Chapter 16-1 C H A P T E R 16 Investments. Chapter 16-2 1. 1.Discuss why corporations invest in debt and stock securities. 2. 2.Explain the accounting.

Chapter 16-1

C H A P T E R C H A P T E R 1616

Investments

Chapter 16-2

1. Discuss why corporations invest in debt and stock securities.

2. Explain the accounting for debt investments.

3. Explain the accounting for stock investments.

4. Describe the use of consolidated financial statements.

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

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

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 16-3

Why Why

Corporations Corporations

InvestInvest

Why Why

Corporations Corporations

InvestInvest

Cash Cash managementmanagement

Investment Investment incomeincome

Strategic Strategic reasonsreasons

Accounting for Accounting for

Debt Debt

InvestmentsInvestments


Debt Debt



Stock Stock



Stock Stock


Valuing and Valuing and

Reporting Reporting


Valuing and Valuing and

Reporting Reporting


Categories of Categories of securitiessecurities

Balance sheet Balance sheet presentationpresentation

Realized and Realized and unrealized gain unrealized gain or lossor loss

Classified Classified balance sheetbalance sheet

Holdings of less Holdings of less than 20%than 20%

Holdings Holdings between 20% between 20% and 50%and 50%

Holdings of more Holdings of more than 50%than 50%

Recording Recording acquisition of acquisition of bondsbonds

Recording bond Recording bond interestinterest

Recording sale Recording sale of bondsof bonds

Long-Term LiabilitiesLong-Term LiabilitiesLong-Term LiabilitiesLong-Term Liabilities

Chapter 16-4

Corporations generally invest in debt or stock securities for one of three reasons.

Why Corporations InvestWhy Corporations InvestWhy Corporations InvestWhy Corporations Invest

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

1. Corporation may have excess cash.

2. To generate earnings from investment income.

3. For strategic reasons.Illustration 16-1

Temporary investments

and the operating

cycle

Chapter 16-5

Pension funds and banks regularly invest in debt and stock securities to:

a. house excess cash until needed.

b. generate earnings.

c. meet strategic goals.

d. avoid a takeover by disgruntled investors.

QuestionQuestion

Why Corporations InvestWhy Corporations InvestWhy Corporations InvestWhy Corporations Invest

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

Chapter 16-6

Accounting for Debt InstrumentsAccounting for Debt InstrumentsAccounting for Debt InstrumentsAccounting for Debt Instruments

SO 2 Explain the accounting for debt investments.SO 2 Explain the accounting for debt investments.

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.

Chapter 16-7



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.

Chapter 16-8

Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, 2010, for $54,000, including brokerage fees of $1,000. The entry to record the investment is:

Debt investments 54,000

Cash 54,000



Jan. 1

Chapter 16-9

Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, 2010, 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:



Cash 2,000

Interest revenue 2,000

* ($50,000 x 8% x ½ = $2,000)

*July 1

Chapter 16-10

Illustration: If Kuhl Corporation’s fiscal year ends on December 31, prepare the entry to accrue interest since July 1.



Interest receivable 2,000

Interest revenue 2,000

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

Cash 2,000

Interest receivable 2,000

Dec. 31

Jan. 1

Chapter 16-11

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.



Cash 58,000

Debt investments 54,000

Gain on sale of investments 4,000

Jan. 1

Chapter 16-12

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.

QuestionQuestion



Chapter 16-13

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.

QuestionQuestion

Accounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt Investments


Chapter 16-14

Do it Do it Page 699 Page 699

Accounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt InvestmentsAccounting for Debt Investments


Chapter 16-1 C H A P T E R 16 Investments. Chapter 16-2 1. 1.Discuss why corporations invest in debt and stock securities. 2. 2.Explain the accounting.

Documents

debt investments accounting

debt instruments

stock investments valuing

temporary investments

stock securities

recording acquisition

acquisition of bonds

operating cycle slide