Prepared by:
Debbie Musil
Kwantlen University College
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.
Investments

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Classification of investments
• Short-term versus long-term
Accounting for debt investments
• Short-term and long-term debt investments
Accounting for equity investments
• Cost and equity methods
Valuation of passive investments
• Trading, available-for-sale, held-to-maturity
Reporting of investments
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

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Corporations can invest in:
• Debt securities: money-market, bonds, commercial paper
• Equity securities: preferred and common shares
Reasons to invest:
• Passive investments: use excess cash, generate investment income
• Strategic investments: to influence or control another company
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

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Debt or equity securities that either :
• Are readily marketable: can be easily sold whenever cash is needed, or
• Mature within the next year
Can be classified as either:
• Trading securities: purchased and held for resale in the short term, hopefully at a gain
• Available-for-sale securities: not trading securities or held-to-maturity securities
• Intention to sell them at some time in the future
• Can be short or long-term based on criteria met
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

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Investments that are both:
• Not readily marketable, and
• Do not mature within one year
Classified as either:
• Available-for-sale securities: not trading securities or held-to-maturity securities
• Intention to sell them at some time in the future
• Can be short or long-term based on criteria met
• Held-to-maturity securities: intention to hold debt security until it matures
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

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• If actively managed and traded: trading securities
Otherwise: available-for-sale securities
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Money-market instruments
Usually pay a fixed interest rate on maturity
Purchase:
Nov. 30 Available-for-Sale - Term Deposit
Cash
To record purchase of 3-month, 2% term deposit
5,000
5,000
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

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Money-market instruments
Accruing interest revenue:
Dec. 31 Interest Receivable
Interest Revenue
To accrue interest on term deposit ($5,000 x 2% x 1/12)
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8
• Maturity:
Feb.28
Cash
Interest Receivable
Interest Revenue ($5,000 x 2% x 2/12)
Available-for-Sale - Term Deposit
To record maturity of term deposit
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.
5,025
8
17
5,000

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Bonds
Recording of investments in bonds differs in three ways:
• Cost: may include a discount or premium
• Timing of interest: usually received semi-annually
• Sale of bond: may be before maturity, with gain or loss
Purchase:
Jan. 1 Available-for-Sale - Doan Bonds
Cash
To record purchase of Doan bonds
49,000
49,000
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

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Bonds
Recording interest revenue:
July 1 Cash
Interest Revenue
To record receipt of interest on Doan bonds
1,500
1,500
• Sale of bonds before maturity:
Feb.28
Cash
Available-for-Sale - Doan Bonds
Gain on Sale of Available-for-Sale Securities
To record sale of Doan bonds
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.
50,500
49,000
1,500

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Purchase:
• Recording is similar to short-term investments
• Any discount or premium on purchase is not recorded separately
Jan. 1 Held-to-Maturity - ABC Bonds
Cash
To record purchase of ABC bonds
101,000
101,000
• Recording interest revenue:
• Any discount or premium is amortized to interest revenue over the remaining term of the bonds
July 1 Cash
Held-to-Maturity - ABC Bonds
Interest Revenue
To record receipt of interest on ABC Bonds
3,500
290
3,210
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

• Based on how much influence investor has over the issuing corporation:
• Short-term investments: investment is accounted for using the cost method
• Long-term investments:
• < 20% ownership – little influence – use cost method to account for investment
• ≥ 20% ownership – significant influence – use equity method to account for investment
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

• Investment is recorded at purchase price (cost)
July 1 Available-for-Sale - Beal Common Shares
Cash (1,000 shares x $40)
To record purchase of 1,000 common shares
40,000
40,000
• Revenue recognized when cash dividends are received
Dec. 1 Cash (1,000 x $2)
Dividend Revenue
To record cash dividend of $2 per share
2,000
2,000
• When shares are sold, difference between proceeds of sale and cost or carrying value of shares is recognized as a gain or loss
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

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• Investment is recorded at cost (same as cost method)
Investor’s share of investee’s net income is recognized as an increase in the value of the investment
Dec. 31 Equity Investment - Beck Common Shares
Revenue from Equity Investment in Beck
To record 30% equity in Beck's net income of $100,000
30,000
30,000
• Dividends received are recognized as a decrease in the value of the investment
Dec. 31 Cash
Equity Investment - Beck Common Shares
To record dividends received (30% of $40,000)
12,000
12,000
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

• Depends upon classification of investment:
• Trading securities and available-for-sale securities:
• Valued at market value
• Changes in market value are reported as an unrealized gain or loss
• Held-to-maturity securities:
• Valued at amortized cost (premiums and discounts are amortized)
• Value is not adjusted for changes in market value unless permanent impairment occurs
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

• Changes in market value of trading and available-forsale securities are treated as unrealized gains or losses
Dec. 31 Allowance to Adjust Trading Securities to Market Value
Unrealized Gain - Trading Securities
To record unrealized gain on trading securities
3,000
3,000
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Allowance account is used to record difference between cost and market and is reported on the balance sheet
Unrealized gain is reported:
• For trading securities: in the income statement
• For available-for-sale securities: as other comprehensive income
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

Short-Term Investments
• Highly liquid investments with a maturity < three months are included in “Cash and Cash
Equivalents”
• Trading securities and available-for-sale securities (if short-term) are listed next
• Valuation adjustment to market may be listed separately on the balance sheet or in the notes
Long-Term Investments
• Available-for-sale (if long-term) at market
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

Long-Term Investments (continued)
• Held-to-maturity at amortized cost
• Maturities within one year are classified as shortterm
• Equity investments where significant influence
Accumulated Other Comprehensive Income
• Presented in the shareholders’ equity section
• The cumulative total of all comprehensive income (loss) from available-for-sale securities and other sources
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

Income Statement
• Other revenue/expense includes:
• Realized gains/losses on investments
• Unrealized gains/losses on trading securities
• Other investment income: interest, dividends
Statement of Comprehensive Income
• Unrealized gains/losses on available-for-sale securities
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

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When a company (parent) controls another company (subsidiary):
• Owns more than 50% of another company, or
• Other factors that indicate control
Consolidated financial statements are also required
• Present the total assets and liabilities controlled by the parent company
• In addition to financial statements of each separate company
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.

Copyright © 2007 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition
© 2007 John Wiley & Sons Canada, Ltd.