Kế toán, kiểm toán - Reporting and analyzing investments

Reporting and Analyzing InvestmentsKimmel ● Weygandt ● KiesoFinancial Accounting, Eighth EditionHCHAPTER OUTLINEExplain how to account for debt investments.1Explain how to account for stock investments.2LEARNING OBJECTIVESDiscuss how debt and stock investments are reported in the financial statements.3Corporations purchase investments in debt or stock securities generally for one of three reasons.Corporation may have excess cash.Generate earnings from investment income.For strategic reasons.ILLUSTRATION H-1Temporary investments and the operating cycleLO 1LEARNING OBJECTIVEExplain how to account for debt investments.1Pension funds and banks regularly invest in debt and stock securities to: house excess cash until needed. generate earnings. meet strategic goals. avoid a takeover by disgruntled investors.QuestionWHY CORPORATIONS INVESTLO 1Recording Acquisition of BondsCost includes all expenditures necessary to acquire these investments, such as the price paid plus brokerage fees (commissions), if any.ACCOUNTING FOR DEBT INVESTMENTSLO 1Investments in government and corporation bonds. Entries are made to record the acquisition,the interest revenue, and the sale.Recording Bond InterestCalculate 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.LO 1ACCOUNTING FOR DEBT INVESTMENTSRecording Sale of BondsCredit the investment account for the cost of the bonds.Record as a gain or loss any difference between the net proceeds from the sale (sales price less brokerage fees) and the cost of the bonds.LO 1ACCOUNTING FOR DEBT INVESTMENTSIllustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, 2017, for $50,000. The entry to record the investment is:Debt Investments 50,000 Cash 50,000Jan. 1LO 1ACCOUNTING FOR DEBT INVESTMENTSKuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, 2017, for $50,000. The bonds pay interest annually on January 1. If Kuhl Corporation’s fiscal year ends on December 31, prepare the entry to accrue interest earned by December 31.Interest Receivable 4,000 Interest Revenue 4,000* ($50,000 x 8% = $4,000)*Dec. 31LO 1ACCOUNTING FOR DEBT INVESTMENTSKuhl reports Interest Receivable as a current asset in the balance sheet. It reports Interest Revenue under “Other revenues and gains” in the income statement. Kuhl reports receipt of the interest on January 1 as follows.Cash 4,000 Interest Receivable 4,000Jan. 1LO 1ACCOUNTING FOR DEBT INVESTMENTSAssume that Kuhl corporation receives net proceeds of $54,000 on the sale of the Doan Inc. bonds on January 1, 2018, after receiving the interest due. Prepare the entry to record the sale of the bonds.Cash 54,000 Debt Investments 50,000 Gain on Sale of Debt Investments 4,000Jan. 1LO 1ACCOUNTING FOR DEBT INVESTMENTSAn event related to an investment in debt securities that does not require a journal entry is: acquisition of the debt investment. receipt of interest revenue from the debt investment. a change in the name of the firm issuing the debt securities. sale of the debt investment.QuestionLO 1ACCOUNTING FOR DEBT INVESTMENTSWhen bonds are sold, the gain or loss on sale is the difference between the: sales price and the cost of the bonds. net proceeds and the cost of the bonds. sales price and the market value of the bonds. net proceeds and the market value of the bonds.QuestionLO 1ACCOUNTING FOR DEBT INVESTMENTS0 ------------------20% -------------- 50% -------------------- 100%No significant influence usually existsSignificant influence usually existsControl usually existsInvestment valued using Cost MethodInvestment valued using Equity MethodInvestment valued on parent’s books using Cost Method or Equity Method (investment eliminated in Consolidation)Ownership PercentagesThe accounting depends on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation (investee).LO 2LEARNING OBJECTIVEExplain how to account for stock investments.2Companies use the cost method.Investment is recorded at cost and revenue recognized 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), if any.Accounting for Stock InvestmentsHOLDING OF LESS THAN 20%LO 2 July 1Illustration: On July 1, 2017, Sanchez Corporation acquires 1,000 shares (10% ownership) of Beal Corporation common stock. Sanchez pays $40 per share. The entry for the purchase is:Stock Investments (1,000 x $40) 40,000 Cash 40,000HOLDING OF LESS THAN 20%Recording Acquisition of StockLO 2 Dec. 31Illustration: During the time Sanchez owns the stock it makes entries for any cash dividends received. If Sanchez receives a $2 per share dividend on December 31, the entry is:Cash (1,000 x $2) 2,000 Dividend Revenue 2,000Recording DividendsLO 2HOLDING OF LESS THAN 20% Feb. 10Illustration: Assume that Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal stock on February 10, 2018. Because the stock cost $40,000, Sanchez incurred a loss of $500. The entry to record the sale is:Cash 39,500Loss on Sale of Stock Investments 500 Stock Investments 40,000Recording Sale of StockLO 2HOLDING OF LESS THAN 20%Equity Method: Investor records the investment at cost and subsequently adjust the amount each period for theproportionate share of the earnings (losses) anddividends received.If investor’s share of investee’s losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method.Accounting for Stock InvestmentsHOLDING BETWEEN 20% AND 50%LO 2Illustration: Milar Corporation acquires 30% of the common shares of Beck Company for $120,000 on January 1, 2017. For 2017, Beck reports net income of $100,000 and paid dividends of $40,000. Prepare the entries for these transactions. Stock Investments 120,000 Cash 120,000 Cash ($40,000 x 30%) 12,000 Stock Investments 12,000 Stock Investments ($100,000 x 30%) 30,000 Revenue from Stock Investments 30,000Jan. 1Dec. 31Dec. 31HOLDINGS BETWEEN 20% AND 50%LO 2After Milar posts the transactions for the year, its investment and revenue accounts will show the following.Illustration: Milar Corporation acquires 30% of the common shares of Beck Company for $120,000 on January 1, 2017. For 2017, Beck reports net income of $100,000 and paid dividends of $40,000. Prepare the entries for these transactions.LO 2ILLUSTRATION H-4Investment and revenueaccounts after postingHOLDINGS BETWEEN 20% AND 50%Under the equity method, the investor records dividends received by crediting: Dividend Revenue. Investment Income. Revenue from Investment. Stock Investments.QuestionLO 2HOLDINGS BETWEEN 20% AND 50%Controlling Interest - When one corporation acquires a voting interest of more than 50 percent in another corporationInvestor 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.Accounting for Stock InvestmentsHOLDINGS OF MORE THAN 50%LO 2Consolidated statements indicate the magnitude and scope of operations of the companies under common control.HOLDINGS OF MORE THAN 50%LO 2ILLUSTRATION H-5Examples of consolidated companies and their subsidiariesCATEGORIES OF SECURITIESClassifications of debt and stock investments:These guidelines apply to all debt securities and all stock investments in which the holdings are less than 20%.LO 3Stock InvestmentsTrading Available-for-sale Debt InvestmentsTrading Available-for-sale Held-to-maturityLEARNING OBJECTIVEDiscuss how debt and stock investments are reported in the financial statements.3Trading SecuritiesCompanies hold with intention of selling in a short period. Trading means frequent buying and selling.Reported at fair value.Changes from cost are reported in the income statement as unrealized gains or losses.CATEGORIES OF SECURITIESLO 3Marketable securities bought and held primarily for sale in the near term are classified as: available-for-sale securities. held-to-maturity securities. stock securities. trading securitiesQuestionLO 3CATEGORIES OF SECURITIESIllustration: Cost and fair values for investments of Pace Corporation classified as trading securities on December 31, 2017.The adjusting entry for Pace Corporation is:Dec. 31Fair Value Adjustment—Trading 7,000 Unrealized Gain—Income 7,000Trading SecuritiesLO 3ILLUSTRATION H-7Valuation of trading securitiesHeld with the intent of selling sometime in the future. Classified as current assets or as long-term assets, depending on the intent of management.Reported at fair value.Changes from cost are reported in stockholders’ equity as unrealized gains or losses.Available-for-sale SecuritiesCATEGORIES OF SECURITIESLO 3Illustration: Assume that Ingrao Corporation has two securities that it classifies as available-for-sale. The adjusting entry is:Available-for-sale SecuritiesLO 3Dec. 31Unrealized Gain or Loss—Equity 9,537 Fair Value Adjustment—AFS 9,537ILLUSTRATION H-8Valuation of available-for-sale securitiesAn unrealized loss on available-for-sale securities is: reported under Other Expenses and Losses in the income statement. closed-out at the end of the accounting period. reported as a separate component of stockholders' equity. deducted from the cost of the investment.QuestionLO 3CATEGORIES OF SECURITIESAlso called marketable securities, are securities held by a company that are readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer.Short-Term InvestmentsBALANCE SHEET PRESENTATIONLO 3Short-term investments are reported at fair value.Investments that do not meet both criteria are classified as long-term investments.Helpful Hint Trading securities are alwaysclassified as short-term.Available-for-sale securitiescan be either short-term orlong-term.Also called marketable securities, are securities held by a company that are readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer.Short-Term InvestmentsBALANCE SHEET PRESENTATIONLO 3ILLUSTRATION H-10Balance sheet presentation of short-term investmentsLong-term investments in available-for-sale securities are reported at fair value. Investments in common stock accounted for under the equity method are reported at equity.Long-Term InvestmentsBALANCE SHEET PRESENTATIONLO 3ILLUSTRATION H-11Balance sheet presentation of long-term investmentsPRESENTATION OF REALIZED AND UNREALIZED GAIN OR LOSSILLUSTRATION H-12Nonoperating items related to investmentsLO 3Unrealized gains or losses on available-for-sale securities are reported as a separate component of stockholders’ equity.LO 3ILLUSTRATION H-13Unrealized loss in stockholders’ equity sectionPRESENTATION OF REALIZED AND UNREALIZED GAIN OR LOSSThe “Investing activities” section of the statement of cash flows reports the cash inflows and outflows during the period that resulted from investment transactions.LO 3ILLUSTRATION H-13Unrealized loss in stockholders’ equity sectionSTATEMENT OF CASH FLOWSILLUSTRATION H-14Statement of cash flows presentation of investment activities“Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. 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