Kế toán, kiểm toán - Chapter 8: Investments in equity securities

2Chapter 8:Investments in Equity Securities3Learning Objective 1Describe what an equity investment is and the criteria used to determine whether investments in securities should be classified as current or noncurrent on the balance sheet.4What is an Equity Investment?An equity investment occurs when one company purchases another company’s outstanding common stock.To earn investment incomeSmaller and/or short-term investmentsDividends Price appreciationTo exert influence or control over the board of directors and managementLarger and/or long-term investments 5Equity Securities Classified as CurrentTwo criteria must be met for an investment in a security to be considered current and thus warrant inclusion as a current asset:The investment must be readily marketable.Management must intend to convert the investment into cash within the time period of current assets (one year or the operating cycle, whichever is longer)6Concept Practice 1 7Learning Objective 2Describe mark-to-market accounting and how it is applied to passive investments in equity securities. 8Passive Investment in Equity SecuritiesCompanies may purchase equity securities in small amounts to earn investment income and not exert influence. These are passive investments.Passive investments use the mark-to-market rule.Assets are carried at their current market value.Changes in value of securities are recorded as income or loss on the income statement.9Purchasing Passive Investments in Equity SecuritiesCapitalized and recorded on the balance sheet at cost. Cost includes purchase price plus incidental acquisition costs.Assuming the security is readily marketable and the equity amount is small the journal entry is:Short-Term Equity Investment (+A) XXX Cash (-A) XXX Purchase passive equity securities10Declaration and Receipt of Cash DividendsThe company has a legal right to declared dividends as a shareholder. A receivable and revenue are recorded.Dividend Receivable (+A) XXX Dividend Revenue (R, +RE) XXX Recognized declaration of dividendWhen Cash is received, the receivable is exchanged for cash. Cash (+A) XXX Dividend Receivable (-A) XXX Received cash dividend11Sale of SecuritiesWhen a passive investment is sold, asset is removed from the books and a realized gain or realized loss is recognized depending on whether or not the sale amount exceeds or is less than the balance sheet valueCash (+A) XXXShort-Term Equity Investments (-A) XXXGain on Sale of Investments (Ga, +RE) XXXSale of stockORCash (+A) XXXLoss of Sale of Investments (Lo, -RE) XXX Short-Term Equity Investments (-A) XXX Sale of stock12Price Changes of Securities on Hand at the End of the Accounting PeriodAt the end of an accounting period, the current market value of all passive equity investments must be determined and adjusting entries are made to restate their value and record unrealized gains or losses.Short-Term Equity Investments(+A) XXXUnrealized Gain(Ga, +RE) XXXRevalue securities to marketORUnrealized Loss(Lo, -RE) XXX Cash (-A) XXX Revalue securities to market13E8-8Mystic Lakes Food Company began investing in equity securities for the first time in 2017. During 2017, the company engaged in the following transactions involving equity securities. Assume that the stock of Thayers International and Bayhe Enterprises is not considered marketable and that ownership is less than 20 percent of the equity. Prepare journal entries to record these transactions.Purchased 10,000 shares of Thayers International for $26 per share.Investment in Equity Securities (+A) 260,000 Cash (–A) 260,0002. Purchased 25,000 shares of Bayhe Enterprises for $35 per share.Investment in Equity Securities (+A) 875,000 Cash (–A) 875,0003. Thayers International declared a $2-per-share dividend to be paid at a later date.Dividend Receivable (+A) 20,000 Dividend Revenue (R, +SE) 20,00014E8-84. Sold 4,500 shares of Bayhe Enterprises for $30 per share.Cash (+A) 135,000Loss on Sale of Equity Securities (Lo, –SE) 22,500 Investment in Equity Securities (–A) 157,5005. Sold 8,000 shares of Thayers International for $32 per share. Cash (+A) 256,000 Investment in Equity Securities (–A) 208,000 Gain on Sale of Equity Securities (Ga, +SE) 48,00015Concept Practice 2 16Concept Practice 2 (cont.) 17Learning Objective 3Explain why companies enter into long-term equity investments and describe the accounting treatments used in cases where the investor company does not have control over the investee company. 18Accounting for Long-Term Equity Investments Major U.S. companies invest in equity of other companies toGet investment income in the form of dividends and stock price appreciationBut primarily Exert influence over company board of directors and management to control operationsAcquisitions are common for large U.S. companies 19Accounting for Long-Term Equity InvestmentsFigure 8-1 Accounting for long-term investmentin equity securities20The Equity MethodSome companies can significantly influence the operating decisions and management policies of other companiesRepresentation on the Board of DirectorsInterchange of management personnelFrequent and/or significant transactions between the two companiesTechnical dependencySignificant investment in equity securities may indicate influence and a substantive economic relationshipFor a degree of conformity, an investment of 20% or more represents significant influence20%-50% should be accounted for using the equity method21The Equity Method – cont.Figure 8-2 The equity method of accounting for long-term equity investments22Investments in AffiliatesFigure 8-3 The relative importance of investments in affiliate companies(selected U.S. companies).23Which of the following is true of the equity method:a. The income recognized by the investor is based on the percentage of stock ownership and the amount of earnings reported by the investee.b. Market value adjustments are made at year end.c. The receipt of dividends increases net income on the investor's financial statements.d. The percent of ownership must be greater than 50% to apply this method.24Which one of the following correctly reflects the effects on the financial statements caused by the increase in the market price of long-term available-for-sale securities?a. Current ratio is unchanged and earnings per share increases.b. Current ratio and earnings per share increase.c. Current ratio and earnings per share are unchanged.d. Current ratio is unchanged and earnings per share decreases.25Learning Objective 4Describe a business acquisition, define goodwill, and explain its accounting treatment. 26Business Acquisition, Mergers, and Consolidated Financial StatementsA business acquisition occurs when an investor company acquires a controlling interest (more than 50 percent of the voting stock) in another company.If the two companies continue as separate legal entities, the investor company is referred to as the parent company, and the investee company is called the subsidiary. Consolidated financial statements should be preparedA merger, or business combination, occurs when two or more companies combine to form a single legal entity.27GoodwillGoodwill is a noncurrent intangible asset created when a company pays an amount to acquire a controlling interest of another company that is more than the fair market value of net assets.Figure 8-4 Computation of goodwill.28Equity Method or Consolidated Statements?The user needs to understand the effect of the different presentations on the financial statements.Figure 8-5 The balance sheets of Megabucks and Tiny Inc.29Equity Method or Consolidated Statements?Consolidating the financial statements can weaken a company’s ratios, especially when the subsidiary has considerable debt. This has encouraged companies to use the equity method when possible and avoid ‘control’.Figure 8-6 Consolidated balance sheet30Special Purpose Entities (SPEs)Companies often create separate entities to carry out activities or transactions directly related to specific purposes. The entities (called special purpose entities or special purpose vehicles) take on various legal forms.The key accounting question related to SPEs is whether the sponsoring company (e.g., Company A) should include (consolidate) the financial statements of the SPE with its own financial statements.Retain control – consolidateRelinquish control – no reason to consolidate31Accounting for Equity Investments: A SummaryFigure 8-8 Accounting for equity securities32Concept Practice 4 33Learning Objective 5Appendix 8ADescribe the acquisition method of accounting for business acquisitions. 34Accounting for Acquisitions and Mergers: The Purchase Method *Appendix 8AFigure 8A-1Balance sheets for Multi CorporationAnd Littleton Company (beforeacquisition)35Accounting for Acquisitions and Mergers: The Purchase Method *Appendix 8A36Case 1 : Purchase 100% of Stock at a Price Greater than the Per-Share Market Value of the Net Assets *Appendix 8A37Case 1 : Purchase 100% of Stock at a Price Greater than the Per-Share Market Value of the Net Assets *Appendix 8A38Case 2 : Purchase Between 50 and 100 Percent of Stock at a Price Greater than the Per-Share Market Value of the Net Assets *Appendix 8A39Case 2 : Purchase Between 50 and 100 Percent of Stock at a Price Greater than the Per-Share Market Value of the Net Assets *Appendix 8A