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chap 13
Chapter 13-1 Investments Chapter Chapter 13 13 Chapter Chapter 13 13 Financial Accounting, Sixth Edition Chapter 13-2 1. Discuss why corporations invest in debt and stock securities. 2. Explain the accounting for debt investments. 3. Explain the accounting for stock investments. 4. Describe the use of consolidated financial statements. 5. Indicate how debt and stock investments are reported in financial statements. 6. Distinguish between short-term and long-term investments. Study Objectives Study Objectives Study Objectives Study Objectives Chapter 13-3 Why Why Corporations Corporations Invest Invest Why Why Corporations Corporations Invest Invest Cash management Investment income Strategic reasons Accounting for Accounting for Debt Debt Investments Investments Accounting for Accounting for Debt Debt Investments Investments Accounting for Accounting for Stock Stock Investments Investments Accounting for Accounting for Stock Stock Investments Investments Valuing and Valuing and Reporting Reporting Investments Investments Valuing and Valuing and Reporting Reporting Investments Investments Categories of securities Balance sheet presentation Realized and unrealized gain or loss Classified balance sheet Holdings of less than 20% Holdings between 20% and 50% Holdings of more than 50% Recording acquisition of bonds Recording bond interest Recording sale of bonds Investments Investments Investments Investments Chapter 13-4 Corporations generally invest in debt or stock securities for one of three reasons. Why Corporations Invest Why Corporations Invest Why Corporations Invest Why 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. Corporation may have excess cash. 2. To generate earnings from investment income. 3. For strategic reasons. Illustration 13-1 Temporary investments and the operating cycle Chapter 13-5 Pension funds and banks regularly invest in debt and stock securities to: a. house excess cash until needed. b. generate earnings. c. meet strategic goals. d. avoid a takeover by disgruntled investors. Question Question Why Corporations Invest Why Corporations Invest Why Corporations Invest Why Corporations Invest SO 1 Discuss why corporations invest in debt and stock securities. SO 1 Discuss why corporations invest in debt and stock securities. Chapter 13-6 Accounting for Debt Instruments Accounting for Debt Instruments Accounting for Debt Instruments Accounting for Debt Instruments SO 2 Explain the accounting for debt investments. SO 2 Explain the 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 face value of the bond times the interest rate times the portion of the year the bond is outstanding. Chapter 13-7 Accounting for Debt Instruments Accounting for Debt Instruments Accounting for Debt Instruments Accounting for Debt Instruments SO 2 Explain the accounting for debt investments. SO 2 Explain the accounting for debt investments. Recording 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. Chapter 13-8 Exercise: Issel Corporation had the following transactions pertaining to debt investments. Jan. 1 Purchased 60, 8%, $1,000 Hollis Co. bonds for $60,000 cash plus brokerage fees of $900. Interest is payable semiannually on July 1 and January 1. July 1 Received semiannual interest on Hollis Co. bonds. July 1 Sold 30 Hollis Co. bonds for $34,000 less $500 brokerage fees. Instructions (a) Journalize the transactions. (b) Prepare the adjusting entry for the accrual of interest at December 31. Accounting for Debt Instruments Accounting for Debt Instruments Accounting for Debt Instruments Accounting for Debt Instruments SO 2 Explain the accounting for debt investments. SO 2 Explain the accounting for debt investments. Chapter 13-9 Exercise: Jan. 1 Purchased 60, 8%, $1,000 Hollis Co. bonds for $60,000 cash plus brokerage fees of $900. Interest is payable semiannually on July 1 and January 1. Debt investment 60,900 Jan 1 Cash 60,900 * ($60,000 + $900 = $60,900) * Accounting for Debt Instruments Accounting for Debt Instruments Accounting for Debt Instruments Accounting for Debt Instruments SO 2 Explain the accounting for debt investments. SO 2 Explain the accounting for debt investments. Chapter 13-10 Exercise: July 1 Received semiannual interest on Hollis Co. bonds. Sold 30 Hollis Co. bonds for $34,000 less $500 brokerage fees. Cash 2,400 July 1 Interest revenue 2,400 * ($60,000 x 8% x ½ = $2,400) Cash 33,500 Debt investments 30,450 Gain on sale 3,050 *** ($60,900 x ½ = $30,450) * *** ** ($34,000 - $500 = $33,500) ** Accounting for Debt Instruments Accounting for Debt Instruments Accounting for Debt Instruments Accounting for Debt Instruments SO 2 Explain the accounting for debt investments. SO 2 Explain the accounting for debt investments.