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    Chapter13-1

    Investments

    ChapterChapter 1313

    ChapterChapter 1313

    Financial Accounting, Sixth Edition

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    Chapter13-2

    1. Discuss why corporations invest in debt and stocksecurities.

    2. Explain the accounting for debt investments.

    3.

    Explain the accounting for stock investments.4. Describe the use of consolidated financial

    statements.

    . !ndicate how debt and stock investments are

    reported in financial statements.". Distinguish between short#term and long#term

    investments.

    Study ObjectivesStudy Objectives

    Study ObjectivesStudy Objectives

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    Chapter13-3

    WhWh

    CorporationsCorporations

    InvestInvest

    WhWh

    CorporationsCorporations

    InvestInvest

    Cashmanagement

    Investmentincome

    Strategic

    reasons

    Accounting !orAccounting !or

    "e#t"e#t

    InvestmentsInvestments

    Accounting !orAccounting !or

    "e#t"e#t

    InvestmentsInvestments

    Accounting !orAccounting !or

    Stoc$Stoc$

    InvestmentsInvestments

    Accounting !orAccounting !or

    Stoc$Stoc$

    InvestmentsInvestments

    %aluing and%aluing and

    &eporting&eporting

    InvestmentsInvestments

    %aluing and%aluing and

    &eporting&eporting

    InvestmentsInvestments

    Categories ofsecurities

    Balancesheetpresentation

    Realized andunrealizedgain or loss

    Classiedbalance

    sheet

    Holdings ofless than20%

    Holdingsbeteen 20%

    and !0%Holdings ofmore than!0%

    Recordingac"uisition ofbonds

    Recordingbond interest

    Recordingsale of bonds

    InvestmentsInvestments

    InvestmentsInvestments

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    Chapter13-'

    $orporations generally invest in debt or stocksecurities for one of three reasons.

    Why Corporations InvestWhy Corporations Invest

    Why Corporations InvestWhy Corporations Invest

    SO 1 Discuss why corporations invest in debt and stock securities.SO 1 Discuss why corporations invest in debt and stock securities.

    1. $orporation may have excess cash.

    2. %o generate earnins !rom investment income.3. &or strateic reasons.

    I""ustration 13#1

    %emporary

    investmentsand theoperating cycle

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    Chapter13-(

    'ension funds and banks regularly invest in debt andstock securities to(

    a. house excess cash until needed.b. generate earnings.

    c. meet strategic goals.

    d. avoid a takeover by disgruntled investors.

    $uestion$uestion

    Why Corporations InvestWhy Corporations Invest

    Why Corporations InvestWhy Corporations Invest

    SO 1 Discuss why corporations invest in debt and stock securities.SO 1 Discuss why corporations invest in debt and stock securities.

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    Chapter13-)

    %ccountin !or Debt Instruments%ccountin !or Debt Instruments

    %ccountin !or Debt Instruments%ccountin !or Debt Instruments

    SO & 'xp"ain the accountin !or debt investments.SO & 'xp"ain the accountin !or debt investments.

    (ecordin %c)uisition o! *onds

    $ost includes all expenditures necessary to ac)uirethese investments* such as the price paid plus

    brokerage fees +commissions,* if any.

    (ecordin *ond Interest

    $alculate and record interest revenue based upon theface value of the bond times the interest rate timesthe portion of the year the bond is outstanding.

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    Chapter13-*

    %ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments

    SO & 'xp"ain the accountin !or debt investments.SO & 'xp"ain the accountin !or debt investments.

    (ecordin Sa"e o! *onds

    $redit the investment account for the cost of thebonds and record as a gain or loss any difference

    between the net proceeds from the sale +sales priceless brokerage fees, and the cost of the bonds.

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    Chapter13-+

    'xercise+ !ssel $orporation had the followingtransactions pertaining to debt investments.

    ,an. 1 'urchased "-* /* 01*--- ollis $o. bonds for0"-*--- cash plus brokerage fees of 0--. !nterest is

    payable semiannually on uly 1 and anuary 1.,u"y 1 eceived semiannual interest on ollis $o. bonds.

    ,u"y 1 5old 3- ollis $o. bonds for 034*--- less 0--brokerage fees.

    Instructions +a, ournali6e the transactions. +b,'repare the ad7usting entry for the accrual of interest atDecember 31.

    %ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments

    SO & 'xp"ain the accountin !or debt investments.SO & 'xp"ain the accountin !or debt investments.

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    Chapter13-

    'xercise+ ,an. 1 'urchased "-* /* 01*--- ollis $o.bonds for 0"-*--- cash plus brokerage fees of 0--.!nterest is payable semiannually on uly 1 and anuary 1.

    Debt investment "-*--,an 1$ash "-*--

    8+0"-*--- 9 0-- : 0"-*--,

    8

    %ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments

    SO & 'xp"ain the accountin !or debt investments.SO & 'xp"ain the accountin !or debt investments.

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    Chapter13-1

    'xercise+ ,u"y 1 eceived semiannual interest onollis $o. bonds. 5old 3- ollis $o. bonds for 034*---less 0-- brokerage fees.

    $ash 2*4--,u"y 1

    !nterest revenue 2*4--

    8 +0"-*--- x / x ; : 02*4--,

    $ash 33*--

    Debt investments 3-*4-

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    Chapter13-11

    'xercise+ +b, 'repare the ad7usting entry for theaccrual of interest at December 31.

    !nterest receivable 1*2--Dec 31

    !nterest revenue 1*2--

    8 +03-*--- x / x ; : 01*2--,

    8

    %ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments

    SO & 'xp"ain the accountin !or debt investments.SO & 'xp"ain the accountin !or debt investments.

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    Chapter13-12

    =n event related to an investment in debt securitiesthat does not re)uire a 7ournal entry is(

    a. ac)uisition of the debt investment.b. receipt of interest revenue from the debt

    investment.

    c. a change in the name of the firm issuing the

    debt securities.d. sale of the debt investment.

    $uestion$uestion

    %ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments

    SO & 'xp"ain the accountin !or debt investments.SO & 'xp"ain the accountin !or debt investments.

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    Chapter13-13

    >hen bonds are sold* the gain or loss on sale is thedifference between the(

    a. sales price and the cost of the bonds.b. net proceeds and the cost of the bonds.

    c. sales price and the market value of the bonds.

    d. net proceeds and the market value of thebonds.

    $uestion$uestion

    %ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments%ccountin !or Debt Instruments

    SO & 'xp"ain the accountin !or debt investments.SO & 'xp"ain the accountin !or debt investments.

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    Chapter13-1'

    - ##############2-/ ############ -/ ############## 1--/- ##############2-/ ############ -/ ############## 1--/?o significant

    influence

    usually exists

    5ignificantinfluence

    usually exists

    $ontrolusually exists

    !nvestmentvalued using

    Cost-ethod

    !nvestmentvalued using

    ')uity-ethod

    !nvestment valued onparent@s books using $ostAethod or E)uity Aethod+investment eliminated in

    Conso"idation,

    Ownership ercentaesOwnership ercentaes

    %ccountin !or Stock Investments%ccountin !or Stock Investments%ccountin !or Stock Investments%ccountin !or Stock Investments

    SO 3 'xp"ain the accountin !or stock investments.SO 3 'xp"ain the accountin !or stock investments.

    %he accounting depends on the extent of the investor/s in!"uenceover the operating and financial affairs of the issuing corporation.

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    Chapter13-1(

    Cost -ethod

    $ost includes all expenditures necessary to ac)uireinvestment* such as price paid plus brokerage fees

    +commissions,.

    evenue recogni6ed only when cash dividends arereceived.

    0o"dins o! ess than &20o"dins o! ess than &20o"dins o! ess than &20o"dins o! ess than &2

    SO 3 'xp"ain the accountin !or stock investments.SO 3 'xp"ain the accountin !or stock investments.

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    Chapter13-1)

    'xercise+ Dossett $ompany had the followingtransactions pertaining to stock investments.

    4eb. 1 'urchased -- shares of ippo common stock+2/, for 0*--- cash* plus brokerage fees of 02--.

    ,u"y 1 eceived cash dividends of 01 per share onippo common stock.

    Sept. 1 5old 3-- shares of ippo common stock for

    04*4--* less brokerage fees of 01--.Instructions+ ournali6e the transactions.

    SO 3 'xp"ain the accountin !or stock investments.SO 3 'xp"ain the accountin !or stock investments.

    0o"dins o! ess than &20o"dins o! ess than &20o"dins o! ess than &20o"dins o! ess than &2

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    Chapter13-1*

    'xercise+ 4eb. 1 'urchased -- shares of ippocommon stock +2/, for 0*--- cash* plus brokeragefees of 02--. ,u"y 1 eceived cash dividends of 01per share on ippo common stock.

    SO 3 'xp"ain the accountin !or stock investments.SO 3 'xp"ain the accountin !or stock investments.

    5tock investments *2--4eb. 1$ash *2--

    8 +0*--- 9 02-- : 0*2--,

    $ash --

    Dividend revenue --

    88 +-- x 01 : 0--,

    8

    88,u"y 1

    0o"dins o! ess than &20o"dins o! ess than &20o"dins o! ess than &20o"dins o! ess than &2

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    Chapter13-1+

    'xercise+ Sept. 1 5old 3-- shares of ippo commonstock for 04*4--* less brokerage fees of 01--.

    SO 3 'xp"ain the accountin !or stock investments.SO 3 'xp"ain the accountin !or stock investments.

    $ash 4*3--Sept. 1

    5tock investments

    3*-B

    8 +04*4-- # 01-- : 04*3--,

    88 +0*2-- x 3C : 03*-B,

    8

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    Chapter13-1

    0o"dins *etween &2 and 520o"dins *etween &2 and 520o"dins *etween &2 and 520o"dins *etween &2 and 52

    ')uity -ethod

    ecord investment at cost and subse)uentlyad7ust amount each period for

    investor@s proportionate share of earnings+losses, and

    dividends received by investor.

    !f investor@s share of investee@s losses exceeds carrying amount ofinvestment* investor ordinarily should discontinue applying thee)uity method.

    SO 3 'xp"ain the accountin !or stock investments.SO 3 'xp"ain the accountin !or stock investments.

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    Chapter13-2

    nder the e)uity method* the investor recordsdividends received by crediting(

    a. Dividend evenue.b. !nvestment !ncome.

    c. evenue from !nvestment.

    d. 5tock !nvestments.

    $uestion$uestion

    0o"dins *etween &2 and 520o"dins *etween &2 and 520o"dins *etween &2 and 520o"dins *etween &2 and 52

    SO 3 'xp"ain the accountin !or stock investments.SO 3 'xp"ain the accountin !or stock investments.

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    Chapter13-21

    'xercise+'xercise+ 6')uity -ethod7 n anuary 1* 2--B*'ennington $orporation purchased 3-/ of the common

    shares of Edwards $ompany for 01-*---. During the

    year* Edwards earned net income of 0-*--- and paid

    dividends of 02-*---.

    Instructions

    'repare entries for 'ennington to record purchase and

    any additional entries related to this investment inEdwards $ompany in 2--B.

    0o"dins *etween &2 and 520o"dins *etween &2 and 520o"dins *etween &2 and 520o"dins *etween &2 and 52

    SO 3 'xp"ain the accountin !or stock investments.SO 3 'xp"ain the accountin !or stock investments.

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    Chapter13-22

    'xercise+'xercise+ 'ennington purchased 3-/ of the commonshares of Edwards for 01-*---. Edwards earned net

    income of 0-*--- and paid dividends of 02-*---.

    5tock investments 1-*---$ash 1-*---

    $ash "*---

    5tock investments "*---

    5tock investments 24*---

    !nvestment revenue 24*---

    0o"dins *etween &2 and 520o"dins *etween &2 and 520o"dins *etween &2 and 520o"dins *etween &2 and 52

    +02-*--- x 3-/,

    +0-*--- x 3-/,

    SO 3 'xp"ain the accountin !or stock investments.SO 3 'xp"ain the accountin !or stock investments.

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    Chapter13-23

    =fter 'ennington posts the transactions for the year* itsinvestment and revenue accounts will show the following.

    Debit $redit

    5tock !nvestments

    1-*---1-*--- 24*---24*---

    Debit $redit

    !nvestment evenue

    0o"dins *etween &2 and 520o"dins *etween &2 and 520o"dins *etween &2 and 520o"dins *etween &2 and 52

    SO 3 'xp"ain the accountin !or stock investments.SO 3 'xp"ain the accountin !or stock investments.

    24*---24*--- "*---"*---

    1*---1*---

    'xercise+'xercise+ 'ennington purchased 3-/ of the commonshares of Edwards for 01-*---. Edwards earned net

    income of 0-*--- and paid dividends of 02-*---.

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    Chapter13-2'

    0o"dins o! -ore 8han 520o"dins o! -ore 8han 520o"dins o! -ore 8han 520o"dins o! -ore 8han 52

    Contro""in Interest# >hen one corporation ac)uires avoting interest of more than - percent in anothercorporation

    !nvestor is referred to as the parent.

    !nvestee is referred to as the subsidiary.

    !nvestment in the subsidiary is reported onparent@s books as a long#term investment.

    'arent generally prepares conso"idated !inancia"statements.

    SO 9 Describe the use o! conso"idated !inancia" statements.SO 9 Describe the use o! conso"idated !inancia" statements.

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    Chapter13-2(

    :a"uin and (eportin Investments:a"uin and (eportin Investments:a"uin and (eportin Investments:a"uin and (eportin Investments

    Cateories o! Securities

    Debt and stock investments(

    8radin securities

    %vai"ab"e#!or#sa"e securities

    0e"d#to#maturity securities

    =pplies to all debt securities and all stock investments in whichthe holdings are less than 2-/.

    SO 5 Indicate how debt and stock investmentsSO 5 Indicate how debt and stock investmentsare reported in !inancia" statements.are reported in !inancia" statements.

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    Chapter13-2)

    :a"uin and (eportin Investments:a"uin and (eportin Investments:a"uin and (eportin Investments:a"uin and (eportin Investments

    8radin Securities

    eld with intention of selling in a short period.

    %rading means fre)uent buying and selling.

    eport at fair value* and report changes fromcost as part of net income.

    SO 5 Indicate how debt and stock investmentsSO 5 Indicate how debt and stock investmentsare reported in !inancia" statements.are reported in !inancia" statements.

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    Chapter13-2*

    :a"uin and (eportin Investments:a"uin and (eportin Investments:a"uin and (eportin Investments:a"uin and (eportin Investments

    %vai"ab"e#!or#Sa"e Securitieseld with intent of selling sometime in thefuture.

    $lassified as current assets or as long#termassets* depending on intent of management.

    eport at fair value* and report changes from

    cost as a component of stockholders@ e)uitysection.

    SO 5 Indicate how debt and stock investmentsSO 5 Indicate how debt and stock investmentsare reported in !inancia" statements.are reported in !inancia" statements.

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    Chapter13-2+

    Aarketable securities bought and held primarily forsale in the near term are classified as(

    a. available#for#sale securities.b. held#to#maturity securities.

    c. stock securities.

    d. trading securities

    $uestion$uestion

    :a"uin and (eportin Investments:a"uin and (eportin Investments:a"uin and (eportin Investments:a"uin and (eportin Investments

    SO 5 Indicate how debt and stock investmentsSO 5 Indicate how debt and stock investmentsare reported in !inancia" statements.are reported in !inancia" statements.

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    Chapter13-2

    rob"em+rob"em+ Foxley $ompany has the following portfolio ofsecurities at 5eptember 3-* 2--B* its last reporting date.

    8radin Securities8radin Securities8radin Securities8radin Securities

    %rading 5ecurities $ost &air Galue

    Dan &ogelberg* !nc. common +*--- shares, 22*---0 2--*---0

    'etra* !nc. preferred +3*-- shares, 133*--- 14-*---%im >eisberg $orp. common +1*--- shares, 1-*--- 1B*---

    n ct. 1-* 2--B* the &ogelberg shares were sold at a priceof 04 per share. !n addition* 3*--- shares of Fos %igres

    common stock were ac)uired at 0.- per share on ?ov. 2*2--B. %he Dec. 31* 2--B* fair values were( 'etra 0"*---*Fos %igres 0132*---* and the >eisberg common 013*---.

    SO 5 Indicate how debt and stock investmentsSO 5 Indicate how debt and stock investmentsare reported in !inancia" statements.are reported in !inancia" statements.

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    Chapter13-3

    rob"em+rob"em+ 'repare the 7ournal entries to record the sale*purchase* and ad7usting entries related to the tradingsecuritiesin the last )uarter of 2--B.

    ort!o"io at September 32; &22 Distinuish between short#term and "on#term investments.

    nreali6ed gain or loss on available#for#salesecurities are reported as a separate component ofstockholders@ e)uity.

    I""ustration 13#11

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    Chapter

    13-3+

    C"assi!ied *a"ance SheetC"assi!ied *a"ance Sheet

    *a"ance Sheet resentation*a"ance Sheet resentation*a"ance Sheet resentation*a"ance Sheet resentation

    SO > Distinuish between short#term and "on#term investments.

    I""ustration 13#1&

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    Chapter

    13-3

    >hen is a good time to get serious about savingI% Aood Day to Start Savin% Aood Day to Start Savin

    Some 4acts(

    nly about 4/ of people in their twenties whoseemployers have a 4-1+k, plan participate in thatplan.

    nly 4-/ of working couples currently are coveredby pension plans* but "1/ of workers expect to getincome from a company pension plan.

    %"" %bout Bou%"" %bout Bou%"" %bout Bou%"" %bout Bou

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    Chapter

    13-'

    >hen is a good time to get serious about savingI% Aood Day to Start Savin% Aood Day to Start Savin

    -ore 4acts(

    Aore than half of workers age and older haveless than 0-*--- in retirement savings.

    -/ of individuals between the ages of 1 to 2"

    said that* if given 01-*---* they would deposit themoney into a traditional bank savings account ratherthan invest in the stock market.

    %"" %bout Bou%"" %bout Bou%"" %bout Bou%"" %bout Bou

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    Chapter

    13-'1

    >hen you are 2 years old* if you start putting 03-- permonth into an investment earning /* by the age of "you will have accumulated more than 01 million.

    %"" %bout Bou%"" %bout Bou%"" %bout Bou%"" %bout Bou

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    Chapter

    13-'2

    What Do Bou 8hinkWhat Do Bou 8hinkLou@ve got 03*--- in credit card bills at an 1/ interestrate. Lour employer has a 4-1+k, plan in which it will matchyour contributions* up to 1-/ of your annual salary. 5hould

    you pay off your credit card bills before you start puttingmoney into the 4-1+k,I

    %"" %bout Bou%"" %bout Bou%"" %bout Bou%"" %bout Bou

    'aying off debt* thus avoiding 1/ interest payments* isessentially e)uivalent to earning 1/ on investments.educing your debts reduces your financial vulnerability.

    %ake part of the money you would have used to pay offyour debt each month and instead put it into the 4-1+k,.

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    Chapter

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