ACCT6328

Introduction to Accounting
Week 8 - Investments
 Learning 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.
 Why Corporations Invest
• Corporations purchase investments 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
 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.

Recording 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.
 Illustration
Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, €1,000 bonds on January 1,
2014, for €54,000, including brokerage fees of €1,000. The entry to record the
investment is:

Jan. 1 Debt investments 54,000

Cash 54,000

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 2,000

Interest revenue2,000
* (€50,000 x 8% x ½ = €2,000)
 Illustration
If Kuhl Corporation’s fiscal year ends on December 31, prepare
the entry to accrue interest since July 1.

Dec. 31Interest receivable 2,000

Interest revenue2,000

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

Jan. 1 Cash 2,000

Interest receivable 2,000
 Illustration
Assume that Kuhl corporation receives net proceeds of
€58,000 on the sale of the Doan Inc. bonds on January 1, 2015,
after receiving the interest due. Prepare the entry to record
the sale of the bonds.

Jan. 1Cash 58,000

Debt investments 54,000
Gain on sale of debt investments 4,000
 Accounting for Share
Investments
Investor’s Ownership Interest in Investee’s Ordinary Shares

The accounting depends on the extent of the investor’s influence over the
operating and financial affairs of the issuing corporation (the Investee).

1. < 20%  No significant influence on Investee, Investment valued using

Cost Method
2. 20% - 50%  Significant influence on Investee, Investment valued using
Equity Method
3. > 50%  Control usually exists, Investment valued on parent’s books
using Cost Method or Equity Method (investment eliminated in
Consolidation)
 Holding of Less than 20%
Companies use the cost method. Under the cost method,
companies record the investment at cost, and recognize
revenue only when cash dividends are received or when shares
are sold.

Cost includes all expenditures necessary to acquire these

investments, such as the price paid plus any brokerage fees
(commissions).
 Holding of Less than 20%

Recording Acquisition of Share Investments

On July 1, 2014, Lee Corporation acquires 1,000 shares (10% ownership) of
Beal Corporation. Lee pays HK$405 per share. The entry for the purchase
is:
July 1 Share investments 405,000
Cash 405,000

Recording Dividends
During the time Lee owns the shares, it makes entries for any cash
dividends received. If Lee receives a HK$20 per share dividend on
December 31, the entry is:
Dec. 31 Cash 20,000
Dividend revenue 20,000
 Holding of Less than 20%
Recording Sale of Share
Illustration: Assume that Lee Corporation receives net
proceeds of HK$395,000 on the sale of its Beal shares on
February 10, 2015. Because the shares cost HK$405,000, Lee
incurred a loss of HK$10,000. The entry to record the sale is:

Feb. 10Cash 395,000

Loss on sale of investments 10,000
Share investments 405,000
 Holding Between 20%
and 50%
Equity Method: Record the investment at cost and subsequently
adjusts the investment account each period for the
investor’s share of the associate’s net income 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.
 Illustration
Milar Corporation acquires 30% of the ordinary shares of Beck Company for
₤120,000 on January 1, 2014. For 2014, 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 120,000

Dec. 31Share investments (₤100,000 x 30%) 30,000

Revenue from share investments 30,000

Dec. 31Cash (₤40,000 x 30%) 12,000

Share investments 12,000
 Holdings of More than
50%
Parent Company - When a company owns more than 50% of
the ordinary shares of another entity.

 Subsidiary(affiliated) company – entity whose shares

are owned by the parent company.
 Parent generally prepares consolidated financial
statemen
 Valuing and Reporting
Investments
Categories of Securities
Debt investments are classified into two categories:
 Trading securities

 Held-for-collection securities

Share investments are classified into two categories:

 Trading securities

 Non-trading securities
These guidelines apply to all debt securities and to those share
investments in which the holdings are less than 20%.
 Trading Securities
 Companies hold trading securities with the intention of selling
them in a short period (generally less than a month).
 Trading means frequent buying and selling.
 Companies report trading securities at fair value, and report
changes from cost as part of net income.
 Classified as current asset.
 Trading Securities
Illustration: Investments of Pace Corporation are classified as trading
securities on December 31, 2014.

The adjusting entry for Pace Corporation is:

Dec. 31 Fair value adjustment—Trading 7,000
Unrealized gain—Income 7,000
 Non-Trading Securities
 These securities can be classified as current assets or as
non-current assets, depending on the intent of
management.
 Procedure for determining fair value and the unrealized
gain or loss for these securities is the same as for trading
securities.
 Companies report securities at fair value, and report
changes from cost as a component of equity.
 Non-Trading Securities
Illustration: Assume that Ingrao Corporation has two securities that it
classifies as non-trading.

The adjusting entry for Ingrao Corporation is:

Dec. 31 Unrealized gain or loss—Equity 9,537
Fair value adjustment—Non-trading 9,537
 Statement of Financial
Position Presentation
Short-Term Investments
Also called marketable securities, are 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.
 Reference
• Weygandt (2013), Financial Accounting, IFRS Edition, 2nd
edition, Wiley, Denver. ISBN: 9781118285909, chapter 12.
Thank You