Transcript Document

12 Investments
I
ntermediate
Accounting
中级会计学
Accounting School · Zhongnan
University of Economics & Law
Intermediate Accounting 12 Investments
1. Classification and Valuation of
Investments
1) Trading securities
2) Available-for-sale
securities
3) Held-to-maturity
debt securities
Intermediate Accounting 12 Investments
Classification of Investments
Trading securities are investments in debt
and equity securities that are purchased and
held principally for the purpose of selling
them in the near term.
Intermediate Accounting 12 Investments
Trading Securities
Trading
These securities
securitiesare
arereported
investments
at their
in debt
fair
and
market
equity
value
securities
on the balance
that are sheet
purchased
date, and
held
unrealized
principally
holding
for the
gains
purpose
and losses
of selling
are
includedthem
in net
in income
the nearof
term.
the period.
Intermediate Accounting 12 Investments
Classification of Investments
Investments in available-for…(b) debt
equity
sale securities
are and
(a) debt
securities
thatnot
are not
securities
that are
classified
trading
classified
as beingasheld
to
securities.
maturity,
and...
Intermediate Accounting 12 Investments
Classification of Investments
Investments in available-for-sale
securities are reported at their fair
value on the balance sheet date.
The unrealized holding gains or
losses are included in other
comprehensive income.
Intermediate Accounting 12 Investments
Classification of Investments
Therefore, the unrealized holding
gains and losses are not included
in net income for the availablefor-sale securities.
Intermediate Accounting 12 Investments
Classification of Investments
Investments in held-to-maturity
debt securities are debt securities
for which the company has the
positive intent and ability to hold
until they mature.
Intermediate Accounting 12 Investments
Classification of Investments
Investments in held-to-maturity
debt securities are reported at their
amortized cost on the balance
sheet…not their fair value.
Intermediate Accounting 12 Investments
Accounting for Investments
Method
Reporting of
Unrealized Holding
Gains and Losses
Investment in Equity Securities
1. No significant influence
a. Trading
b. Available for sale
Fair value
Fair value
2. Significant influence
3. Control
Equity method
Consolidation
Net Income
Other comprehensive income
Not recognized
Not recognized
Intermediate Accounting 12 Investments
Accounting for Investments
Method
Reporting of
Unrealized Holding
Gains and Losses
Investment in Debt Securities
1. Trading
2. Available for sale
3. Held to maturity
Fair value
Fair value
Net Income
Other comprehensive income
Amortized cost Not recognized
Intermediate Accounting 12 Investments
2. Investments in Available-for-Sale
Debt and Equity Securities
 The investment is initially recorded at cost.
 It is subsequently reported at fair value.
 Unrealized holding gains and losses are
reported as a component of other
comprehensive income.
 Interest and dividend revenue, as well as
realized gains and losses on sales, are
included in net income for the current period.
Intermediate Accounting 12 Investments
Investments in Available-for-Sale Debt
and Equity Securities
Kent Company purchases the following securities
on May 1, 2003 as an investment in available-forsale securities:
• 100 shares of A Company common stock
at $50 per share
• 300 shares of B Company common stock
at $80 per share
• 200 shares of Company C preferred stock
at $120 per share.
• $15,000 Company D 10% bonds
$ 5,000
24,000
24,000
15,000
Total $68,000
Intermediate Accounting 12 Investments
Investments in Available-for-Sale Debt
and Equity Securities
Investment in Available-for-Sale
Securities
Interest Revenue
Cash
68,000
625
68,625
Continued
Intermediate Accounting 12 Investments
Investments in Available-for-Sale Debt
and Equity Securities
Accrued interest on the D Company bond from
November 30, 2002 to May 31, 2003
May 31, 2003
Cash
Interest Revenue
750
750
Continued
$15,000 x 0.10
x 6/12
Intermediate Accounting 12 Investments
Investments in Available-for-Sale Debt
and Equity Securities
December 31, 2003
Interest Receivable
Interest Revenue
125
125
During 2003 Kent Company receives
$15,000 x 0.10
x 1/12
dividends of $3,000 from its investment
in the
stocks of A, B, and C Companies.
Cash
Dividend Revenue
3,000
3,000
Intermediate Accounting 12 Investments
Investments in Available-for-Sale Debt
and Equity Securities
The cost and fair value of the available-for-sale
securities held by the Kent Company is as follows:
Allowance for Change in Value
of Investment
Security
Cost
Unrealized Increase/Decrease
Value
of Available-for100 shares in
of A
Co. common
stock $ 5,000
300 shares Sale
of B Co.
common stock
24,000
Securities
200 shares of C Co. preferred stock
D Company 10% bonds
Totals
24,000
15,000
$68,000
Cumulative
12/31/03
Change
Fair
in Fair
3,000
Value
Value
$ 6,000
23,500
26,000
15,500
$71,000
$1,000
(500 )
3,000
2,000
500
$3,000
Intermediate Accounting 12 Investments
Investments in Available-for-Sale Debt
and Equity Securities
The same securities are held on December 31, 2004.
Cumulative
12/31/04
Change
Fair
in Fair
Unrealized Increase/Decrease in
Security
Cost
Value
Value
Value of Available-for-Sale Securities
5,000
Allowance
for Change
100 shares
of A Co. common
stock in$Value
5,000 of
300 shares Investment
of B Co. common stock
24,000
200 shares of C Co. preferred stock
24,000
D Company 10% bonds
15,000
Totals
$68,000
$ 6,100
22,700
23,200
14,000
$66,000
$1,100
(1,300 )
5,000
(800 )
(1,000 )
$(2,000 )
Intermediate Accounting 12 Investments
Sale of Available-for-Sale Securities
On March 1, 2005 the Kent Company sold 100
shares of A Company stock for $6,000. The fair
value on December 31, 2004 was $6,100.
Cash
Investment in Available-forSale Securities
Gain on Sale of Available-forSale Securities
6,000
5,000
1,000
The Unrealized Increase/Decrease in Value and the
allowance account are reduced by $1,100.
Intermediate Accounting 12 Investments
Sale of Available-for-Sale Securities
Security
Cost
300 shares of B Co. common stock
$24,000
200 shares of C Co. preferred stock
24,000
D Company
10 bonds
Allowance
for Change in Value15,000
Totals
$63,000
of Investment
Unrealized Increase/Decrease
in Value of Available-forSale Securities
Cumulative
12/31/05
Change
Fair
in Fair
Value
Value
$23,500
24,100
14,700
$62,300
2,400
$(500 )
100
(300 )
$(700 )
2,400
Intermediate Accounting 12 Investments
3. Investments in Held-toMaturity Debt Securities
1) The investment is initially recorded at
cost.
2) It is subsequently reported at
amortized cost.
3) Unrealized holding gains and losses
are not recorded.
4) Interest revenue and realized gains
and losses on sales (if any) are all
included in net income.
Intermediate Accounting 12 Investments
Investments in Held-toMaturity Debt Securities
A company purchases 9% bonds with a face value
of $100,000 on August 1, 2003 at 99 plus accrued
interest, which is payable semiannually.
Investment in Held-to-Maturity
Debt Securities
99,000
Interest Revenue
1,500
Cash
100,500
$100,000 x 0.99
$100,000 x 0.09 x 2/12
Intermediate Accounting 12 Investments
Accounting for Bond Premiums
On January 1, 2003 Colburn Company invests in
bonds that will be held to maturity, with a face
value of $100,000, paying $102,458.71. The stated
rate is 13% and the effective interest rate is 12%.
Investment in Held-toMaturity Debt Securities
Cash
102,458.71
102,458.71
Intermediate Accounting 12 Investments
Accounting for Bond Premiums
Colburn Company records the first
interest receipt on June 30, 2003 using
the effective interest method.
Cash
6,500.00
Investment in Held-toMaturity Debt Securities
352.48
$100,000 x 0.13 x 1/2
Interest Revenue
6,147.52
$102,458.71 x .12 x 1/2
Intermediate Accounting 12 Investments
Accounting for Bond Discounts
On January 1, 2003 Colburn Company invests in
bonds that will be held to maturity, with a face
value of $100,000, paying $97,616.71. The stated
rate is 13% and the effective interest rate is 14%.
Investment in Held-toMaturity Debt Securities
Cash
97,616.71
97,616.71
Intermediate Accounting 12 Investments
Accounting for Bond Discounts
Colburn Company records the first
interest receipt on June 30, 2003 using
the effective interest method.
Cash
Investment in Held-toMaturity Debt Securities
Interest Revenue
6,500.00
333.17
6,833.17
$97,616.71 x .14 x 1/2
Intermediate Accounting 12 Investments
Amortization of Bonds Acquired
Between Interest Dates
Tallen Company purchased 13% bonds with a face value
of $200,000 for $204,575.07 on April 3, 2003. Interest
on these bonds is payable June 30 and December 31, and
$200,000 x
the bonds mature on December 31, 2005.
0.13 x 3/12
Investment in Held-to-Maturity
Debt Securities
204,575.07
Interest Revenue
6,500.00
Cash
211,075.07
Continued
Intermediate Accounting 12 Investments
Amortization of Bonds Acquired
Between Interest Dates
June 30, 2003
Cash
13,000.00
Interest Revenue
12,637.25
Investment in Held-to-Maturity
Debt Securities
362.75
($204,575.07 x
0.12 x ¼) +
$6,500
$13,000
–
Continued
$12,637.25
Intermediate Accounting 12 Investments
Amortization of Bonds Acquired
Between Interest Dates
December 31, 2003
Cash
13,000.00
Interest Revenue
12,252.74
Investment in Held-to-Maturity
Debt Securities
362.75
($204,575.07 x
0.12 x ¼) +
$6,500 –
$13,000
$12,252.74
Intermediate Accounting 12 Investments
Sale of Investment in Bonds Before
Maturity
The $100,000 of 13% bonds purchased by the Colburn
Company for $97,616.71 were sold on March 31, 2004
($2,383.29 ÷
for $102,000 plus accrued interest.
6) x ½
Investment in Held-to-Maturity
Debt Securities
Interest Revenue
Continued
198.61
198.61
Intermediate Accounting 12 Investments
Sale of Investment in Bonds Before
Maturity
Cash
105,250.00
Interest Revenue
3,250.00
Investment in Held-to-Maturity $102,000 +
$3,250 $100,000
Debt Securities
98,609.76
x 0.13
Gain on Sale of Debt Securities
3,390.24
x¼
$98,411.15 +
$198.61
Intermediate Accounting 12 Investments
4.
Transfers of Investments
Between Categories
1. A transfer from the trading category.
2. A transfer into the trading category.
3. A transfer into the available for sale
category.
4. A transfer of a debt security into the
held to maturity category from the
available for sale category.
Intermediate Accounting 12 Investments
Transfers of Investments
Between Categories
In 2005 Kent transfers the Company A securities into
the trading category when the fair value is $6,300.
Investment in Trading Securities
Investment in Available-forSale Securities
Gain on Transfer of Securities
Unrealized Increase/Decrease in
Value of Available-for-Sale Securities
Allowance for Change in Value of
Investment
6,300
5,000
1,300
1,100
1,100
Intermediate Accounting 12 Investments
Transfers of Investments
Between Categories
Devon Company has $10,000 in bonds that were
purchased at par. When the fair value is $9,500, Devon
transfers them to the available-for-sale category.
Investment in Available-for-Sale
Securities
10,000
Investment in Held-toMaturity Debt Securities
10,000
Unrealized Increase/Decrease in
Value of Available-for-Sale Securities 500
Allowance for Change in Value of
Investment
500
Intermediate Accounting 12 Investments
Transfers of Investments
Between Categories
Devon Company classifies its bond investment as
available for sale and transfers them into the held-tomaturity category. The current market value of the debt
securities is $9,500.
Investment in Held-to-Maturity Debt
Securities
Unrealized Increase/Decrease from
Transfer of Securities
Investment in Available-forSale Securities
Continued
9,500
500
10,000
Intermediate Accounting 12 Investments
Transfers of Investments
Between Categories
An entry is needed to eliminate the previous $300
($9,700 – $10,000) amount in the allowance and
unrealized increase/decrease accounts.
Allowance for Change in Value of
Investment
Unrealized Increase/Decrease in
Value of Available-for-Sale
Securities
300
300
Intermediate Accounting 12 Investments
5.
Impairments
Impairments may be an “other than
temporary” decline below the amortized
cost of an investment in a debt security
classified as available for sale or held to
maturity.
Intermediate Accounting 12 Investments
Impairments
Tracy Company has a bond investment categorized as
held to maturity, which has an unamortized carrying
amount of $21,500 and a fair value of $6,500. The
investment is considered to be “impaired.”
Realized Loss on Decline in Value
Investment in Held-to-Maturity
Debt Securities
15,000
15,000
Intermediate Accounting 12 Investments
6.
Disclosures
1. Trading Securities—A company must disclose
the change in the net unrealized holding gain or
loss that is included in each income statement.
2. Available-for-Sale Securities—For each
balance sheet date, a company must disclose
the aggregate fair value, gross unrealized
holding gains and gross unrealized holding
losses and (amortized cost) by major types.
3. Held-to-Maturity Debt Securities—For each
balance sheet date, a company must disclose
the aggregate fair value, gross unrealized
holding gains, gross unrealized holding losses,
and amortized cost by major security types.
Intermediate Accounting 12 Investments
7. Financial Statement
Classification
Current Assets
Temporary investment in available-for-sale
securities (at cost)
Plus: Allowance for change in value of
investment
Temporary investment in available-for-sale
securities (at fair value)
Noncurrent Assets
Investment in available-for-sale securities (at cost)
Plus: Allowance for change in value of investment
Investment in available-for-sale securities
(at fair value)
$29,000
500
$29,500
$39,000
2,500
$41,500
Intermediate Accounting 12 Investments
FASB 115: A Conceptual Evaluation
1. Fair value is required in the balance sheet
for trading securities and available-for-sale
securities, whereas amortized cost is
required for held-to-maturity securities.
2. Fair value is not required for certain liabilities.
3. Unrealized holding gains and losses are
reported in net income for trading securities,
but in other comprehensive income for
available-for-sale securities.
4. The classification of securities is based on
management intent.
Four Issues
Intermediate Accounting 12 Investments
8. Equity Method
When an investor
corporation owns a
significantly large
percentage of common
stock, it is able to exert
significant influence over
the policies of the investee
corporation. The equity
method is used to account
for this investment.
Intermediate Accounting 12 Investments
Equity Method
The equity method- Acknowledges the existence of a material
economic relationship between the
investor and the investee.
 Is based upon the requirements of accrual
accounting.
 Reflects the change in stockholders’
equity of the investee company.
Intermediate Accounting 12 Investments
Equity Method
According to FASB
Interpretation No. 35, what
are the facts and
circumstances that indicate
that investors with 20% or
more in the investee’s stock
should not use the equity
method?
Continued
Intermediate Accounting 12 Investments
Equity Method
• Opposition by the investee which challenges the
investor’s ability to exercise significant influence.
• The investor and investee sign an agreement
under which the investor surrenders significant
stockholder’s rights.
• Majority ownership of the investee is concentrated
among a small group of shareholders who operate
the investee without regard to views of the investor.
• Inability to gather information not available to other
shareholders.
• Failure to obtain representation on investee’s
board of directors.
Intermediate Accounting 12 Investments
Equity Method
Investor’s
Share of
Dividends
Investment = Acquisition Cost +
–
Investee
ReceivedIncome
where
Investor’s
(Investee’s Net
Share of
Adjust–
x
Ownership
%
Income
Investee =
ments
Income
Continued
Intermediate Accounting 12 Investments
Equity Method
Total
Dividends
–
%
Dividends Received = Paid by – Ownership
Investee
and
Intermediate Accounting 12 Investments
Equity Method
Cliborn Company purchases 4,200 shares of the S
Company’s outstanding stock (25%) on January 1,
2004 for $125,000 (significant influence).
Investment in Stock: S Company
Cash
125,000
0.25 x125,000
$20,000
S Company paid a $20,000 dividend.
Cash
Investment in Stock: S Company
Continued
5,000
5,000
Intermediate Accounting 12 Investments
Equity Method
S Company reported net income for 2004 of $81,000,
consisting of ordinary income of $73,000 and an
extraordinary gain of $8,000.
Investment in Stock: S Company
20,250
Investment Income: Ordinary
18,250
Investment Income: Extraordinary
2,000
25% of $81,000
25% of $73,000
25% of 8,000
Continued
Intermediate Accounting 12 Investments
Equity Method
When acquired by S Company, the investee’s
depreciable assets had a fair market value that
exceeded book value by $50,000 (10-year
life). Cliborn’s share of the depreciable asset
value is $12,500 (25%).
Investment Income: Ordinary
1,250
Investment in Stock: S Company
1,250
Note that this entry results in a
deduction from
ordinary income.
Continued
Intermediate Accounting 12 Investments
Equity Method
Cliborn calculates its purchased goodwill as follows:
Purchase price
$125,000
Book value of net asset acquired
$97,500
Adjustments: Increase in depreciable
assets acquired
12,500
Increase in other nondepreciable assets
acquired
14,000
Increase in liabilities
(5,000 )
Fair value of identifiable net assets acquired
(119,000 )
Purchased goodwill
$ 6,000
Intermediate Accounting 12 Investments
Equity Method
Cliborn calculates its investment carrying value as follows:
Investment in S Company
Acquisition price January 1, 2004
Add: Share of 2004 reported ordinary
income
$18,250
Share of 2004 reported extraordinary
income
2,000
Less: Dividends received August 28, 2004
Depreciation on excess fair market
value of acquired assets
Carrying value
$125,000
20,250
$145,250
$ 5,000
1,250
(6,250 )
$139,000
The End