12 Investments
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
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 securities are investments in debt
and equity securities that are purchased and
held principally for the purpose of selling
them in the near term.
These securit es are reported at heir fair
market valu on he bal nce sheet date,
unrealized holding gains and losses are
included in net income of the period.
Intermediate Accounting 12 Investments
Investments in available-for-
sale securities are (a) debt
securities that are not
classified as being held to
maturity,and...
…(b) debt and equity
securities that are not
classified as trading
securities.
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 available-
for-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
Classification of Investments
Accounting for Investments
Reporting of
Unrealized Holding
Method Gains and Losses
Investment in Equity Securities
1,No significant influence
a,Trading Fair value Net Income
b,Available for sale Fair value Other comprehen-
sive income
2,Significant influence Equity method Not recognized
3,Control Consolidation Not recognized
Intermediate Accounting 12 Investments
Reporting of
Unrealized Holding
Method Gains and Losses
Investment in Debt Securities
1,Trading Fair value Net Income
2,Available for sale Fair value Other comprehen-
sive income
3,Held to maturity Amortized cost Not recognized
Intermediate Accounting 12 Investments
Accounting for 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
? 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
Investments in Available-for-Sale Debt
and Equity Securities
Kent Company purchases the following securities
on May 1,2003 as an investment in available-for-
sale securities:
Total $68,000
Intermediate Accounting 12 Investments
Investment in Available-for-Sale
Securities 68,000
Interest Revenue 625
Cash 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 750
Interest Revenue 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 125
Interest Revenue 125
Cash 3,000
Dividend Revenue 3,000
$15,000 x 0.10 x 1/12
During 2003 Kent Company receives
dividends of $3,000 from its investment in the
stocks of A,B,and C Companies.
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:
Cumulative
12/31/03 Change
Fair in Fair
Security Cost Value Value
100 shares of A Co,common stock $ 5,000 $ 6,000 $1,000
300 shares of B Co,common stock 24,000 23,500 (500 )
200 shares of C Co,preferred stock 24,000 26,000 2,000
D Company 10% bonds 15,000 15,500 500
Totals $68,000 $71,000 $3,000
Allowance for Change in Value
of Investment 3,000
Unrealized Increase/Decrease
in Value f Available-for-
Sale Securities 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
Security Cost Value Value
100 shares of A Co,common stock $ 5,000 $ 6,100 $1,100
300 shares of B Co,common stock 24,000 22,700 (1,300 )
200 shares of C Co,preferred stock 24,000 23,200 (800 )
D Company 10% bonds 15,000 14,000 (1,000 )
Totals $68,000 $66,000 $(2,000 )
Unrealized Increase/Decrease in
Value of Available-for-Sale Securities 5,000
Allowance for Change in Value of
Investment 5,000
Intermediate Accounting 12 Investments
Investments in Available-for-Sale Debt
and Equity Securities
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 6,000
Investment in Available-for-
Sale Securities 5,000
Gain on Sale of Available-for-
Sale Securities 1,000
The Unrealized Increase/Decrease in Value and the
allowance account are reduced by $1,100.
Intermediate Accounting 12 Investments
Cumulative
12/31/05 Change
Fair in Fair
Security Cost Value Value
300 shares of B Co,common stock $24,000 $23,500 $(500 )
200 shares of C Co,preferred stock 24,000 24,100 100
D Company 10 bonds 15,000 14,700 (300 )
Totals $63,000 $62,300 $(700 )Allowance for Change in Valueof Investment 2,400
Unrealized Increase/Decrease
in Value of Available-for-
Sale Securities 2,400
Intermediate Accounting 12 Investments
Sale of Available-for-Sale Securities
3,Investments in Held-to-
Maturity 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
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
Investments in Held-to-
Maturity Debt Securities
$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-to-
Maturity Debt Securities 102,458.71
Cash 102,458.71
Intermediate Accounting 12 Investments
Colburn Company records the first
interest receipt on June 30,2003 using
the effective interest method.
Cash 6,500.00
Investment in Held-to-
Maturity Debt Securities 352.48
Interest Revenue 6,147.52$100,000 x 0.13 x 1/2
$102,458.71 x,12 x 1/2
Intermediate Accounting 12 Investments
Accounting for Bond Premiums
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-to-
Maturity Debt Securities 97,616.71
Cash 97,616.71
Intermediate Accounting 12 Investments
Colburn Company records the first
interest receipt on June 30,2003 using
the effective interest method.
Cash 6,500.00
Investment in Held-to-
Maturity Debt Securities 333.17
Interest Revenue 6,833.17
$97,616.71 x,14 x 1/2
Intermediate Accounting 12 Investments
Accounting for Bond Discounts
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
the bonds mature on December 31,2005.
Investment in Held-to-Maturity
Debt Securities 204,575.07
Interest Revenue 6,500.00
Cash 211,075.07
$200,000 x
0.13 x 3/12
Continued
Intermediate Accounting 12 Investments
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 ?) +
$6,500$13,000 –
$12,637.25
Continued
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 ?) +
$6,500$13,000 –
$12,252.74
Intermediate Accounting 12 Investments
Amortization of Bonds Acquired
Between Interest Dates
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
for $102,000 plus accrued interest.
Investment in Held-to-Maturity
Debt Securities 198.61
Interest Revenue 198.61
($2,383.29 ÷
6) x ?
Continued
Intermediate Accounting 12 Investments
Cash 105,250.00
Interest Revenue 3,250.00
Investment in Held-to-Maturity
Debt Securities 98,609.76
Gain on Sale of Debt Securities 3,390.24
$102,000 +
$3,250 $100,000 x 0.13
x ?
$98,411.15 +
$198.61
Intermediate Accounting 12 Investments
Sale of Investment in Bonds Before
Maturity
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
In 2005 Kent transfers the Company A securities into
the trading category when the fair value is $6,300.
Investment in Trading Securities 6,300
Investment in Available-for-
Sale Securities 5,000
Gain on Transfer of Securities 1,300
Unrealized Increase/Decrease in
Value of Available-for-Sale Securities 1,100
Allowance for Change in Value of
Investment 1,100
Transfers of Investments
Between Categories
Intermediate Accounting 12 Investments
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-to-
Maturity 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-to-
maturity category,The current market value of the debt
securities is $9,500.
Investment in Held-to-Maturity Debt
Securities 9,500
Unrealized Increase/Decrease from
Transfer of Securities 500
Investment in Available-for-
Sale Securities 10,000
Continued
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 300
Unrealized Increase/Decrease in
Value of Available-for-Sale
Securities 300
Intermediate Accounting 12 Investments
Transfers of Investments
Between Categories
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 15,000
Investment in Held-to-Maturity
Debt Securities 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) $29,000
Plus,Allowance for change in value of
investment 500
Temporary investment in available-for-sale
securities (at fair value) $29,500
Noncurrent Assets
Investment in available-for-sale securities (at cost) $39,000
Plus,Allowance for change in value of investment 2,500
Investment in available-for-sale securities
(at fair value) $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
?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.
Equity Method
The equity method--
Intermediate Accounting 12 Investments
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
Investment = Acquisition Cost +
Investor’s
Share of
Investee
Income
Dividends
Received-–
where
Investor’s
Share of
Investee
Income
(Investee’s Net
Income= x Ownership %
Adjust-
ments–
Continued
Intermediate Accounting 12 Investments
Equity Method
Dividends Received =
Total
Dividends
Paid by
Investee
– Ownership %–
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 125,000
Cash 125,000
S Company paid a $20,000 dividend.
Cash 5,000
Investment in Stock,S Company 5,000
Continued
0.25 x
$20,000
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
Continued
25% of $81,000
25% of $73,000
25% of 8,000
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 non-
depreciable 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
Investment in S Company
Acquisition price January 1,2004 $125,000
Add,Share of 2004 reported ordinary
income $18,250
Share of 2004 reported extraordinary
income 2,000 20,250
$145,250
Less,Dividends received August 28,2004 $ 5,000
Depreciation on excess fair market
value of acquired assets 1,250 (6,250 )
Carrying value $139,000
Cliborn calculates its investment carrying value as follows:
Intermediate Accounting 12 Investments
Equity Method
The End
Accounting School ·Zhongnan
University of Economics & Law
ntermediate
Accounting
I
中级会计学
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 securities are investments in debt
and equity securities that are purchased and
held principally for the purpose of selling
them in the near term.
These securit es are reported at heir fair
market valu on he bal nce sheet date,
unrealized holding gains and losses are
included in net income of the period.
Intermediate Accounting 12 Investments
Investments in available-for-
sale securities are (a) debt
securities that are not
classified as being held to
maturity,and...
…(b) debt and equity
securities that are not
classified as trading
securities.
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 available-
for-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
Classification of Investments
Accounting for Investments
Reporting of
Unrealized Holding
Method Gains and Losses
Investment in Equity Securities
1,No significant influence
a,Trading Fair value Net Income
b,Available for sale Fair value Other comprehen-
sive income
2,Significant influence Equity method Not recognized
3,Control Consolidation Not recognized
Intermediate Accounting 12 Investments
Reporting of
Unrealized Holding
Method Gains and Losses
Investment in Debt Securities
1,Trading Fair value Net Income
2,Available for sale Fair value Other comprehen-
sive income
3,Held to maturity Amortized cost Not recognized
Intermediate Accounting 12 Investments
Accounting for 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
? 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
Investments in Available-for-Sale Debt
and Equity Securities
Kent Company purchases the following securities
on May 1,2003 as an investment in available-for-
sale securities:
Total $68,000
Intermediate Accounting 12 Investments
Investment in Available-for-Sale
Securities 68,000
Interest Revenue 625
Cash 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 750
Interest Revenue 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 125
Interest Revenue 125
Cash 3,000
Dividend Revenue 3,000
$15,000 x 0.10 x 1/12
During 2003 Kent Company receives
dividends of $3,000 from its investment in the
stocks of A,B,and C Companies.
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:
Cumulative
12/31/03 Change
Fair in Fair
Security Cost Value Value
100 shares of A Co,common stock $ 5,000 $ 6,000 $1,000
300 shares of B Co,common stock 24,000 23,500 (500 )
200 shares of C Co,preferred stock 24,000 26,000 2,000
D Company 10% bonds 15,000 15,500 500
Totals $68,000 $71,000 $3,000
Allowance for Change in Value
of Investment 3,000
Unrealized Increase/Decrease
in Value f Available-for-
Sale Securities 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
Security Cost Value Value
100 shares of A Co,common stock $ 5,000 $ 6,100 $1,100
300 shares of B Co,common stock 24,000 22,700 (1,300 )
200 shares of C Co,preferred stock 24,000 23,200 (800 )
D Company 10% bonds 15,000 14,000 (1,000 )
Totals $68,000 $66,000 $(2,000 )
Unrealized Increase/Decrease in
Value of Available-for-Sale Securities 5,000
Allowance for Change in Value of
Investment 5,000
Intermediate Accounting 12 Investments
Investments in Available-for-Sale Debt
and Equity Securities
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 6,000
Investment in Available-for-
Sale Securities 5,000
Gain on Sale of Available-for-
Sale Securities 1,000
The Unrealized Increase/Decrease in Value and the
allowance account are reduced by $1,100.
Intermediate Accounting 12 Investments
Cumulative
12/31/05 Change
Fair in Fair
Security Cost Value Value
300 shares of B Co,common stock $24,000 $23,500 $(500 )
200 shares of C Co,preferred stock 24,000 24,100 100
D Company 10 bonds 15,000 14,700 (300 )
Totals $63,000 $62,300 $(700 )Allowance for Change in Valueof Investment 2,400
Unrealized Increase/Decrease
in Value of Available-for-
Sale Securities 2,400
Intermediate Accounting 12 Investments
Sale of Available-for-Sale Securities
3,Investments in Held-to-
Maturity 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
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
Investments in Held-to-
Maturity Debt Securities
$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-to-
Maturity Debt Securities 102,458.71
Cash 102,458.71
Intermediate Accounting 12 Investments
Colburn Company records the first
interest receipt on June 30,2003 using
the effective interest method.
Cash 6,500.00
Investment in Held-to-
Maturity Debt Securities 352.48
Interest Revenue 6,147.52$100,000 x 0.13 x 1/2
$102,458.71 x,12 x 1/2
Intermediate Accounting 12 Investments
Accounting for Bond Premiums
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-to-
Maturity Debt Securities 97,616.71
Cash 97,616.71
Intermediate Accounting 12 Investments
Colburn Company records the first
interest receipt on June 30,2003 using
the effective interest method.
Cash 6,500.00
Investment in Held-to-
Maturity Debt Securities 333.17
Interest Revenue 6,833.17
$97,616.71 x,14 x 1/2
Intermediate Accounting 12 Investments
Accounting for Bond Discounts
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
the bonds mature on December 31,2005.
Investment in Held-to-Maturity
Debt Securities 204,575.07
Interest Revenue 6,500.00
Cash 211,075.07
$200,000 x
0.13 x 3/12
Continued
Intermediate Accounting 12 Investments
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 ?) +
$6,500$13,000 –
$12,637.25
Continued
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 ?) +
$6,500$13,000 –
$12,252.74
Intermediate Accounting 12 Investments
Amortization of Bonds Acquired
Between Interest Dates
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
for $102,000 plus accrued interest.
Investment in Held-to-Maturity
Debt Securities 198.61
Interest Revenue 198.61
($2,383.29 ÷
6) x ?
Continued
Intermediate Accounting 12 Investments
Cash 105,250.00
Interest Revenue 3,250.00
Investment in Held-to-Maturity
Debt Securities 98,609.76
Gain on Sale of Debt Securities 3,390.24
$102,000 +
$3,250 $100,000 x 0.13
x ?
$98,411.15 +
$198.61
Intermediate Accounting 12 Investments
Sale of Investment in Bonds Before
Maturity
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
In 2005 Kent transfers the Company A securities into
the trading category when the fair value is $6,300.
Investment in Trading Securities 6,300
Investment in Available-for-
Sale Securities 5,000
Gain on Transfer of Securities 1,300
Unrealized Increase/Decrease in
Value of Available-for-Sale Securities 1,100
Allowance for Change in Value of
Investment 1,100
Transfers of Investments
Between Categories
Intermediate Accounting 12 Investments
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-to-
Maturity 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-to-
maturity category,The current market value of the debt
securities is $9,500.
Investment in Held-to-Maturity Debt
Securities 9,500
Unrealized Increase/Decrease from
Transfer of Securities 500
Investment in Available-for-
Sale Securities 10,000
Continued
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 300
Unrealized Increase/Decrease in
Value of Available-for-Sale
Securities 300
Intermediate Accounting 12 Investments
Transfers of Investments
Between Categories
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 15,000
Investment in Held-to-Maturity
Debt Securities 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) $29,000
Plus,Allowance for change in value of
investment 500
Temporary investment in available-for-sale
securities (at fair value) $29,500
Noncurrent Assets
Investment in available-for-sale securities (at cost) $39,000
Plus,Allowance for change in value of investment 2,500
Investment in available-for-sale securities
(at fair value) $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
?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.
Equity Method
The equity method--
Intermediate Accounting 12 Investments
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
Investment = Acquisition Cost +
Investor’s
Share of
Investee
Income
Dividends
Received-–
where
Investor’s
Share of
Investee
Income
(Investee’s Net
Income= x Ownership %
Adjust-
ments–
Continued
Intermediate Accounting 12 Investments
Equity Method
Dividends Received =
Total
Dividends
Paid by
Investee
– Ownership %–
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 125,000
Cash 125,000
S Company paid a $20,000 dividend.
Cash 5,000
Investment in Stock,S Company 5,000
Continued
0.25 x
$20,000
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
Continued
25% of $81,000
25% of $73,000
25% of 8,000
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 non-
depreciable 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
Investment in S Company
Acquisition price January 1,2004 $125,000
Add,Share of 2004 reported ordinary
income $18,250
Share of 2004 reported extraordinary
income 2,000 20,250
$145,250
Less,Dividends received August 28,2004 $ 5,000
Depreciation on excess fair market
value of acquired assets 1,250 (6,250 )
Carrying value $139,000
Cliborn calculates its investment carrying value as follows:
Intermediate Accounting 12 Investments
Equity Method
The End
