Pengantar Akuntansi 2 - Ch12 Investment

Chapter

12

Investments

Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
12-1

Study Objectives
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.
Slide
12-2

Investments

Why
Corporations
Invest
Cash
management

Investment
income
Strategic
reasons

Accounting for
Debt
Investments
Recording
acquisition of
bonds

Accounting for
Share
Investments

Valuing and
Reporting
Investments

Holdings of less
than 20%

Categories of
securities

Recording bond
interest

Holdings
between 20%
and 50%

Statement of
financial position

Recording sale
of bonds

Holdings of more
than 50%

Realized and
unrealized gain
or loss
Classified
statement of
financial position

Slide
12-3

Why Corporations 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
12-4

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

Why Corporations Invest

Question
Pension funds and banks regularly invest in debt and
share securities to:
a. house excess cash until needed.
b. generate earnings.
c. meet strategic goals.
d. avoid a takeover by disgruntled investors.

Slide
12-5

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

Accounting for Debt 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
12-6

SO 2 Explain the accounting for debt investments.

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
12-7


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
12-8

54,000
54,000


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 ½ = $2,000)
Slide
12-9


Illustration: If Kuhl Corporation’s 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

Slide
12-10

Cash
Interest receivable

2,000
2,000

SO 2

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
12-11

54,000
4,000



Question
An event related to an investment in debt securities that
does not require a journal entry is:
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.

Slide
12-12



Question
When bonds are sold, the gain or loss on sale is the
difference between the:
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.

Slide
12-13


Accounting for Share 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
parent’s books using Cost
Method or Equity Method
(investment eliminated in
Consolidation)

The accounting depends on the extent of the investor’s influence over
the operating and financial affairs of the issuing corporation.
Slide
12-14

SO 3 Explain the accounting for share 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
12-15


Holdings of Less than 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
12-16

40,500
40,500


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

Slide
12-17

2,000


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
12-18

1,000
40,500


Holdings Between 20% and 50% (Equity Method)
Record the investment at cost and subsequently adjust
the amount each period for
 the investor’s proportionate share of the earnings

(losses) and
 dividends received by the investor.
If investor’s share of investee’s losses exceeds the carrying amount of
the investment, the investor ordinarily should discontinue applying the
equity method.
Slide
12-19


Holdings Between 20% and 50%

Question
Under the equity method, the investor records
dividends received by crediting:
a. Dividend Revenue.
b. Investment Income.
c. Revenue from Investment.
d. Share Investments.

Slide
12-20


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
12-21

30,000

12,000
12,000


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
120,000
30,000

Revenue from Investments

Credit

Debit

Credit
30,000

12,000

138,000
Slide
12-22


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 parent’s books as

a long-term investment.
 Parent generally prepares consolidated financial statements.

Slide
12-23

SO 4 Describe the use of consolidated financial statements.

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
12-24

SO 4 Describe the use of consolidated financial statements.

Answer
on notes
page
Slide
12-25

Valuing and Reporting 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
12-26

SO 5 Indicate how debt and share investments are
reported in financial statements.

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
12-27


Fair Value Through Profit or Loss (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 adjustment—FVPL
Unrealized gain—income

Slide
12-28

7,000
7,000


29

Answer on notes page

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
12-30



Question
Marketable securities bought and held primarily for sale
in the near term are classified as:
a. Available-for-sale securities.
b. Held-to-maturity securities.

c. Share securities.
d. Fair value through profit or loss

Slide
12-31


Available-for-Sale 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 Loss—Equity account is used instead of
Unrealized Gain or Loss—Income.
The unrealized loss would be deducted from equity rather
than charged to income.

Slide
12-32


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 loss—equity
Market adjustment—AFS

Slide
12-33

9,537
9,537



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

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.

Slide
12-34


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.
Slide
12-35

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

Presentation of Realized and Unrealized Gain
or Loss
Nonoperating items related to investments
Illustration 12-10

Slide
12-36


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

Slide
12-37


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

Slide
12-38


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

Slide
12-39


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
12-40

Answers on
notes page

Equity
Non-current liabilities
Current liabilities


Understanding U.S. GAAP
Key Differences

Investments

Both IFRS and GAAP use the same criteria to determine
whether the equity method of accounting should be used—that
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 associate’s policies to conform to the investor’s books.
GAAP does not have that requirement.
Slide
12-41

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
12-42

The loans and receivables category does not exist under 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.

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
Slide
12-43

comprehensive income.

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
12-44

Preparing Consolidated Financial 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
12-45

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 Company’s 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
12-46

Illustration 12A-1

Slide
12-47

Use of a Worksheet—Cost Equal to Book Value
Illustration 12A-2

Slide
12-48

SO 7

Use of a Worksheet—Cost Above Book Value
Illustration: Assume the same data used above, except
that Powers Company pays $165,000 in cash for 100% of
Serto’s ordinary shares. The excess of cost over book
value is $15,000 ($165,000 - $150,000).

Slide
12-49

SO 7 Describe the content of a worksheet for a
consolidated statement of financial position.

Use of a Worksheet—Cost Above Book Value
Illustration 12A-3

Slide
12-50

SO 7

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
12-51

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


Slide
12-52

Illustration 12A-4


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
12-53


Copyright
“Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.”

Slide
12-54

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