Revenue
The Polaris Corp. bonds have an
$8,000 face value and pay 5% semiannual interest on November 30 and
May 31. On December 31, 2014,
Maggie Inc. will recognize the future
receipt of interest as follows:
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Receipt of Additional Revenue
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Receipt of Additional Revenue
The Armour Ltd. shareholders
received a $1.50 dividend on January
31, 2015. The journal entry to record
receipt of the dividends on January
31, 2015, would be as follows:
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Receipt of Additional Revenue
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Accounting for Sale of
Held-for-Trading Investments
On February 24, 2015, Maggie Inc.
sold 200 of the Maven Ltd. shares for
$12 per share. The shares are valued
at $18.80 ($9,400/500 shares).
Assuming a brokerage fee of $200 on
the sale, the transaction will be
recorded as follows:
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Accounting for Sale of
Held-for-Trading Investments
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EXAMPLE EXERCISE 15-2
Journalizing the Sale of Held-for-Trading Investments
Using the information from Example Exercise
15-1, journalize the entry required to record
the sale on January 18, 2016, of one-half of
the investment in Amber Woods Inc. for
$5,000 less a $300 brokerage fee.
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FOLLOW MY EXAMPLE 15-2
Journalizing the Sale of Held-for-Trading Investments
For Practice: PE 15-2
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Held-To-Maturity Investments,
Loans, and Receivables
Held-to-maturity
investments are debt
investments, such as
notes or bonds, that a
company intends to hold
until their maturity date.
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Held-to-Maturity Investments
• Reported as noncurrent assets
unless the investment will mature
within a year.
• Brokerage commissions may be
expensed or capitalized.
• Reported on the balance sheet at
their amortized cost.
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Purchase of Bonds
Homer Inc. purchases $18,000 of
Sakata Ltd. bonds at their par value
on April 14, 2015 (73 days after the
last interest payment date). The
bonds have an interest rate of 6%,
payable on July 31 and January 31.
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Purchase of Bonds
$18,000 × 6% × (73/365)
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Interest Revenue
On July 31, Homer Inc. receives a
semiannual interest payment of $540
($18,000 × 6% × ½).
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Interest Revenue
($540 – $216)
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Accrued Interest
Homer Inc.’s accounting period ends on
December 31. The following adjusted
entry is required to record the accrued
interest:
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Accrued Interest
Homer Inc. would report Interest
Revenue on its 2015 income
statement at $774 ($324 + $450).
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Reporting of Held-to-Maturity
Investments
Homer Inc. will report its investment in
Sakata Ltd. Bonds as follows:
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EXAMPLE EXERCISE 15-3
Held-to-Maturity Transactions
Journalize the entries to record the following
selected held-to-maturity investment
transactions for Tristan Ltd.:
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EXAMPLE EXERCISE 15-3
Held-to-Maturity Transactions
Oct. 24. Purchased for cash, $80,000 of Arcon
Corp. 7% bonds at 100 plus 146 days of
accrued interest and $450 of brokerage
fees. Tristan capitalizes brokerage fees on
held-to-maturity investments.
Nov. 30. Received the semiannual interest payment
on the Arcon Corp. bonds.
Dec. 31. Accrued interest on the Arcon Corp.
bonds.
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FOLLOW MY EXAMPLE 15-3
Held-to-Maturity Transactions
For Practice: PE 15-3
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Purchase of Bonds
at a Discount or Premium
As discussed in Chapter 14, bond
investments may be purchased at
premium or a discount.
1. If the bond rate of interest is more
than the market rate, bonds are
purchased at a premium.
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Purchase of Bonds
at a Discount or Premium
2. If the bond rate of interest is less
than the market rate, bonds are
purchased at a discount.
Normally, the investment is recorded
net, in one account, rather than at
the face amount with a separate
account for the premium or discount.
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Amortization of
a Premium or Discount
Any premium or discount should be
amortized over the remaining life of
the bond.
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Amortization of
a Premium or Discount
1. Bond Premium Amortization:
Decreases Bond Investment and
decreases Interest Revenue.
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Amortization of
a Premium or Discount
2. Bond Discount Amortization: Increases
Bond Investment and increases Interest
Revenue.
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On April 1, 2015, Crenshaw Ltd.
purchases 10-year semiannual 8%
bonds on their issuance date directly
from XPS Corporation as a held-tomaturity investment. The bonds were
purchased at 88.
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Face amount of bonds
Less discount on bonds
Purchase price
($50,000 × 88%)
$50,000
(6,000)
$44,000
IFRS require the amortization to be
computed using the effective interest
method, but the straight-line method
is acceptable under ASPE.
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Amortization Using
the Effective Interest Method
Purchase of bonds on April 1, 2015.
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Amortization Using
the Effective Interest Method
Receipt of semiannual interest, and
amortization of discount using the
effective interest method on October 1.
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Amortization Using
the Effective Interest Method
Adjusting entry for accrued interest and
amortization of discount on December 31,
Crenshaw Ltd.’s year-end.
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Amortization Using
the Straight-Line Method
Accounting for the Crenshaw Ltd. purchase of the XPS
Corporation bonds, using the straight-line method
acceptable under ASPE:
Receipt of semiannual interest, and amortization of
discount using the straight-line method on October 1.
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Amortization Using
the Straight-Line Method
Adjusting entry for accrued interest and
amortization of discount on December 31,
Crenshaw Ltd.’s year-end.
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Receipt of Maturity Value of Bond
At the maturity date of the bonds,
any premium or discount will be fully
amortized and the book value
(carrying value) of the bond
investment account will equal the
face amount of the bond.
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The XPS Corporation bonds mature on
April 1, 2025. At that time, the discount
will be totally amortized and the
investment will have a balance of $50,000.
The receipt of the face value of the bonds
on April 1, 2025 is recorded as follows:
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EXAMPLE EXERCISE 15-4
Held-to-Maturity Transactions
Journalize the entries to record the following
selected held-to-maturity investment
transactions for Cooper Ltd., using the
effective interest method of amortization:
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EXAMPLE EXERCISE 15-4
Held-to-Maturity Transactions
1. Purchased for cash $3,000,000 of XYZ Corp.
10-year, 6% bonds at 102.25 on their issuance
date, January 1. The market rate was 5.7%. The
bonds pay interest on July 1 and January 1.
2. Recorded receipt of the first semiannual interest
payment and amortization of the premium on
July 1.
3. Recorded the adjusting entry for accrued
interest and amortization of the premium on
December 31, Cooper Ltd.’s year-end.
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FOLLOW MY EXAMPLE 15-4
Held-to-Maturity Transactions
For Practice: PE 15-4
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EXAMPLE EXERCISE 15-5
Held-to-Maturity Transactions
Using the information from Example Exercise 15-4,
journalize the following transactions using the
straight-line method of amortization:
1. receipt of the first semiannual interest payment
and amortization of the premium on July 1.
2. adjusting entry for accrued interest and
amortization of the premium on December 31,
Cooper Ltd.’s year-end.
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FOLLOW MY EXAMPLE 15-5
Held-to-Maturity Transactions
For Practice: PE 15-5
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Available-for-Sale Investments
Available-for-sale
Investments are debt and
equity investments that
are not classified as heldfor-trading or held-tomaturity investments.
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Available-for-Sale Investments
Available-for-sale investments are
also valued at fair value, similar to
the accounting for held-for-trading
investments, with the following
differences:
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Available-for-Sale Investments
• Brokerage fees can be capitalized.
• Reported as current or noncurrent
assets.
• Changes in fair value are
recognized as unrealized gain or
loss in other comprehensive
income.
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Available-for-Sale Investments
On June 21, 2015, Montrose Inc., a
publicly traded corporation using
IFRS, purchased the following
securities as available-for-sale
investments, paying $200,000 plus a
brokerage fee of $2,500.
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Available-for-Sale Investments
Name
Carmon Ltd.
Rasscom Inc.
Normandy
Corp.
Shares
1,000
1,500
3,000
Cost
$ 60,000
66,000
74,000
$200,000
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Available-for-Sale Investments
The brokerage fees can be allocated
to the investments proportionately,
and are allocated as follows:
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Available-for-Sale Investments
Name
Carmon
Ltd.
Rasscom
Inc.
Normandy
Corp.
Shares
Cost
Fees
1,000 $ 60,000 $ 750
Total Cost
$ 60,750
1,500
66,000
825
66,825
3,000
74,000
925
74,925
$200,000 $2,500
$202,500
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Available-for-Sale Investments
The journal entry to record the
purchase is as follows:
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Available-for-Sale Investments
On December 31, 2015, the cost and
fair values of the securities are as
follows:
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Available-for-Sale Investments
Name
Carmon
Ltd.
Rasscom
Inc.
Normandy
Corp.
Shares
Total
Total Fair
Cost
Value
1,000 $ 60,750 $ 70,250
Change
$9,500
1,500
66,825
67,250
425
3,000
74,925
70,500
(4,425)
$202,500 $208,000
$5,500
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Available-for-Sale Investments
The adjusting entry on December 31,
2015, to revalue the securities directly is as
follows:
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Available-for-Sale Investments
The unrealized holding gain (loss) is
recognized as other comprehensive
income.
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Other Comprehensive Income
• Other comprehensive income is defined
as revenues, expenses, gains and losses
that are recognized in comprehensive
income but excluded from net income.
• Comprehensive income is closed into
Accumulated other comprehensive
income, a shareholders’ equity account.
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EXAMPLE EXERCISE 15-6
Valuing Available-for-Sale Investments at Fair Value
On December 31, 2015, Rockin’ Lizards Ltd., a
publicly traded corporation using IFRS, had
the following costs and fair values for its
available-for-sale investments:
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EXAMPLE EXERCISE 15-6
Valuing Available-for-Sale Investments at Fair Value
Journalize the adjusting entry required on
December 31, 2015, to recognize these
investments at fair value.
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FOLLOW MY EXAMPLE 15-6
Valuing Available-for-Sale Investments at Fair Value
For Practice: PE 15-6
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3
Describe and illustrate the
accounting for strategic
investments.
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Accounting for Strategic Investments
Strategic investments involve the
purchase of a significant portion of the
shares of another company and are usually
for a specific purpose, such as:
• Reduction of costs
• Replacement of management
• Expansion
• Integration
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Accounting for Equity Investments
A company may invest in the
common or preferred shares of
another company. The company
investing in another company’s
shares is the investor. The company
whose shares are purchased is the
investee.
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The percentages given are general rules only.
Other factors could also play a role in the
relationship between the two companies.
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Accounting for Strategic Investments
Under IFRS, strategic investments are
categorized into one of three
classifications:
• Investment in associate
• Joint venture
• Business combination
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Investments in Associates
If the investor purchases between
20% and 50% of the outstanding
voting shares of the investee, the
investor is usually considered to have
significant influence over the
investee and the investment is
accounted for using the equity
method.
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Purchase of Shares (Equity Method)
Under the equity method, shares are
recorded at cost including any
brokerage commissions.
Simpson Inc. purchased a 40%
interest in Flanders Corporation’s
common shares on January 2, 2015,
for $350,000.
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Purchase of Shares (Equity Method)
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Recording Investee Net Income
(Equity Method)
For the year ending on December 31,
2015, Flanders Corporation reported
net income of $105,000.
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Recording Investee Net Income
(Equity Method)
Investment Revenue, if significant, is
reported as Other Income on
Simpson Inc.’s income statement.
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Recording Investee Dividends
(Equity Method)
During the year, Flanders declared
and paid cash dividends of $45,000.
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Reporting of Investments in
Associates
Investments in associates are
reported as noncurrent assets on the
balance sheet. On December 31,
2015, Simpson Inc. would report its
investment in Flanders Corporation
as follows:
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Reporting of Investments in
Associates
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Sale of Shares (Equity Method)
On January 1, 2016, Simpson Inc.
sold Flanders Corporation’s shares for
$400,000, a gain of $26,000,
calculated as follows:
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Sale of Shares (Equity Method)
Proceeds from sale
Carrying value of
share investment
Gain on sale
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$400,000
374,000
$ 26,000
93
Sale of Shares (Equity Method)
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EXAMPLE EXERCISE 15-7
Equity Method
On January 2, Olson Ltd. acquired 35% of the
outstanding common shares of Bryant Corp.
for $140,000. For the year ended December
31, Bryant Corp. earned income of $44,000
and paid dividends of $20,000. Using the
equity method, prepare the entries for Olson
Ltd. for the purchase of the shares, Olson’s
share of Bryant income, and the dividends
received from Bryant Corp.
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FOLLOW MY EXAMPLE 15-7
Equity Method
For Practice: PE 15-7
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Accounting for Joint Ventures
A joint venture is formed when two
or more corporations enter into a
contractual obligation for the
purpose of a special project.
Decisions are made jointly, with
equal votes for the venturers,
regardless of shareholding
percentages.
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Accounting for Joint Ventures
IFRS requires joint ventures to be
accounted for by either the
proportionate consolidation method
or the equity method.
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Accounting for Business
Combinations
If the investor purchases more than
50% of the outstanding voting shares
of the investee, the investor is
considered to have control over the
investee. The purchase is termed a
business combination.
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Accounting for Business
Combinations
A corporation owning all or a
majority of the voting shares of
another company is called a parent
company. The corporation that is
controlled is called the subsidiary
company.
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Accounting for Business
Combinations
Parent and subsidiary corporations often
continue to maintain separate accounting
records and prepare their own financial
statements. In such cases, at the end of
the year, the financial statements of the
parent and subsidiary are combined in
consolidated financial statements and
reported as a single company.
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Exhibit 2 (cont.)
Summary of Valuing and Reporting of
Investments
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Dividend Yield
Dividend Yield =
Annual Dividends per Share
Market Price per Share
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Shaw Communications Inc.
Dividend Yield =
$0.90
$19.37
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= 4.65%
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EXAMPLE EXERCISE 15-8
Dividend Yield
On September 25, 2015, Lucas Corporation
had a market price per common share of $8.
For the previous year, Lucas paid an annual
dividend of $0.16. Compute the dividend
yield for Lucas Corporation.
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FOLLOW MY EXAMPLE 15-8
Dividend Yield
For Practice: PE 15-8
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The End
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