Académique Documents
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12-1
Chapter
12
Investments
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
12-2
Study
Study Objectives
Objectives
Slide
12-3
1.
2.
3.
4.
5.
6.
Investments
Investments
Why
Corporations
Invest
Cash
management
Investment
income
Strategic
reasons
Slide
12-4
Accounting for
Debt Investments
Recording
acquisition of
bonds
Recording bond
interest
Recording sale
of bonds
Accounting for
Share
Investments
Holdings of less
than 20%
Holdings
between 20%
and 50%
Holdings of more
than 50%
Valuing and
Reporting
Investments
Categories of
securities
Statement of
financial position
Realized and
unrealized gain
or loss
Classified
statement of
financial position
Why
Why Corporations
Corporations Invest
Invest
Corporations generally invest in debt or share securities
for one of three reasons.
1.
2.
3.
Temporary
investments
and the
operating cycle
Slide
12-5
Why
Why Corporations
Corporations Invest
Invest
Question
Slide
12-6
a.
b.
generate earnings.
c.
d.
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Recording Acquisition of Bonds
Cost includes all expenditures necessary to acquire
these investments, such as the price paid plus
brokerage fees (commissions), if any.
Slide
12-7
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Sale of Bonds
Credit the investment account for the cost of the bonds
and 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.
Slide
12-8
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%,
10-year, $1,000 bonds on January 1, 2011, for $54,000,
including brokerage fees of $1,000. The entry to record the
investment is:
Jan. 1
Debt investments
Cash
Slide
12-9
54,000
54,000
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%,
10-year, $1,000 bonds on January 1, 2011, for $54,000,
including brokerage fees of $1,000. The bonds pay interest
semiannually on July 1 and January 1. The entry for the
receipt of interest on July 1 is:
July 1
Cash
Interest revenue
2,000 *
2,000
* ($50,000 x 8% x = $2,000)
Slide
12-10
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Illustration: If Kuhl Corporations fiscal year ends on
December 31, prepare the entry to accrue interest since
July 1.
Dec. 31
Interest receivable
Interest revenue
2,000
2,000
Slide
12-11
Cash
Interest receivable
2,000
2,000
SO 2
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Recording Sale of Bonds
Illustration: Assume that Kuhl corporation receives net
proceeds of $58,000 on the sale of the Doan Inc. bonds on
January 1, 2011, after receiving the interest due. Prepare
the entry to record the sale of the bonds.
Jan. 1
Cash
58,000
Debt investments
Gain on sale of debt investments
Slide
12-12
54,000
4,000
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Question
Slide
12-13
a.
b.
c.
d.
Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Question
Slide
12-14
a.
b.
c.
d.
Accounting
Accounting for
for Share
Share Investments
Investments
Ownership Percentages
Significant
influence
usually exists
Investment
valued using
Cost
Method
Investment
valued using
Equity
Method
Control usually
exists
Investment valued on
parents books using Cost
Method or Equity Method
(investment eliminated in
Consolidation)
Accounting
Accounting for
for Share
Share Investments
Investments
Holdings of Less than 20% (Cost Method)
Companies record
Slide
12-16
Holdings
Holdings of
of Less
Less than
than 20%
20%
Illustration: On July 1, 2011, Sanchez Corporation
acquires 1,000 ordinary shares (10% ownership) of Beal
Corporation. Sanchez pays $40 per share plus brokerage
fees of $500. The entry for the purchase is:
July 1
Share investments
Cash
Slide
12-17
40,500
40,500
Holdings
Holdings of
of Less
Less than
than 20%
20%
Illustration: During the time Sanchez owns the shares, it
makes entries for any cash dividends received. If Sanchez
receives a $2 per share dividend on December 31, the
entry is:
Dec. 31
Cash
2,000
Dividend revenue
Slide
12-18
2,000
Holdings
Holdings of
of Less
Less than
than 20%
20%
Illustration: Assume that Sanchez Corporation receives
net proceeds of $39,500 on the sale of its Beal shares on
February 10, 2012. Because the shares cost $40,500,
Sanchez incurred a loss of $1,000. The entry to record the
sale is:
Feb. 10
Cash
39,500
Slide
12-19
1,000
40,500
Accounting
Accounting for
for Share
Share Investments
Investments
Holdings Between 20% and 50% (Equity Method)
Record the investment at cost and subsequently adjust
the amount each period for
the investors proportionate share of the earnings
(losses) and
dividends received by the investor.
If investors share of investees losses exceeds the carrying amount of
the investment, the investor ordinarily should discontinue applying the
equity method.
Slide
12-20
Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
Question
Slide
12-21
a.
Dividend Revenue.
b.
Investment Income.
c.
d.
Share Investments.
Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
Illustration: Milar Corporation acquires 30% of the ordinary
shares of Beck Company for $120,000 on January 1, 2011. For
2011, Beck reports net income of $100,000 and paid dividends of
$40,000. Prepare the entries for these transactions.
Jan. 1
Share investments
120,000
Cash
Dec. 31
120,000
Share investments
($100,000 x 30%)
30,000
30,000
12,000
12,000
Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
Illustration: Milar Corporation acquires 30% of the ordinary
shares of Beck Company for $120,000 on January 1, 2011. For
2011, Beck reports net income of $100,000 and paid dividends of
$40,000. Prepare the entries for these transactions.
After Milar posts the transactions for the year, its investment
and revenue accounts will show the following.
Share Investments
Debit
Credit
120,000
30,000
12,000
138,000
Slide
12-23
Accounting
Accounting for
for Share
Share Investments
Investments
Holdings of More Than 50%
Controlling Interest - When one corporation acquires a voting
interest of more than 50 percent in another corporation
Investor is referred to as the parent.
Investee is referred to as the subsidiary.
Investment in the subsidiary is reported on the parents books as
a long-term investment.
Parent generally prepares consolidated financial statements.
Slide
12-24
Accounting
Accounting for
for Share
Share Investments
Investments
Holdings of More Than 50%
Consolidated statements indicate the magnitude and scope
of operations of the companies under common control.
Illustration 12-5
Examples of consolidated companies and their subsidiaries
Slide
12-25
Answer
on notes
page
Slide
12-26
Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Categories of Securities
Companies classify debt and share investments into
three categories:
Fair value through profit or loss (FVPL) securities
Available-for-sale (AFS) securities
Held-to-maturity securities
These guidelines apply to all debt securities and all share investments
in which the holdings are less than 20%.
Slide
12-27
Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Fair Value Through Profit or Loss (FVPL)
Companies hold securities with the intention of selling
them in a short period (< month).
Frequent buying and selling.
Companies report securities at fair value, and report
changes from cost as part of net income.
Changes are reported as unrealized gains or losses.
Slide
12-28
Fair
Fair Value
Value Through
Through Profit
Profit or
or Loss
Loss (FVPL)
(FVPL)
Illustration: Investment of Pace classified as fair value through
profit or loss securities on December 31, 2011.
Illustration 12-7
Market adjustmentFVPL
Unrealized gainincome
Slide
12-29
7,000
7,000
Slide
12-30
Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Available-for-Sale (AFS) Securities
Held with the intent of selling these investments
sometime in the future.
Classified as current assets or as non-current assets,
depending on the intent of management.
Report securities at fair value
Report changes from cost as a component of the equity
Slide
12-31
Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Question
Slide
12-32
a.
Available-for-sale securities.
b.
Held-to-maturity securities.
c.
Share securities.
d.
Available-for-Sale
Available-for-Sale Securities
Securities
Problem: How would the entries for fair value through
profit or loss securities change if the securities were
classified as available-for-sale?
Slide
12-33
Available-for-Sale
Available-for-Sale Securities
Securities
Illustration: Assume that Ingrao Corporation has two securities
that it classifies as available-for-sale.
Illustration 12-8
Slide
12-34
9,537
9,537
Available-for-Sale
Available-for-Sale Securities
Securities
Question
Slide
12-35
a.
b.
c.
d.
Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Statement of Financial Position Presentation
Short-Term Investments
Securities held by a company that are
(1)
(2)
Statement
Statement of
of Financial
Financial Position
Position Presentation
Presentation
Presentation of Realized and Unrealized Gain or Loss
Slide
12-37
Statement
Statement of
of Financial
Financial Position
Position Presentation
Presentation
Realized and Unrealized Gain or Loss
Unrealized gain or loss on available-for-sale securities is
reported as a separate component of equity.
Illustration 12-11
Slide
12-38
Classified
Statement of
Financial
Position
(partial)
Illustration 12-12
Slide
12-39
Classified
Statement of
Financial
Position
(partial)
Illustration 12-12
Slide
12-40
Statement
Statement of
of Financial
Financial Position
Position Presentation
Presentation
Identify where each of the following items would be
reported in the financial statements.
Answers on
notes page
Equity
Non-current liabilities
Current liabilities
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences
Investments
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences
Investments
The loans and receivables category does not exist under GAAP.
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences
Investments
Slide
12-44
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future
Investments
As indicated earlier, both the FASB and IASB have indicated that
they believe that all financial instruments should be reported at fair
value and that changes in fair value should be reported as part of
net income. It seems likely, as more companies choose the fair
value option for financial instruments, that we will eventually arrive
at fair value measurement for all financial instruments.
Slide
12-45
Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Consolidated Statement of Financial Position
Appendix
Slide
12-46
Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Consolidated Statement of Financial Position
Illustration: Assume that on January 1, 2011, Powers
Construction Company pays $150,000 in cash for 100% of
Serto Brick Companys ordinary shares. Powers Company
records the investment at cost, as required by the cost
principle.
The combined totals do not represent a consolidated
statement of financial position, because there has been a
double counting of assets and equity in the amount of
$150,000.
Slide
12-47
Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Consolidated Statement of Financial Position
Illustration 12A-1
Slide
12-48
Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Use of a WorksheetCost Equal to Book Value
Illustration 12A-2
Slide
12-49
SO 7
Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Use of a WorksheetCost Above Book Value
Illustration: Assume the same data used above, except
that Powers Company pays $165,000 in cash for 100% of
Sertos ordinary shares. The excess of cost over book
value is $15,000 ($165,000 - $150,000).
Slide
12-50
Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Use of a WorksheetCost Above Book Value
Illustration 12A-3
Slide
12-51
SO 7
Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Consolidated Statement of Financial Position
Illustration: The prior worksheet shows an excess of cost
over book value of $15,000. In the consolidated statement
of financial position, Powers first allocates this amount to
specific assets, such as inventory and plant equipment, if
their fair market values on the acquisition date exceed their
book values. Any remainder is considered to be goodwill.
For Serto Company, assume that the fair market value of
property and equipment is $155,000.Thus, Powers
allocates $10,000 of the excess of cost over book value to
property and equipment, and the remainder, $5,000, to
goodwill.
Slide
12-52
Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Consolidated Statement of Financial Position
Slide
12-53
Illustration 12A-4
Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Consolidated Income Statement
Appendix
Slide
12-54
Copyright
Copyright
Copyright 2011 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
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errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
Slide
12-55