chapter 12 investments ( 投資 ) instructor: chih-liang julian liu department of industrial and...

Chapter 12 Investments (投資 )

Instructor: Chih-Liang Julian Liu

Department of Industrial and Business Management

Chang Gung University

Corporation

Debt(ch.10)

Share(ch.11)

Financing Investing

Debt

Share

$ $

Chapter12 Investments

Learning Objectives

1. Discuss why corporations invest in debt (債券 )

and share (股票 ) securities.

2. Explain the accounting for debt investments.

3. Explain the accounting for share investments.

4. Describe the use of consolidated financial statements (合併財務報表 ).

5. Indicate how debt and share investments are reported in financial statements.

6. Distinguish between short-term and long-term investments (短期與長期投資 ).

Preview of Chapter 12

Corporations purchase investments in debt or share

securities for one of three reasons.

1. Corporation may have excess cash.

2. To generate earnings from investment income.

3. For strategic reasons.

Temporary investments

and the operating cycle

Why Corporations Invest

Illustration 12-1

Question

Pension funds and banks regularly invest in debt

and share securities to:

a. house excess cash until needed.

b. generate earnings.

c. meet strategic goals.

d. avoid a takeover by disgruntled investors.

Why Corporations Invest

Debt investments are investments in government and corporation bonds. In accounting for debt investments, firms make entries to record

(1) The acquisition,

(2) the interest revenue, and

(3) the sale

Accounting for Debt Investments

Recording Acquisition of Bonds

Cost includes all expenditures necessary to acquire these

investments, such as the price paid plus brokerage fees

(commissions), if any.

Recording Bond Interest

Calculate and record interest revenue based upon the

carrying value of the bond times the interest rate

times the portion of the year the bond is

outstanding.


Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%,

10-year, €1,000 bonds on January 1, 2014, for €50,000.

The entry to record the investment is:

Cash 50,000

Debt Investments 50,000Jan. 1


Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%,

10-year, €1,000 bonds on January 1, 2014, for €50,000.

The bonds pay interest semiannually on July 1 and January

1. The entry for the receipt of interest on July 1 is:

Cash 2,000

Interest Revenue 2,000

* (€50,000 x 8% x ½ = €2,000)

*July 1


Illustration: If Kuhl Corporation’s fiscal year ends on

December 31, prepare the entry to accrue interest since

July 1.

Interest Receivable 2,000

Interest Revenue 2,000 (Other income and expenses)

Kuhl reports receipt of the interest on January 1 as follows.

Cash 2,000

Interest Receivable 2,000

Dec. 31

Jan. 1


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.


CashBonds

(Investments)

Buy

Debt Investments Cash

Sale

Cash Debt Investments

Recording Sale of Bonds

Illustration: Assume that Kuhl corporation receives net

proceeds of €54,000 on the sale of the Doan Inc. bonds on

January 1, 2015, after receiving the interest due. Prepare

the entry to record the sale of the bonds.

Cash 54,000

Debt Investments 50,000

Gain on Sale of Debt Investments 4,000

(Other income and expense)

Jan. 1


When bonds are sold, the gain or loss on sale is the

difference 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 the

bonds.

Accounting for Debt InvestmentsQuestion

Share investments are investments in the shares of other corporations. When a company holds shares of several different corporations, the group of securities is identified as an investment portfolio.

The accounting for investments in shares depends on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation (the investee).

Accounting for Share Investments

0 --------------20% ------------ 50% -------------- 100%insignificant influence on

Investee

Significant influence on

Investee

Controlling usually exists

Investment valued using

Cost Method

Investment valued using

Equity Method

Consolidated financial statements

Investor’s Ownership Interest in Investee’s Ordinary SharesInvestor’s Ownership Interest in Investee’s Ordinary Shares

The accounting depends on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation (the Investee).

Accounting for Share Investments

Companies use the cost method. Under the cost method,

companies record the investment at cost, and recognize

revenue only when cash dividends are received.

Accounting for Share InvestmentsHolding of Less than 20%

Cost includes all expenditures necessary to acquire these

investments, such as the price paid plus any brokerage

fees (commissions).

July 1

Illustration: On July 1, 2014, Lee Corporation acquires

1,000 shares (10% ownership) of Beal Corporation. Lee

pays HK$405 per share. The entry for the purchase is:

Share Investments 405,000

Cash 405,000

Holding of Less than 20%Recording Acquisition of Share Investments

Dec. 31

Illustration: During the time Lee owns the shares, it makes

entries for any cash dividends received. If Lee receives a

HK$20 per share dividend on December 31, the entry is:

Cash 20,000

Dividend Revenue 20,000 (Other income and expense)

Holding of Less than 20%Recording Dividends

Feb. 10

Illustration: Assume that Lee Corporation receives net

proceeds of HK$395,000 on the sale of its Beal shares on

February 10, 2015. Because the shares cost HK$405,000,

Lee incurred a loss of HK$10,000. The entry to record the

sale is:

Cash 395,000


Holding of Less than 20%Recording Sale of Shares

Loss on Sale of Share Investments 10,000 (Other income and expense)

Equity Method: Record the investment at cost and

subsequently adjusts the investment account each period

for the

investor’s share of the associate’s (investee’s) net

income and

dividends received by the investor.

If investor’s share of investee’s losses exceeds the carrying amount of the investment, the investor ordinarily should discontinue applying the equity method.

Accounting for Share InvestmentsHolding Between 20% and 50%

Investee(Tuner

Broadcasting)

Owns between 20% and 50% of the ordinary shares of a investee

Investor has significant influence

over an investee (associate)

Investor(Time Warner)

Net income InvestmentProportionate share of associate’s net income

Dividend Investment

Decrease the investment account for the amount of dividends received

Illustration: Milar Corporation acquires 30% of the ordinary shares of

Beck Company for ₤120,000 on January 1, 2014. For 2014, Beck

reports net income of ₤100,000 and paid dividends of ₤40,000. Prepare the entries for these transactions.


Cash 120,000

Cash (₤40,000 x 30%) 12,000


Share Investments (₤100,000 x 30%) 30,000

Revenue from Share Investments 30,000

Jan. 1

Dec. 31

Dec. 31

Holdings Between 20% and 50%

Under the equity method, the investor records

dividends received by crediting:

a. Dividend Revenue.

b. Investment Income.

c. Revenue from Share Investment.

d. Share Investments.


After Milar posts the transactions for the year, its investment

and revenue accounts will show the following.

Illustration 12-4

Holdings Between 20% and 50%

Illustration 12-5Examples of consolidatedcompanies and theirsubsidiaries

Parent Company (母公司 ) - When a company (investor) own

s more than 50% of the ordinary shares of another entity.

Subsidiary (affiliated) company (子公司 ) – entity whos

e shares are owned by the parent company.

Parent generally prepares consolidated financial state

ments.

Accounting for Share InvestmentsHoldings of More than 50%

Valuing and Reporting InvestmentsCategories of Securities

Debt investments are classified into two categories:

Trading securities

Held-for-collection securities

These guidelines apply to all debt securities and to those share investments in which the holdings are less than 20%.

Share investments are classified into two categories:

Trading securities

Non-trading securities

Valuing and Reporting InvestmentsCategories of Securities

Trading Securities

Companies hold trading securities with the intention

of selling them in a short period (generally less than

a month).

Trading means frequent buying and selling.

Companies report trading securities at fair value, and

report changes from cost as part of net income.

Classified as current asset.

Categories of Securities

Illustration: Investments of Pace Corporation are classified as trading securities on December 31, 2014.

The adjusting entry for Pace Corporation is:

Dec. 31 Fair Value Adjustment—Trading 7,000

Unrealized Gain—Income 7,000 (Other income and expense)

Illustration 12-7

Trading Securities

These securities can be classified as current assets

or as non-current assets, depending on the intent of

management (sell the securities within the next year

or operating cycle).

Procedure for determining fair value and the

unrealized gain or loss for these securities is the

same as for trading securities.

Companies report securities at fair value, and

report changes from cost as a component of equity.

Non-Trading Securities

Categories of Securities

Illustration: Assume that Ingrao Corporation has two securities that it classifies as non-trading.

The adjusting entry for Ingrao Corporation is:

Dec. 31 Unrealized Gain or Loss—Equity 9,537

Fair Value Adjustment—Non-trading 9,537

Illustration 12-8

Non-Trading Securities

An unrealized loss on non-trading securities is:

a. reported under Other Revenue and Expense

in the income statement.

b. closed-out at the end of the accounting

period.

c. reported as a separate component of equity.

d. deducted from the cost of the investment.


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.

Investments that do not meet both criteria are

classified as long-term investments.

Statement of Financial Position Presentation

Short-Term Investments

Illustration 12-9Presentation of short-terminvestments

Presentation of Realized and Unrealized Gain or Loss

Illustration 12-10Non-operating items related to investments


Unrealized gain or loss on non-trading securities are

reported as a separate component of equity.

Illustration 12-11

Realized and Unrealized Gain or Loss


Classified Statement of Financial Position

Illustration 12-12

chapter 12 investments ( 投資 ) instructor: chih-liang julian liu department of industrial and...

Documents

share investments

corporation debt

investments instructor

chapter12 investments

temporary investments

corporation bonds

sale of bonds

sale accounting