Ch12 Investments 2015

12-1 Chapter 12 Investments 12-2 Accounting for Investment Securities Bonds Bonds and and notes notes (Debt (Debt securities) securities) Common Common and and preferred preferred stock stock (Equity (Equity securities) securities) Investments can be accounted for in a variety of ways, depending on the nature of the investment relationship 12-3 Learning Objectives Demonstrate how to identify and account for investments classified for reporting purposes as held to maturity 12-4 Reporting Categories for Investments Held-to-maturity Held-to-maturity (HTM) securities (HTM) securities Securities available Securities available for sale are are investments in forinvestments sale (SAS) (SAS) are are in expected to be held expected to be held debt the investor debt the investor for an unspecified for an unspecified intends and has intends and has Trading period of Trading securities periodsecurities of time time the ability to the ability to hold hold (TS) and (TS)are are bought bought and held to until they until they mature mature held primarily primarily to be be sold sold in inthe the near nearterm term 12-5 Investments Held for an Unspecified Period of Time When When an an investment investment is is held held for for an an unspecified unspecified period period of of time, time, itit is is reported reported at at the the fair fair value value of of the on the security security on the the reporting reporting date date Must Must be be “readily “readily determinable” determinable” Otherwise, Otherwise, the the investment investment is is reported reported at at cost cost 12-6 Learning Objectives Demonstrate how to identify and account for investments classified for reporting purposes as available-for-sale 12-7 Securities Available-for-Sale Adjustments Adjustments to to fair fair value value are are recorded recorded as: as: 1 2 aa direct direct adjustment adjustment to to the the investment investment account, account, and and an an allowance allowance account account in in the the equity equity section section of of the the balance balance sheet sheet called called ““Net Net Unrealized Unrealized Holding Holding Gains/Losses Gains/Losses” ” 12-8 Securities Available for Sale Example Matrix, Matrix, Inc Inc purchased purchased the the securities securities listed listed below below in in 2006 2006 They They are are classified classified as as Securities Securities Available Available for for Sale Sale (SAS) (SAS) The The fair fair value value of of the the securities securities were were determined determined on on December December 31, 31, 2006 2006 Prepare Prepare the the journal journal entries entries for for Matrix, Matrix, Inc Inc to to adjust adjust the the securities securities to to fair fair value value at at December December 31, 31, 2006 2006 12-9 Securities Available for Sale Example This This net net unrealized unrealized holding holding gain gain is is reported reported as as an an allowance allowance in in the the equity equity section section of of the the balance balance sheet sheet 12-10 Other Comprehensive Income When we add other comprehensive income to net income we refer to the result as “comprehensive income.” 12-20 Reporting Categories for Investments 12-21 Reporting Categories for Investments The The cost cost method method is is used used for for investments investments in in equity equity securities securities when significant when significant The equity method The equity method is is influence is influence is not not in used for used for investments investments in present equity securities present equity securities resulting in significant resulting in significant When an investment results When an investment results influence (20%-50%) influence (20%-50%) in in the the control control of of the the investee investee (generally (generally >> 50 50%), %), the the subsidiary subsidiary is is consolidated consolidated with with the the parent parent company company 12-22 Learning Objectives Understand the way investments are recorded and reported by the equity method 12-23 Equity Method 1 The The investment investment account account is is increased increased by: by:   2 Original Original investment investment cost cost Proportionate Proportionate share share of of investee's investee's earnings earnings The The investment investment account account is is decreased decreased by: by:  Dividends Dividends received received 12-24 Equity Method  The investment account is reported on the balance sheet as a single amount  The investor’s share of the investee’s earnings from date of acquisition is reported as a single item on the investor’s income statement 12-25 Equity Method On On January January 1, 1, 2006, 2006, Matrix, Matrix, Inc Inc acquired acquired 45% 45% of of the the equity equity securities securities of of Apex, Apex, Inc Inc for for $1,350,000 $1,350,000 On On the the acquisition acquisition date, date, Apex’s Apex’s net net assets assets had had aa fair fair value value of of $3,000,000 $3,000,000 During During 2006, 2006, Apex Apex cash cash paid paid dividends dividends of of $150,000 $150,000 and and reported reported net net income income of of $1,750,000 $1,750,000 What What amount amount will will Matrix, Matrix, Inc Inc report report on on the the balance balance sheet sheet as as Investment Investment in in Apex, Apex, Inc.? Inc.? 12-26 Equity Method 12-27 Equity Method 12-28 Equity Method Investment in Apex, Inc Investment 1,350,000 45% Earnings 787,500 67,500 45% Dividends Reported amount 2,070,000 If the subsidiary had a loss, the investment account would have been reduced 12-29 Learning Objectives Explain the adjustments made in the equity method when the fair value of the net assets underlying an investment exceeds their book value at acquisition 12-30 Equity Method IfIf the the investor investor acquires acquires the the equity equity securities securities of of an an investee investee by by paying paying more more than than the the fair fair value value of of net net assets assets the the difference difference is is allocated allocated to to GOODWILL GOODWILL 12-31 Equity Method On January 1, 2006, Matrix, Inc purchase 25% of the common stock of Apex, Inc for $200,000 At the date of acquisition, the book value of the net assets of Apex was $480,000, and the net fair value of these assets is $600,000 During 2006, Apex paid cash dividends of $40,000, and reported earnings of $100,000 Let’s prepare the journal entries to reflect the acquisition and other events during 2006 12-32 Equity Method Remember, goodwill is not amortized 12-33 Reporting Categories for Investments 12-34 End of Chapter 12 Homework  Read the textbook  Do all examples in text book  Do homework ... Categories for Investments 12-20 Reporting Categories for Investments 12-21 Reporting Categories for Investments The The cost cost method method is is used used for for investments investments in... Reporting Categories for Investments Held-to-maturity Held-to-maturity (HTM) securities (HTM) securities Securities available Securities available for sale are are investments in forinvestments sale... securities) Investments can be accounted for in a variety of ways, depending on the nature of the investment relationship 12-3 Learning Objectives Demonstrate how to identify and account for investments