Investment Chapter._ - Copy
Investment Chapter._ - Copy
5
Debt Securities Equity Securities
• Reflect a creditor • Reflect an owner
relationship relationship
• Examples: Investments • Examples: Investments in
in notes, bonds, and CDs shares of stock
• May be issued by • Issued by companies
governments,
companies, or
individuals
6
Classification and Reporting
Accounting for Investments depends on three factors:
1. Security type: debt or equity
2. Intent to hold the security short or long term
3. Percentage ownership in another company’s equity
securities
Debt Investments –
Held-to-Maturity
1. Debt securities
2. Intent and ability to hold until maturity
3. Reported as:
a) Current assets if maturity dates are within one
year or the operating cycle, whichever is
longer.
b) Noncurrent investments if their maturity dates
are longer.
4. Portfolio of HTM securities reported at amortized
cost.
5. No fair value adjustment to the portfolio.
• Debt investments are recorded at cost.
• On July 1, 2019, Ling Co. paid $30,000 to
buy Dell’s 7%, 2-year bonds payable with a
$30,000 par value.
• The bonds pay interest semiannually on
December 31 and June 30.
Equity
Add unrealized gain on AFS securities $ 1,550
Available-for-Sale: Reporting for
Next Year
Let’s extend our example and assume that at December 31,
2020, Mitsu’s portfolio of long-term AFS securities has an
$81,000 cost and an $82,000 fair value.
Classification and Reporting
Accounting for Investments depends on three factors:
1. Security type: debt or equity
2. Intent to hold the security short or long term
3. Percentage ownership in another company’s equity
securities
Cost Method Investments
Investor Ownership of
Investee Shares Outstanding
Cost or
Market
Value Equity Consolidated Financial
Method Method Statements
• Unrealized gain is reported in Other Revenues and Gains (or Expenses and
Losses) on the Income Statement.
• Fair Value Adjustment – Stock, permanent asset which reports adjustments
in portfolio.
• Total cost kept in one account and fair value adjustment kept in separate
account. Reported in assets as shown below:
• When sold, difference between net proceeds and
cost recorded as gain or loss.
• Prior-period fair value adjustments not used to
compute gain or loss from sale of individual stocks.
• 3/9/20: ITI sold individual stock with cost of $500 for
$800.
• Gain: $800 net proceeds - $500 cost = $300.
Berkshire Co. purchases investments in trading securities at a cost of $130 on December 15, 20X1. (This is its first
and only purchase of such securities.) On December 28, Berkshire received a $15 cash dividend from the stock
purchased on December 15. At December 31, 20X1, the trading securities had a fair value of $140.
a. Prepare the December 15 acquisition entry for the trading securities’ portfolio.
b. Prepare the December 28 receipt of cash dividends entry for the trading securities’ portfolio.
Dec. 28 Cash 15
Dividend revenue 15
20X2
Aug. 1 Lopez declared and paid a cash dividend of $2.25 per share.
Dec. 31 Lopez announced that net income for the year is $2,750.
20X3
Jan. 1 Garcia sold 100 shares of Lopez for $1,300 cash.
20X3
Jan. 1 Garcia sold 100 shares of Lopez for $1,300 cash.
Includes:
LO 7
Comprehensive Income
Net Income
Income Statement (in thousands) Other Comprehensive
Sales
Cost of goods sold
$ 285,000
149,000 + Income
Gross profit 136,000 ◆ Unrealized gains and
Operating expenses:
losses on available-for-
Selling expenses 10,000
Administrative expenses 43,000
sale securities.
Total operating expense 53,000 ◆ Translation gains and
Income from operations 83,000 losses on foreign
Other revenue (expense):
currency.
Interest revenue 17,000
Interest expense (21,000) ◆ Plus others
Total other (4,000)
Income before taxes 79,000
Reported in Stockholders’
Income tax expense 24,000
Net income $ 55,000 Equity
LO 7
• Trading Purposes Investment in Equity
Investment in equity at a cost of 1,000 for trading purposes.
Dr Investment 1,000
Cr Cash 1,000
At the end of the financial period, the market price of the investment was 1,150
Dr Investment 1,000
Cr Cash 1,000
At the end of the financial period, the market price of the investment was 1,250
Dr Fair value adjustment 250
Cr Unrealized holding gain- Equity 250
• Statement of comprehensive Income
Sales
- COGS
Gross Profit
- Operating expenses
- Other Income and expenses
- unrealized holding gain and loss - Income
Div Revenue
Revenue from investment
Net income
Other comprehensive Income
Unrealized holding gain and loss –Equity
Comprehensive Income
Question
Gains and losses that bypass net income but affect
stockholders' equity are referred to as
a. comprehensive income.
LO 7
Comprehensive Income
LO 7
Comprehensive Income
One Statement
Approach
Advantage – does
not require the
creation of a new
financial statement.
Disadvantage - net
income buried as a
subtotal on the ILLUSTRATION 4-20
statement. One Statement Format: Comprehensive Income
LO 7
Comprehensive Income
ILLUSTRATION 4-21
Two Statement Format:
Comprehensive Income
Statement of Financial position
Assets
Non current assets
-Long term Investment
Equity Investment
Debt Investment
Intangible assets
PPE
Current Asset
Inventory
A/R
- Short term Investment
Equity Investment (trading )
Debt Investment ( Trading )
Liabilities
xxx
Equity
Share capital
Retained Earning
Accumulated Other comprehensive Income xxx xxxx