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JohnWiley&Sons,Inc.FinancialAccounting,5ePreparedbyKurtM.Hull,MBACPACaliforniaStateUniversity,LosAngelesWeygandt,Kieso,&KimmelCHAPTER13INVESTMENTSSTUDYOBJECTIVESAfterstudyingthischapter,youshouldunderstand:WhycorporationsinvestindebtandstocksecuritiesConsolidatedfinancialStatementsAccountingfordebtinvestmentsValuationofdebtandstockinvestmentsAccountingforstockinvestmentsShort-termvs.long-terminvestmentsReasonTypicalInvestmentTohouseexcesscashuntilneededLow-risk,high-liquidity,short-termsecuritiessuchasgovernment-issuedsecuritiesTogenerateearningsIneed1,000Treasurybillsbytonight!Debtsecurities(banksandotherfinancialinstitutions);andstocksecurities(mutualfundsandpensionfunds)Tomeetstrategic
goalsStocksofcompaniesinarelatedindustryorinanunrelatedindustrythatthecompanywishestoenterSTUDYOBJECTIVE1WHYCORPORATIONSINVESTThebondspay$2,000interestonJuly1andJanuary1($50,000x8%x?).TheJuly1entryis:Itisnecessarytoaccrue$2,000interestearnedsinceJuly1atyear-end.TheDecember31entryis:DateAccountTitlesandExplanationDebitCreditJuly1CashInterestRevenue(TorecordreceiptofinterestonDoanInc.bonds)2,0002,000DateAccountTitlesandExplanationDebitCreditDec.31InterestReceivableInterestRevenue(ToaccrueinterestonDoanInc.bonds)2,0002,000RECORDINGBONDINTERESTOnJanuary1,2007,KuhlCorporationreceivesnetproceedsof$58,000onthesaleoftheDoanInc.bonds.Theentrytorecordthesaleandrecognizethegainis:DateAccountTitlesandExplanationDebitCreditJan.1CashDebtInvestmentsGainonSaleofDebtInvestments(TorecordsaleofDoanInc.bonds)58,00054,0004,000RECORDINGSALEOFBONDSPROCEEDS–COST=GAINorLOSSREVIEWQUESTIONOnFebruary6,HanesCompanysellsdebtinvestmentscosting$26,000for$28,000.
Preparethejournalentrytorecordthesale.26,000DebtInvestments2,000GainonSale28,000CashFeb6CreditDebitAccountsDateProceeds–Cost=GainorLossOnJuly1,2006,SanchezCorporationacquires1,000shares(10%)ofBealCorporationcommonstockfor$40pershareplusbrokeragefeesof$500.Theentryforthepurchaseis:DateAccountTitlesandExplanationDebitCreditJuly1StockInvestmentsCash(Torecordpurchaseof1,000sharesofBealCorporationcommonstock)40,50040,500RECORDINGSTOCKINVESTMENTSHOLDINGS<20%COSTMETHOD
Recordinvestmentatcost.Recognizerevenuewhencashdividendsarereceived.DateAccountTitlesandExplanationDebitCreditDec.31Cash(1,000x$2)DividendRevenue(Torecordreceiptofacashdividend)2,0002,000RECORDINGDIVIDENDSHOLDINGS<20%OnDecember31,SanchezCorporationreceivesa$2persharecashdividend.Dividendrevenueisreportedontheincomestatementunder“Otherrevenuesandgains.”
RECORDINGSTOCKINVESTMENTSHOLDINGSBETWEEN20%&50%EQUITYMETHOD
Recordinvestmentatcost.Investmentaccountadjustedannuallyfordividendsreceivedandshareofinvesteenetincome.PercentofinvesteenetlossPercentofinvesteenetincomeDividendsreceivedCostofinvestmentCreditDebit OnJanuary1,2006,MilarCorporationacquires30%ofthecommonstockofBeckCompanyfor$120,000.Theentrytorecordthistransactionis:DateAccountTitlesandExplanationDebitCreditJan.1StockInvestmentsCash(TorecordpurchaseofBeckcommonstock)120,000120,000RECORDINGACQUISITIONSHOLDINGSBETWEEN20%&50%
StockInvestments
January1
120,000
December31
12,000
December31
30,000
December31Balance
138,000
RevenuefromInvestmentinBeckCompany
December31
30,000
INVESTMENTANDREVENUEACCOUNTSAFTERPOSTINGMilar’sshareofBeck’snetincomeis$30,000.Thisincreasestheinvestment.Milardoesnotreceiveanycash.DividendsreceivedFromBeckreducetheinvestment.Milarreceives$12,000incash.IfBeckreportsanetloss,Milar’ssharewouldreducetheinvestment.APARENTCOMPANYownsmorethan50%ofthecommonstockofaSUBSIDIARYCOMPANY.TheparentcompanyhasaCONTROLLINGINTERESTinthesubsidiarycompany.CONSOLIDATEDFINANCIALSTATEMENTSareusuallyprepared.PARENTOWNS50%OFSUBA60%OFSUBB75%OFSUBCSTUDYOBJECTIVE4ACCOUNTINGFORSTOCKINVESTMENTSHOLDINGS>50%-CONSOLIDATIONSTradingWe’llsellwithintendays.Available-for-SaleWe’llholdthestockforawhiletoseehowitperforms.Held-to-MaturityWeintendtoholdthesebondsuntilmaturity.AtfairvaluewithchangesreportedinnetincomeAtfairvaluewithchangesreportedinthestockholders’equitysectionAtamortizedcostFairvalue=expectedcashrealizablevalueofthesecuritiessoldinnormalmarketconditions.STUDYOBJECTIVE5VALUINGANDREPORTINGINVESTMENTSFAIRMARKETVALUEHeldwiththeintentionofsellingtheminashortperiod.Reportedatfairvalue.ChangesfromcostarereportedasunrealizedgainsorlossesandincludedinNETINCOME.PaceCorporationholdingsareillustratedbelow:
TradingSecurities,December31,2006
Investments
Cost
FairValue
UnrealizedGain(Loss)
YorkvilleCompanybonds
$50,000
$48,000
$(2,000)
KodakCompanystock
90,000
99,000
9,000
Total
$140,000
$147,000
$7,000
TRADINGSECURITIESTradingsecuritiesareadjustedtomarketvalueatthebalancesheetdate.DateAccountTitlesandExplanationDebitCreditDec.31MarketAdjustment—TradingUnrealizedGain—Income(Torecordunrealizedgainontradingsecurities)7,000 7,000VALUATIONANDREPORTINGOFTRADINGSECURITIESFAIRVALUE–COST=UNREALIZEDGAIN(LOSS)FairvalueonbalancesheetUnrealizedgain/lossonincomestatementREVIEWQUESTIONAttheendofthefirstyearofoperations,thetotalcostofatradingsecuritiesportfoliois$120,000.Fairvalueis$115,000.Preparethejournalentrytoadjustthesecuritiestofairvalue.IncomeStatement(toadjusttradingportfoliotomarket)5,000Short-terminvestments5,000UnrealizedlossontradingsecuritiesDec31CreditDebitAccountsDateDateAccountTitlesandExplanationDebitCreditDec.31UnrealizedLoss—EquityMarketAdjustment—Available-for-Sale(Torecordunrealizedlossonavailable-for-salesecurities)9,5379,537Availableforsalesecuritiesareadjustedtomarketvalueatthebalancesheetdate.FAIRVALUE–COST=UNREALIZEDGAIN(LOSS)FairvalueonbalancesheetUnrealizedgain/lossinstockholders’equityVALUATIONANDREPORTINGOFAVAILABLEFORSALESECURITIESShort-terminvestmentsarereadilymarketable,andIntendedtobeconvertedintocashwithinthenextyearoroperatingcycle,whicheverislonger.Listedonbalancesheetimmediatelybelowcash.Reportedatfairvalue.
PACECORPORATION
BalanceSheet(partial)
Currentassets
Cash
$21,000
Short-termInvestmentsatfairvalue
147,000
STUDYOBJECTIVE6SHORT-TERMvs.LONG-TERMINVESTMENTSLong-terminvestmentsarereported onthebalancesheetimmediatelybelowcurrentassets.Intheincomestatement,theitemsbelowarereportedinthenon-operatingsection:LONG-TERMINVESTMENTSBALANCESHEETPRESENTATIONAnunrealizedgainorlossonavailable-for-salesecuritiesisreportedasaseparatecomponentofstockholders’equity.Thestatementpresentationoftheunrealizedlossisshownbelow.DAWSONINC.PartialBalanceSheetStockholders’equityCommonstock$3,000,000Retainedearnings1,500,000Totalpaid-incapitalandretainedearnings
4,500,000Less:Unrealizedlossonavailable-for-salesecurities(100,000)Totalstockholders’equity$4,400,000UNREALIZEDLOSSINSTOCKHOLDERS’EQUITY
LiabilitiesandStockholders’Equity
Currentliabilities
Accountspayable
$185,000
Bondinterestpayable
10,000
Federalincometaxespayable
60,000
Totalcurrentliabilities
255,000
Long-termliabilities
Bondspayable,10%,due2010
$300,000
Less:Discountonbonds
10,000
TotalLong-termliabilities
290,000
Totalliabilities
545,000
Stockholders’equity
Paid-incapital
Commonstock,$10parvalue,200,000shares
authorized,80,000issuedandoutstanding
800,000
Paid-incapitalinexcessofparvalue
100,000
Totalpaid-incapital
900,000
Retainedearnings(Note2)
255,000
Totalpaid-incapitalandretainedearnings
1,155,000
Add:Unrealizedgainonavailablefor-salesecurities
10,000
Totalstockholders’equity
1,165,000
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