Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Investments 12 12-2 Accounting for Investment Securities Bonds and notes (Debt securities) Bonds and notes (Debt securities) Common and preferred stock (Equity (Equity securities) securities) Common and preferred stock (Equity (Equity securities) securities) Investments can be accounted for in a variety of ways, depending on the nature of the investment relationship. 12-3 Reporting Categories for Investments 12-4 Learning Objectives Demonstrate how to identify and account for investments classified for reporting purposes as held to maturity. 12-5 Trading securities Trading securities (TS) are bought and (TS) are bought and held primarily to be held primarily to be sold in the near term. sold in the near term. Trading securities Trading securities (TS) are bought and (TS) are bought and held primarily to be held primarily to be sold in the near term. sold in the near term. Securities available Securities available for sale (SAS) are for sale (SAS) are expected to be held expected to be held for an unspecified for an unspecified period of time. period of time. Securities available Securities available for sale (SAS) are for sale (SAS) are expected to be held expected to be held for an unspecified for an unspecified period of time. period of time. Reporting Categories for Investments Held-to-maturity Held-to-maturity (HTM) securities (HTM) securities are investments in are investments in debt the investor debt the investor intends and has intends and has the ability to hold the ability to hold until they mature. until they mature. Held-to-maturity Held-to-maturity (HTM) securities (HTM) securities are investments in are investments in debt the investor debt the investor intends and has intends and has the ability to hold the ability to hold until they mature. until they mature. 12-6 Securities to Be Held to Maturity On January 1, 2006, Matrix, Inc. purchased as an investment $1,000,000, of 10%, 10-year bonds, interest paid semi- annually. The market rate for similar bonds is 12%, so Matrix paid $885,301 for the bonds. Let’s look at the required journal entries. $885,301 $885,301 × (12% ÷ 2) = $53,118 × (12% ÷ 2) = $53,118 $885,301 $885,301 × (12% ÷ 2) = $53,118 × (12% ÷ 2) = $53,118 12-7 Securities to Be Held to Maturity $114,699 - $3,118 = $111,581 unamortized discount $114,699 - $3,118 = $111,581 unamortized discount On January 1, 2006, Matrix, Inc. purchased as an investment $1,000,000, of 10%, 10-year bonds, interest paid semi- annually. The market rate for similar bonds is 12%, so Matrix paid $885,301 for the bonds. Let’s look at the required journal entries. 12-8 Investments Held for an Unspecified Period of Time When an investment is held for an unspecified period of time, it is reported at the fair value of the security on the reporting date. When an investment is held for an unspecified period of time, it is reported at the fair value of the security on the reporting date. Must be “readily determinable” Must be “readily determinable” Otherwise, the investment is reported at cost. Otherwise, the investment is reported at cost. . 12-9 Learning Objectives Demonstrate how to identify and account for investments classified for reporting purposes as available-for-sale. 12-10 Securities Available-for-Sale Adjustments to fair value Adjustments to fair value are recorded as: are recorded as: 1. 1. a direct adjustment to the a direct adjustment to the investment account, and investment account, and 2. 2. an allowance account in an allowance account in the equity section of the the equity section of the balance sheet called “ balance sheet called “ Net Net Unrealized Holding Unrealized Holding Gains/Losses Gains/Losses ”. ”. Adjustments to fair value Adjustments to fair value are recorded as: are recorded as: 1. 1. a direct adjustment to the a direct adjustment to the investment account, and investment account, and 2. 2. an allowance account in an allowance account in the equity section of the the equity section of the balance sheet called “ balance sheet called “ Net Net Unrealized Holding Unrealized Holding Gains/Losses Gains/Losses ”. ”. [...]... holding gains and losses from securities available-for-sale are reported in the equity section of the balance sheet 1 2-1 5 Securities Available for Sale Occasionally, an Occasionally, an investment’s value investment’s value will decline for will decline for reasons that are reasons that are “other than “other than temporary” temporary” This is called 1 2-1 6 Securities Available for Sale If the value... with the classification into which the security into which the security is being transferred is being transferred 1 2-2 3 Disclosures 1 2-2 4 Learning Objectives Explain what constitutes significant influence by the investor over the operating and financial policies of the investee 1 2-2 5 1 2-2 6 The cost method is The cost method is used for investments used for investments in equity securities in equity... investment results influence (20 %-5 0%) influence of the investee (20 %-5 0%) in the control of the investee in the control (generally > 50%), the (generally > 50%), the subsidiary is consolidated subsidiary is consolidated with the parent company with the parent company 1 2-2 7 Learning Objectives Understand the way investments are recorded and reported by the equity method 1 2-2 8 Equity Method 1 1 The investment... sheet as Investment in Apex, Inc.? balance sheet as Investment in Apex, Inc.? 1 2-3 1 Equity Method 1 2-3 2 Equity Method 1 2-3 3 Equity Method Investment in Apex, Inc Investment 1,350,000 45% Earnings 67,500 45% Dividends 787,500 Reported amount 2,070,000 If the subsidiary had a loss, the investment account would have been reduced 1 2-3 4 Learning Objectives Explain the adjustments made in the equity method when... value at 12/31/06 the securities to fair value at 12/31/06 1 2-2 0 Trading Securities The Net Unrealized Holding Loss is The Net Unrealized Holding Loss is reported on the Income Statement reported on the Income Statement 1 2-2 1 Trading Securities Unrealized holding gains and losses from trading securities are reported on the income statement 1 2-2 2 Transfers Between Reporting Categories Transfers are Transfers... 2006 1 2-1 2 Securities Available for Sale Example This net unrealized holding gain is This net unrealized holding gain is reported as an allowance in the equity reported as an allowance in the equity section of the balance sheet section of the balance sheet 1 2-1 3 Other Comprehensive Income When we add other comprehensive income to net income we refer to the result as “comprehensive income.” 1 2-1 4 Securities... account is decreased by: decreased by:   Dividends received Dividends received 1 2-2 9 Equity Method  The investment account is reported on the balance sheet as a single amount  The investor’s share of the investee’s earnings from date of acquisition is reported as a single item on the investor’s income statement 1 2-3 0 Equity Method On January 1, 2006, Matrix, Inc acquired 45% of On January 1, 2006,... fair value) is not value) is not changed for changed for subsequent subsequent recoveries in recoveries in fair value fair value 1 2-1 7 Learning Objectives Demonstrate how to identify and account for investments classified for reporting purposes as trading securities 1 2-1 8 Trading Securities Adjustments to fair Adjustments to fair value are recorded value are recorded as: as: 1 1 2 2 a direct adjustment... 1 2-3 5 Equity Method If the investor acquires the equity securities of If the investor acquires the equity securities of an investee by paying more than the fair an investee by paying more than the fair value of net assets value of net assets the difference is allocated between the difference is allocated between GOODWILL and IDENTIFIABLE GOODWILL and IDENTIFIABLE ASSETS ASSETS ASSETS ASSETS 1 2-3 6...1 2-1 1 Securities Available for Sale Example Matrix, Inc purchased the securities listed below in Matrix, Inc purchased the securities listed below in 2006 They are classified as Securities Available 2006 . at cost. . 1 2-9 Learning Objectives Demonstrate how to identify and account for investments classified for reporting purposes as available-for-sale. 1 2-1 0 Securities Available-for-Sale Adjustments. the ability to hold the ability to hold until they mature. until they mature. Held-to-maturity Held-to-maturity (HTM) securities (HTM) securities are investments in are investments in. unspecified period of time. period of time. Reporting Categories for Investments Held-to-maturity Held-to-maturity (HTM) securities (HTM) securities are investments in are investments in