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1、Accounting Principles, 6e Weygandt, Kieso, & KimmelPrepared byMarianne Bradford, Ph.D.Bryant CollegeJohn Wiley & Sons, Inc.蜗牛之家网 After studying this chapter, you should be able to:1 Discuss why corporations invest in debt and stock securities.2 Explain the accounting for debt investments.3 Explain t

2、he accounting for stock investments.4 Describe the use of consolidated financial statements.5 Indicate how debt and stock investments are valued and reported on the financial statements.6 Distinguish between short-term and long-term investments.CHAPTER 17 INVESTMENTSPREVIEW OF CHAPTER 17InvestmentsW

3、hy Corporations InvestAccounting for Debt InvestmentsRecording acquisition of bondsRecording bond interestRecording sale of bonds STUDY OBJECTIVE 1Discuss why corporations invest in debt and stock securities.ILLUSTRATION 17-1 TEMPORARY INVESTMENTS AND THE OPERATING CYCLECashTemporary InvestmentsAcco

4、unts ReceivableInventoryInvestSellAt the end of their operating cycles, many companies may have temporarily idle cash on hand until the start of the next operating cycle.These companies may invest the excess funds to earn a greater return.The relationship of temporary investments to the operating cy

5、cle is depicted below. ILLUSTRATION 17-2 WHY CORPORATIONS INVESTReasonTypical InvestmentTo house excess cash until neededLow-risk, high-liquidity, short-term securities such as government-issued securitiesTo generate earningsI need 1,000 Treasury bills by tonight!Debt securities (banks and other fin

6、ancial institutions); and stock securities (mutual funds and pension funds)To meet strategic goalsStocks of companies in a related industry or in an unrelated industry that the company wishes to enterSTUDY OBJECTIVE 2Explain the accounting for debt investments.ACCOUNTING FOR DEBT INVESTMENTS RECORDI

7、NG BOND INTERESTThe bonds pay $3,000 interest on July 1 and January 1 ($50,000 x 12% x ). The July 1 entry is:It is necessary to accrue $3,000 interest earned since July 1 at year-end. The December 31 entry is:3,000 3,000DateAccount Titles and ExplanationDebitCreditDec. 31Interest Receivable Interes

8、t Revenue (To accrue interest on Doan Inc. bonds)3,000 3,000ACCOUNTING FOR DEBT INVESTMENTS RECORDING SALE OF BONDSAny difference between the net proceeds from the sale (sales price less brokerage fees) and the cost of the bonds is recorded as a gain or loss. Kuhl Corporation receives net proceeds o

9、f $58,000 on the sale of the Doan Inc. bonds on January 1, 2003, after receiving the interest due. Since the securities cost $54,000, a gain of $4,000 has been realized. The entry to record the sale is: 58,000 54,000 4,000ILLUSTRATION 17-3 ACCOUNTING GUIDELINES FOR STOCK INVESTMENTSStock investments

10、 are investments in the capital stock of corporations. When a company holds stock or debt of various corporations, the group of securities is identified as an investment portfolio.RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20%In accounting for stock investments of less than 20%, the cost method

11、is used. Under the cost method, the investment is recorded at cost, and revenue is recognized only when cash dividends are received. On July 1, 2002, Sanchez Corporation acquires 1,000 shares (10% ownership) of Beal Corporation common stock. Sanchez pays $40 per share plus brokerage fees of $500. Th

12、e entry for the purchase is:40,500 40,500RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20%Entries are required for any cash dividends received during the time the stock is held. If a $2 per share dividend is received by Sanchez Corporation on December 31, the entry is:Dividend Revenue is reported u

13、nder Other Revenue and Gains in the income statement. Since dividends do not accrue, adjusting entries are not made to accrue dividends. 2,000 2,000RECORDING STOCK INVESTMENTS HOLDINGS LESS THAN 20%When stock is sold, the difference between the net proceeds from the sale and the cost of the stock is

14、 recognized as a gain or loss. Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal Corporation common stock on February 10, 2003. Because the stock cost $40,500, a loss of $1,000 has been incurred. The entry to record the sale is:DateAccount Titles and ExplanationDebitCredit

15、Feb. 10CashLoss on Sale of Stock Investments Stock Investments (To record sale of Beal common stock) 39,500 1,000 40,500ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%When an investor owns between 20% and 50% of the common stock of a corporation, the investor has significant influence

16、over the financial and operating activities of the investee. Under the equity method, the investment in common stock is initially recorded at cost, and the investment account is adjusted annually to show the investors equity in the investee. Each year, the investor 1) debits the investment account a

17、nd credits revenue for its share of the investees net income and 2) credits dividends received to the investment account. ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%Beck reports 2002 net income of $100,000 and declares and pays a $40,000 cash dividend. Milar is required to record 1

18、) its share of Becks net income, $30,000 (30% X $100,000) and 2) the reduction in the investment account for the dividends received, $12,000 ($40,000 X 30%). The entries are:30,000 30,00012,000 12,000ILLUSTRATION 17-4 INVESTMENT AND REVENUE ACCOUNTS AFTER POSTINGAfter posting the transactions for th

19、e year, the investment and revenue accounts will show the above results. During the year, the investment account has increased by $18,000 which represents Milars 30% equity in the $60,000 increase in Becks retained earnings ($100,000 - $40,000). Milar will also report $30,000 of revenue from its inv

20、estment, which is 30% of Becks net income of $100,000. Milar would report only $12,000 (30% X $40,000) of dividend revenue if the cost method were used.RECORDING STOCK INVESTMENTS MANAGEMENT PERSPECTIVEControlling GroupHome Box Office Board of DirectorsTime Warner, Inc. Board of DirectorsHome Box Of

21、fice CorporationTime Warner, Inc.Time Warner, Inc.ControlControlSeparate Legal EntitiesSingle Economic EntityTime Warner, Inc. own 100% of the common stock of Home Box Office (HBO). The common stockholders of Time Warner elect the board of directors of the company, who, in turn, select the officers

22、and managers of the company. The Board of Directors controls the property owned by the corporation, which includes the common stock of HBO.STUDY OBJECTIVE 4Indicate how debt and stock investments are valued and reported on the financial statements.CATEGORIES OF SECURITIESFor purposes of valuation an

23、d reporting at a financial statement date, debt and stock investments are classified into the following THREE categories of securities:1) Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.2) Available-for-sale sec

24、urities are securities that may be sold in the future.3) Held-to-maturity securities are debt securities that the investor has the intent and ability to hold to maturity. ILLUSTRATION 17-6 VALUATION OF TRADING SECURITIESTrading securities are 1) held with the intention of selling them in a short per

25、iod (generally less than a month), and 2) are reported at fair value, and changes from cost are reported as part of net income. The changes are reported as unrealized gains or losses since the securities have not been sold. The unrealized gain or loss is the difference between the total cost of trad

26、ing securities and their total fair value. Pace Corporation has the following costs and fair values for its investments classified as trading securities:VALUATION AND REPORTING OF INVESTMENTS TRADING SECURITIESPace Corporation has an unrealized gain of $7,000 because total fair value ($147,000) is $

27、7,000 greater than total cost ($140,000). Fair value and the unrealized gain or loss are recorded through an adjusting entry at the time financial statements are prepared. A valuation allowance account, Market Adjustment - Trading, is used to record the difference between the total cost and the tota

28、l fair value of the securities. The adjusting entry for Pace Corporation is: 7,000 7,000ILLUSTRATION 17-7 VALUATION OF AVAILABLE-FOR-SALE SECURITIESAvailable-for-sale securities are 1) held with the intention of selling them in the near future, and 2) are reported at fair value, and changes from cos

29、t are reported as a component of stockholders equity.The changes are reported as unrealized gains or losses since the securities have not been sold.The unrealized gain or loss is the difference between the total cost of the securities in the category and their total fair value.Elbert Corporation has

30、 the following costs and fair values for its investments classified as available-for-sale securities:VALUATION AND REPORTING OF INVESTMENTS AVAILABLE-FOR-SALE SECURITIESElbert Corporation has an unrealized loss of $9,537 because total fair value ($284,000) is $9,537 less than total cost ($293,537).

31、Fair value and the unrealized gain or loss are recorded through an adjusting entry at the time financial statements are prepared. A valuation allowance account, Market Adjustment - Available-for-Sale, is used to record the difference between the total cost and the total fair value of the securities.

32、 The adjusting entry for Elbert Corporation is:9,537 9,537VALUATION AND REPORTING OF INVESTMENTS AVAILABLE-FOR-SALE SECURITIES1 The fair value of the securities is the amount reported on the balance sheet.2 The unrealized gain or loss is reported as a separate component of stockholders equity.STUDY

33、OBJECTIVE 5Distinguish between short-term and long-term investments.SHORT-TERM INVESTMENTSShort-term investments 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.An investment is r

34、eadily marketable when it can be sold easily whenever the need for cash arises.Intent to convert means that management intends to sell the investment within the next year or operating cycle, whichever is longer. ILLUSTRATION 17-8 PRESENTATION OF SHORT-TERM INVESTMENTS Short Term investments are list

35、ed immediately below cash in the current asset section of the balance sheet due to their liquidity.They are reported at fair value.ILLUSTRATION 17-9 NONOPERATING ITEMS RELATED TO INVESTMENTS Long-term investments are typically reported in a separate section of the balance sheet immediately below cur

36、rent assets. In the income statement, the items below are reported in the nonoperating section:ILLUSTRATION 17-10 UNREALIZED LOSS IN STOCKHOLDERS EQUITY SECTION An unrealized gain or loss on available-for-sale securities is reported as a separate component of stockholders equity. Dawson Inc. has com

37、mon stock of $3,000,000, retained earnings of $1,500,000, and an unrealized loss on available-for-sale securities of $100,000. The statement presentation of the unrealized loss is shown below.ILLUSTRATION 17-11 COMPREHENSIVE BALANCE SHEETThe comprehensive balance sheet for Pace Corporation includes

38、the following assets:1 Short-term Investments,2 Investments of less than 20%, and3 Investments of 20% - 50%. PACE CORPORATION Balance Sheet December 31, 2002 Assets Current assets Cash $ 21,000 Short-term investments, at fair value 147,000 Accounts receivable $ 84,000 Less: Allowance for doubful accounts 4,000 80,000 Merchandise inventory, at FIFO cost 43,000 Prepaid insurance 23,000 Total current assets 314,000 Investments Bond sinking fund 100,000 Investments in stock of less than 20% owned companie