Financial accounting 10th by harmin app h

Prepared by Coby Harmon University of California, Santa Barbara Westmont College H-1 Reporting and Appendix H Analyzing Investments Learning Objectives H-2 Explain how to account for debt investments Explain how to account for stock investments Discuss how debt and stock investments are reported in the financial statements LEARNING OBJECTIVE Explain how to account for debt investments Corporations 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-1 Temporary investments and the operating cycle H-3 LO Why Corporations Invest Question Pension funds and banks regularly invest in debt and stock securities to: a house excess cash until needed b generate earnings c meet strategic goals d avoid a takeover by disgruntled investors H-4 LO Accounting for Debt Investments Investments in government and corporation bonds Entries are made to record the acquisition, the interest revenue, and the sale RECORDING ACQUISITION OF BONDS Cost includes all expenditures necessary to acquire these investments, such as the price paid plus brokerage fees (commissions), if any H-5 LO Accounting for Debt Investments RECORDING BOND INTEREST Calculate and record interest revenue based upon the H-6  carrying value of the bond  times the interest rate  times the portion of the year the bond is outstanding LO Accounting for Debt Investments RECORDING SALE OF BONDS H-7  Credit 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 Accounting for Debt Investments Illustration: Kuhl Corporation acquires 50 Doan Inc 8%, 10year, $1,000 bonds on January 1, 2019, for $50,000 The entry to record the investment is: Jan Debt Investments 50,000 Cash H-8 50,000 LO Accounting for Debt Investments Kuhl Corporation acquires 50 Doan Inc 8%, 10-year, $1,000 bonds on January 1, 2019, for $50,000 The bonds pay interest annually on January If Kuhl Corporation’s fiscal year ends on December 31, prepare the entry to accrue interest earned by December 31 Dec 31 Interest Receivable Interest Revenue 4,000 * 4,000 * ($50,000 x 8% = $4,000) H-9 LO Accounting for Debt Investments Kuhl 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 as follows Jan Cash 4,000 Interest Receivable H-10 4,000 LO Holdings of More Than 50% Consolidated statements indicate the magnitude and scope of operations of the companies under common control Illustration H-5 Examples of consolidated companies and their subsidiaries H-24 LO LEARNING OBJECTIVE Discuss how debt and stock investments are reported in the financial statements Debt Securities Classifications Trading Available-for-sale Held-to-maturity H-25 LO Debt Securities TRADING SECURITIES H-26  Companies 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 LO TRADING SECURITIES Illustration: Cost and fair values for investments of Pace Corporation classified as trading securities on December 31, 2019 Illustration H-7 Valuation of trading securities The adjusting entry for Pace Corporation is: Dec 31 Fair Value Adjustment—Trading 7,000 Unrealized Gain or Loss—Income H-27 7,000 LO Debt Securities AVAILABLE-FOR-SALE SECURITIES H-28  Held 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 LO AVAILABLE-FOR-SALE SECURITIES Illustration: Assume that Ingrao Corporation has two securities that it classifies as available-for-sale Illustration H-8 Valuation of availablefor-sale securities The adjusting entry is: Dec 31 Unrealized Gain or Loss—Equity Fair Value Adjustment—AFS H-29 9,537 9,537 LO Debt Securities Question An unrealized loss on available-for-sale securities is: a reported under Other Expenses and Losses in the income statement b closed-out at the end of the accounting period c reported as a separate component of stockholders' equity d deducted from the cost of the investment H-30 LO Equity Securities The valuation and reporting of equity securities at a financial statement date depends on the levels of influence involved Illustration H-10 Accounting and reporting for equity securities by category H-31 LO Equity Securities Shelton Corporation has two equity securities in which it has less than a 20% ownership interest Illustration H-11 Computation of fair value adjustment—equity security portfolio (2019) The adjusting entry is: Dec 31 Fair Value Adjustment—Stock 1,800 Unrealized Gain or Loss—Income H-32 1,800 LO Balance Sheet Presentation SHORT-TERM INVESTMENTS Also called marketable securities, are securities held by a company that are (1) readily marketable and (2) intended to be converted into cash within the next year or operating cycle, whichever is longer Short-term investments are reported at fair value Investments that not meet both criteria are classified as long-term investments H-33 Helpful Helpful Hint Hint Trading Trading securities securities are are always always classified classified as as short-term short-term Available-for-sale Available-for-sale securities securities can can be be either either short-term short-term or or long-term long-term LO Balance Sheet Presentation SHORT-TERM INVESTMENTS Also called marketable securities, are securities held by a company that are (1) readily marketable and (2) intended to be converted into cash within the next year or operating cycle, whichever is longer H-34 Illustration H-12 Balance sheet presentation of short-term investments LO Balance Sheet Presentation LONG-TERM INVESTMENTS Long-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 Illustration H-13 Balance sheet presentation of long-term investments H-35 LO Presentation of Realized and Unrealized Gain or Loss Illustration H-14 Nonoperating items related to investments H-36 LO Presentation of Realized and Unrealized Gain or Loss Companies report the cumulative amount of other comprehensive income items as a separate component of stockholders’ equity Illustration H-15 Unrealized loss in stockholders’ equity section H-37 LO Copyright “Copyright © 2017 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” H-38 ... from the debt investment c a change in the name of the firm issuing the debt securities d sale of the debt investment H- 12 LO Accounting for Debt Investments Question When bonds are sold, the gain... on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation (investee) H- 14 LO Accounting for Stock Investments Holding of Less Than 20% H- 15... (10% ownership) of Beal Corporation common stock Sanchez pays $40 per share The entry for the purchase is: July H- 16 Stock Investments (1,000 x $40) Cash 40,000 40,000 LO Holding of Less Than 20%