Kế toán tài chính 2 - Chapter 14: Investments

CHAPTER 14INVESTMENTSINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.Understand the procedures for discount and premium amortization on bond investments.Identify the categories of equity securities and describe the accounting and reporting treatment for each category.Explain the equity method of accounting and compare it to the fair value method for equity securities.Describe the disclosure requirements for investments in debt and equity securities.Discuss the accounting for impairments of debt and equity investments.Describe the accounting for transfer of investment securities between categories.Learning ObjectivesInvestments in Debt SecuritiesInvestments in Equity SecuritiesOther Reporting IssuesHeld-to-maturity securitiesAvailable-for-sale securitiesTrading securitiesHoldings of less than 20%Holdings between 20% and 50%Holdings of more than 50%Financial statement presentationImpairment of valueTransfers between categoriesFair value controversyInvestmentsDifferent motivations for investing:To earn a high rate of return.To secure certain operating or financing arrangements with another company.InvestmentsCompanies account for investments based onthe type of security (debt or equity) and their intent with respect to the investment.InvestmentsIllustration 14-1LO 1 Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.Debt securities (creditor relationship):Investments in Debt SecuritiesU.S. Government securitiesMunicipal securities Corporate bondsConvertible debtCommercial paperTypeHeld-to-maturityTradingAvailable-for-saleAccounting CategoryLO 1 Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.Investments in Debt SecuritiesAccounting for Debt Securities by CategoryIllustration 14-2Held-to-Maturity SecuritiesClassify a debt security as held-to-maturity only if it has both the positive intent and the ability to hold securities to maturity.Accounted for at amortized cost, not fair value.Amortize premium or discount using the effective-interest method unless the straight-line method—yields a similar result.LO 2 Understand the procedures for discount and premium amortization on bond investments.Exercise: (Held-to-Maturity Securities) On January 1, 2006, Hi and Lois Company purchased 12% bonds, having a maturity value of $300,000, for $322,744. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2006, and mature January 1, 2011, with interest receivable December 31 of each year. Hi and Lois Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.Instructions (a) Prepare the journal entry at the date of the bond purchase.Held-to-Maturity SecuritiesLO 2 Understand the procedures for discount and premium amortization on bond investments.Exercise: (a) Prepare the journal entry at the date of the bond purchase.Held-to-Maturity SecuritiesLO 2 Understand the procedures for discount and premium amortization on bond investments.Held-to-Maturity Securities 322,744 Cash 322,744January 1, 2006:Exercise: (b) Prepare a bond amortization schedule.Held-to-Maturity SecuritiesLO 2 Understand the procedures for discount and premium amortization on bond investments.* rounding*Exercise: (c) (d) Prepare the journal entry to record the interest received and the amortization for 2006 & 2007.Held-to-Maturity SecuritiesLO 2 Understand the procedures for discount and premium amortization on bond investments.Cash 36,000 Held-to-Maturity Securities 3,726December 31, 2006: Interest Revenue 32,274Cash 36,000 Held-to-Maturity Securities 4,098December 31, 2007: Interest Revenue 31,902Companies 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.LO 2 Understand the procedures for discount and premium amortization on bond investments.Available-for-Sale SecuritiesExercise: (Available-for-Sale Securities) Assume the same information as the previous Exercise except that the securities are classified as available-for-sale. The fair value of the bonds at December 31 for 2006 and 2007 is $320,500 and $309,000, respectively.InstructionsPrepare the journal entry at date of bond purchase. Prepare the journal entries to record the interest received and recognition of fair value for 2006.Prepare the journal entry to record recognition of fair value for 2007.LO 2 Understand the procedures for discount and premium amortization on bond investments.Available-for-Sale SecuritiesExercise: (a) Prepare the journal entry at date of bond purchase. LO 2 Understand the procedures for discount and premium amortization on bond investments.Available-for-Sale Securities 322,744 Cash 322,744January 1, 2006:Available-for-Sale SecuritiesExercise: (b) Prepare the journal entries to record the interest received and recognition of fair value for 2006.LO 2 Understand the procedures for discount and premium amortization on bond investments.Cash 36,000 Available-for-Sale Securities 3,726December 31, 2006: Interest Revenue 32,274Securities Fair Value Adjustment-AFS 1,482 Unrealized Holding Gain/Loss 1,482($320,500 – $319,018 = $1,482) Available-for-Sale SecuritiesExercise: (c) Prepare the journal entry to record recognition of fair value for 2007.LO 2 Understand the procedures for discount and premium amortization on bond investments.Unrealized Holding Gain/Loss 7,402 Securities Fair Value Adjustment-AFS 7,402December 31, 2007:Available-for-Sale SecuritiesAvailable-for-Sale SecuritiesSale of Available-for-Sale SecuritiesLO 2 Understand the procedures for discount and premium amortization on bond investments.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.Trading SecuritiesCompanies report trading securities at fair value, with unrealized holding gains and losses reported as part of net income.Any discount or premium is amortized.LO 2 Understand the procedures for discount and premium amortization on bond investments.Exercise: (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. InstructionsPrepare the journal entry for the purchase of the investment. Prepare the journal entries for the interest received.Prepare the journal entry for the fair value adjustment.LO 2 Understand the procedures for discount and premium amortization on bond investments.Trading SecuritiesExercise: Prepare the journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment.LO 2 Understand the procedures for discount and premium amortization on bond investments.(a) Trading Securities 40,000 Cash 40,000(b) Cash 2,000 Interest Revenue 2,000(c) Unrealized Holding Loss - Income 1,600 Securities Fair Value Adj.- Trading 1,600Trading SecuritiesInvestments in Equity SecuritiesRepresent 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.LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.0 --------------20% ------------ 50% -------------- 100%SFAS 115APBO 18, SFAS 142SFAS 141, SFAS 142No significant influence usually existsSignificant influence usually existsControl usually existsInvestment valued using Fair Value MethodInvestment valued using Equity MethodInvestment valued on parent’s books using Cost Method or Equity Method (investment eliminated in Consolidation)Ownership PercentagesInvestments in Equity SecuritiesLO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.Holdings of Less Than 20%Accounting Subsequent to AcquisitionLO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.Market Price AvailableValue and report the investment using the fair value method.Market Price UnavailableValue 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.Holdings of Less Than 20%Accounting and Reporting – Fair Value Method LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.Because equity securities have no maturity date, companies cannot classify them as held-to-maturity.Problem: Loxley Company has the following portfolio of securities at September 30, 2007, its last reporting date.Holdings of Less Than 20%LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.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. Problem: Prepare the journal entries to record the sale, purchase, and adjusting entries related to the trading securities in the last quarter of 2007.Holdings of Less Than 20%LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.Portfolio at September 30, 2007Securities Fair Value Adjustment - credit ($19,000)Problem: Prepare the journal entries to record the sale, purchase, and adjusting entries related to the trading securities in the last quarter of 2007.Holdings of Less Than 20%LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.Cash (5,000 x $54) 270,000 Trading Securities 225,000October 10, 2007 (Fogelberg): Gain on Sale 45,000Trading Securities (3,000 x $59.50) 178,500 Cash 178,500November 2, 2007 (Los Tigres):Problem: Portfolio at December 31, 2007Holdings of Less Than 20%LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.Unrealized Holding Loss - Income 51,500 Securities Fair Value Adj. - Trading 51,500December 31, 2007:Problem: How would the entries change if the securities were classified as available-for-sale?Holdings of Less Than 20%LO 3 Identify the categories of equity securities and describe the accounting and reporting treatment for each category.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.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.LO 4 Explain the equity method of accounting and compare it to the fair value method for equity securities.Holdings Between 20% and 50%Equity MethodLO 4 Explain the equity method of accounting and compare it to the fair value method for equity securities.Record the investment at cost and subsequently adjust the amount each period for the investor’s proportionate share of the earnings (losses) anddividends 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.Exercise: (Equity Method) On January 1, 2008, 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.InstructionsPrepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2008.Holdings Between 20% and 50%LO 4 Explain the equity method of accounting and compare it to the fair value method for equity securities.Exercise: Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2008. Investment in Stock 180,000 Cash 180,000 Cash 6,000 Investment in Stock 6,000 Investment in Stock 24,000 Investment Revenue 24,000Holdings Between 20% and 50%LO 4 Explain the equity method of accounting and compare it to the fair value method for equity securities.($20,000 x 30%) ($80,000 x 30%) Holdings of More Than 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.LO 4 Explain the equity method of accounting and compare it to the fair value method for equity securities.Financial Statement PresentationReport trading securities at aggregate fair value as current assets.Report held-to-maturity and available-for-sale securities as current or noncurrent.Aggregate fair value, gross unrealized holding gains, gross unrealized losses, amortized cost basis by type (debt and equity), and information about the maturity of debt securities.LO 5 Describe the disclosure requirements for investments in debt and equity securities.Financial Statement PresentationDisclosures Required under the Equity MethodLO 5 Describe the disclosure requirements for investments in debt and equity securities.Name of each investee and percentage ownership.Accounting policies of the investor.Difference between amount in the investment account and amount of underlying equity in the net assets of the investee.The aggregate value of each identified investment based on quoted market price (if available).When material, present information concerning assets, liabilities, and results of operations of the investees.Financial Statement PresentationReclassification AdjustmentsLO 5 Describe the disclosure requirements for investments in debt and equity securities.Company needs a reclassification adjustment when it reports realized gains or losses as part of net income but also shows the amounts as part of other comprehensive income in the current or in previous periods.Impairment of ValueImpairments of debt and equity securities are losses in value that are determined to be other than temporary, based on a fair value test, and are charged to income.LO 6 Discuss the accounting for impairments of debt and equity investments.Security transferred at fair value.Unrealized gain or loss at date of transfer increases or decreases stockholders’ equity.Unrealized gain or loss at date of transfer is recognized in income.Transfers Between CategoriesLO 7 Describe the accounting for transfer of investment securities between categories.Transfers between Trading and Available-for-SaleSecurity transferred at fair value. Separate component of stockholders’ equity is increased or decreased by the unrealized gain or loss at date of transfer . NO impact of transfer on net income.Transfers Between CategoriesLO 7 Describe the accounting for transfer of investment securities between categories.Transfer from Held-to-Maturity to Available-for-SaleSecurity transferred at fair value. Unrealized gain or loss at date of transfer carried as a separate component of stockholders’ equity is amortized over the remaining life of the security.NO impact of transfer on net income.Transfers Between CategoriesLO 7 Describe the accounting for transfer of investment securities between categories.Transfer from Available-for-Sale to Held-to-MaturityMeasurement Based on IntentGains TradingLiabilities Not Fairly ValuedSubjectivity of Fair ValuesFair Value ControversyMajor Unresolved IssuesCopyright © 2008 John Wiley & Sons, Inc. All rights reserved. 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