Slide

12-1

Chapter

12

Investments
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
12-2

Study
Study Objectives
Objectives

Slide
12-3

1.

Discuss why corporations invest in debt and share

securities.

2.

Explain the accounting for debt investments.

3.

Explain the accounting for share investments.

4.

Describe the use of consolidated financial statements.

5.

Indicate how debt and share investments are reported in

financial statements.

6.

Distinguish between short-term and long-term

investments.

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.

Corporation may have excess cash.

2.

To generate earnings from investment income.

3.

For strategic reasons.

Illustration 12-1

Temporary
investments
and the
operating cycle

Slide
12-5

SO 1 Discuss why corporations invest in debt and share securities.

Why
Why Corporations
Corporations Invest
Invest
Question

Pension funds and banks regularly invest in debt and

share securities to:

Slide
12-6

a.

house excess cash until needed.

b.

generate earnings.

c.

meet strategic goals.

d.

avoid a takeover by disgruntled investors.

SO 1 Discuss why corporations invest in debt and share securities.

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.

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.

Slide
12-7

SO 2 Explain the accounting for debt investments.

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

SO 2 Explain the accounting for debt investments.

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

SO 2 Explain the accounting for debt investments.

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)
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12-10

SO 2 Explain the accounting for debt investments.

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

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

Jan. 1

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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

SO 2 Explain the accounting for debt investments.

Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Question

An event related to an investment in debt securities that

does not require a journal entry is:

Slide
12-13

a.

acquisition of the debt investment.

b.

receipt of interest revenue from the debt

investment.

c.

a change in the name of the firm issuing the debt

securities.

d.

sale of the debt investment.

SO 2 Explain the accounting for debt investments.

Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Question

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

difference between the:

Slide
12-14

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.

SO 2 Explain the accounting for debt investments.

Accounting
Accounting for
for Share
Share Investments
Investments
Ownership Percentages

0 --------------20% ------------ 50% -------------- 100%

No significant
influence
usually exists

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)

The accounting depends on the extent of the investors influence over

the operating and financial affairs of the issuing corporation.
Slide
12-15

SO 3 Explain the accounting for share investments.

Accounting
Accounting for
for Share
Share Investments
Investments
Holdings of Less than 20% (Cost Method)
Companies record

the investment at cost, and

recognize revenue only when cash dividends are

received.

Cost includes all expenditures necessary to acquire these investments,

such as the price paid plus any brokerage fees (commissions).

Slide
12-16

SO 3 Explain the accounting for share investments.

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

SO 3 Explain the accounting for share investments.

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

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12-18

2,000

SO 3 Explain the accounting for share investments.

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

Loss on sale of share

Share investments

Slide
12-19

1,000
40,500

SO 3 Explain the accounting for share investments.

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

SO 3 Explain the accounting for share investments.

Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
Question

Under the equity method, the investor records dividends

received by crediting:

Slide
12-21

a.

Dividend Revenue.

b.

Investment Income.

c.

Revenue from Investment.

d.

Share Investments.

SO 3 Explain the accounting for 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

Revenue from investments

Dec. 31 Cash ($40,000 x 30%)
Share investments
Slide
12-22

30,000
12,000
12,000

SO 3 Explain the accounting for 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.
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

Revenue from Investments

Debit
Credit
30,000

12,000

138,000
Slide
12-23

SO 3 Explain the accounting for share investments.

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

SO 4 Describe the use of consolidated financial statements.

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

SO 4 Describe the use of consolidated financial statements.

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

SO 5 Indicate how debt and share investments are

reported in financial statements.

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

SO 5 Indicate how debt and share investments are

reported in financial statements.

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

The adjusting entry for Pace Corporation is:

Dec. 31

Market adjustmentFVPL
Unrealized gainincome

Slide
12-29

7,000
7,000

SO 5 Indicate how debt and share investments are

reported in financial statements.

Slide
12-30

Answer on notes page

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

SO 5 Indicate how debt and share investments are

reported in financial statements.

Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Question

Marketable securities bought and held primarily for sale

in the near term are classified as:

Slide
12-32

a.

Available-for-sale securities.

b.

Held-to-maturity securities.

c.

Share securities.

d.

Fair value through profit or loss

SO 5 Indicate how debt and share investments are

reported in financial statements.

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?

The entries would be the same except that the

Unrealized Gain or LossEquity account is used instead of
Unrealized Gain or LossIncome.
The unrealized loss would be deducted from equity rather
than charged to income.

Slide
12-33

SO 5 Indicate how debt and share investments are

reported in financial statements.

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

The adjusting entry for Ingrao Corporation is:

Dec. 31

Unrealized gain or lossequity

Market adjustmentAFS

Slide
12-34

9,537
9,537

SO 5 Indicate how debt and share investments are

reported in financial statements.

Available-for-Sale
Available-for-Sale Securities
Securities
Question

An unrealized loss on available-for-sale securities is:

Slide
12-35

a.

reported under other revenue and expenses 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.

SO 5 Indicate how debt and share investments are

reported in financial statements.

Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Statement of Financial Position Presentation
Short-Term Investments
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.
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12-36

SO 6 Distinguish between short-term and long-term investments.

Statement
Statement of
of Financial
Financial Position
Position Presentation
Presentation
Presentation of Realized and Unrealized Gain or Loss

Nonoperating items related to investments

Illustration 12-10

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12-37

SO 6 Distinguish between short-term and long-term investments.

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

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12-38

SO 6 Distinguish between short-term and long-term investments.

Classified
Statement of
Financial
Position
(partial)
Illustration 12-12

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12-39

SO 6 Distinguish between short-term and long-term investments.

Classified
Statement of
Financial
Position
(partial)
Illustration 12-12

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12-40

SO 6 Distinguish between short-term and long-term investments.

Statement
Statement of
of Financial
Financial Position
Position Presentation
Presentation
Identify where each of the following items would be
reported in the financial statements.

Use the following possible categories:

Intangible assets
Property, plant, and equipment
Investments
Current assets
Other income and expenses
Slide
12-41

Answers on
notes page

Equity
Non-current liabilities
Current liabilities

SO 6 Distinguish between short-term and long-term investments.

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Investments

Both IFRS and GAAP use the same criteria to determine

whether the equity method of accounting should be usedthat
is, significant influence with a general guide of over 20%
ownership. GAAP uses the term equity investment whereas
IFRS uses the term associate investment to describe
investments under the equity method.
Under IFRS, both the investor and an associate company
should follow the same accounting policies. As a result, in
order to prepare financial information, adjustments are made to
the associates policies to conform to the investors books.
GAAP does not have that requirement.
Slide
12-42

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Investments

The basis for consolidation under IFRS is control. Under GAAP,

a bipolar approach is used, which is a risk-and reward model
(often referred to as a variable-entity approach) and a voting
interest approach. However, under both systems, for
consolidation to occur, the investor company must generally
own 50% of another company.
IFRS specifies the following four types of financial assets:
1. Financial assets at fair value through profit or loss.
2. Held-to-maturity investments.
3. Loans and receivables.
4. Available-for-sale financial assets.
Slide
12-43

The loans and receivables category does not exist under GAAP.

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Investments

The category of financial asset at fair value through profit or

loss is similar to the trading securities discussed in GAAP. As
noted in the chapter, this category also includes investments
that the company has decided to report at fair value. GAAP also
gives the company the option to report investments at fair value.

Slide
12-44

Unrealized gains and losses related to available-for-sale

securities are reported in other comprehensive income under
GAAP and IFRS. These gains and losses that accumulate are
then reported in the equity section. Under IFRS, they are
frequently reported in a line item labeled Reserves whereas
under GAAP, they are reported in accumulated other
comprehensive income.

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

Companies prepare consolidated statements of

financial position from the individual statements of their
affiliated companies.
Transactions between the affiliated companies are
eliminated.

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

SO 7 Describe the content of a worksheet for a

consolidated statement of financial position.

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

SO 8 Explain the form and content of consolidated financial statements.

Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Consolidated Statement of Financial Position

Slide
12-53

Illustration 12A-4

SO 8 Explain the form and content of consolidated financial statements.

Preparing
Preparing Consolidated
Consolidated Financial
Financial Statements
Statements
Consolidated Income Statement

Appendix

Statement shows the results of operations of affiliated

companies as though they are one economic unit.
All intercompany revenue and expense transactions
must be eliminated.
A worksheet facilitates the preparation of consolidated
income statements in the same manner as it does for
the statement of financial position.

Slide
12-54

SO 8 Explain the form and content of consolidated financial statements.

Copyright
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12-55