Chapter 17-1 InvestmentsInvestments. Chapter 17-2 Investments in Debt Securities Investments in Equity Securities Held-to-maturity securities Available-for-sale

Chapter 17-1

InvestmentsInvestmentsInvestmentsInvestments

Chapter 17-2

Investments in Debt Investments in Debt

SecuritiesSecurities

Investments in Investments in

Equity SecuritiesEquity Securities

Held-to-maturity Held-to-maturity securitiessecurities

Available-for-sale Available-for-sale securitiessecurities

Trading securitiesTrading securities

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

Held-to-maturity Held-to-maturity securitiessecurities

Available-for-sale Available-for-sale securitiessecurities

Trading securitiesTrading securities

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

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

InvestmentsInvestmentsInvestmentsInvestments

Passive InvestmentsPassive Investments

Chapter 17-3

Investments in Debt SecuritiesInvestments in Debt SecuritiesInvestments in Debt SecuritiesInvestments in Debt Securities

Accounting for Debt Securities by Category

Chapter 17-4

Held-to-Maturity SecuritiesHeld-to-Maturity SecuritiesHeld-to-Maturity SecuritiesHeld-to-Maturity Securities

Classify a debt security as held-to-maturity only if it has both

(1) the positive intent and

(2) the ability to hold securities to maturity.

Accounted for at amortized cost, not fair value.

Amortize premium or discount using the effective-interest method unless the straight-line method—yields a similar result.

Chapter 17-5

Companies report available-for-sale securities at

fair value, with

unrealized holding gains and losses reported as part of comprehensive income (equity).

Any discount or premium is amortized.

Available-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale Securities

Chapter 17-6

Available-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale Securities

Sale of Available-for-Sale Securities

LO 2 Understand the procedures for discount and premium amortization on bond investments.

If company sells bonds before maturity date:

Must make entry to remove the,

Cost in Available-for-Sale Securities and

Securities Fair Value Adjustment accounts.

Any realized gain or loss on sale is reported in the “Other expenses and losses” section of the income statement.

Chapter 17-7

Trading SecuritiesTrading SecuritiesTrading SecuritiesTrading Securities

Companies report trading securities at

fair value, with

unrealized holding gains and losses reported as part of net income.

Any discount or premium is amortized.


Chapter 17-8

Pete Sampras Corporation purchased trading investment bonds for $40,000 at par. At December 31, Sampras received annual interest of $2,000, and the fair value of the bonds was $38,400.

Instructions

(a) Prepare the journal entry for the purchase of the investment.

(b) Prepare the journal entries for the interest received.

(c) Prepare the journal entry for the fair value adjustment.



Chapter 17-9

BE17-4 BE17-4 Prepare the journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment.

(a) Trading securities 40,000Cash 40,000

(b) Cash 2,000Interest revenue 2,000

(c) Unrealized Holding Loss - Income 1,600 Trading Securities 1,600


Chapter 17-10

Investments in Equity SecuritiesInvestments in Equity SecuritiesInvestments in Equity SecuritiesInvestments in Equity Securities

Represent ownership of capital stock.

Cost includes:

price of the security, plus

broker’s commissions and fees related to purchase.

The degree to which one corporation (investor) acquires an interest in the common stock of another corporation (investee) generally determines the accounting treatment for the investment subsequent to acquisition.

Chapter 17-11

0 --------------20% ------------ 50% -------------- 100%0 --------------20% ------------ 50% -------------- 100%

No significant influence usually exists

Significant influence usually exists

Control usually exists

Investment valued using Fair Value

Method

Investment valued using

Equity Method

Investment valued on parent’s books using

Cost Method or Equity Method (investment

eliminated in Consolidation)

Ownership PercentagesOwnership Percentages

Investments in Equity SecuritiesInvestments in Equity SecuritiesInvestments in Equity SecuritiesInvestments in Equity Securities

Chapter 17-12

Holdings of Less Than 20%Holdings of Less Than 20%Holdings of Less Than 20%Holdings of Less Than 20%

Accounting Subsequent to Acquisition

Market Price Available

Value and report the investment using

the fair value method.

Market Price Unavailable

Value and report the investment using

the cost method.*

* Securities are reported at cost. Dividends are recognized when received and gains or losses only recognized on sale of securities.

Chapter 17-13


Accounting and Reporting – Fair Value Method

Because equity securities have no maturity date, companies cannot classify them as held-to-maturity.

Chapter 17-14

Loxley Company has the following portfolio of securities at September 30, 2007, its last reporting date.


Trading Securities Cost Fair ValueDan Fogelberg, I nc. common (5,000 shares) 225,000$ 200,000$ Petra, I nc. preferred (3,500 shares) 133,000 140,000 Tim Weisberg Corp. common (1,000 shares) 180,000 179,000

On Oct. 10, 2007, the Fogelberg shares were sold at a price of $54 per share. In addition, 3,000 shares of Los Tigres common stock were acquired at $59.50 per share on Nov. 2, 2007. The Dec. 31, 2007, fair values were: Petra $96,000, Los Tigres $132,000, and the Weisberg common $193,000.

Chapter 17-15


Portfolio at September 30, 2007


538,000$ 519,000$

Securities Fair Value Adjustment - creditSecurities Fair Value Adjustment - credit ($19,000)($19,000)

Unrealized holding loss - income 19,000Trading Securities 19,000

Chapter 17-16

Prepare the journal entries to record the sale, purchase, and adjusting entries related to the trading securities in the last quarter of 2007.


Cash (5,000 x $54) 270,000Trading securities 200,000

October 10, 2007 (Fogelberg):

Gain on sale 70,000

Trading securities (3,000 x $59.50) 178,500Cash 178,500

November 2, 2007 (Los Tigres):

Chapter 17-17

Portfolio at December 31, 2007


Unrealized

Trading Securities Cost Fair Value Gain (Loss)

Petra, I nc. pref erred 140.000$ 96.000$ (44.000)$

Tim Weisberg Corp. common 179.000 193.000 14.000

Los Tigres common 178.500 132.000 (46.500)

497.500$ 421.000$ (76.500)

Unrealized holding loss - income 76,500Trading Securities 76,500

December 31, 2007:

Chapter 17-18

How would the entries change if the securities were classified as available-for-sale?


The entries would be the same The entries would be the same except that the

Unrealized Holding Gain or Loss—Equity account is used instead of Unrealized Holding Gain or Loss—Income.

The unrealized holding loss would be deducted from the stockholders’ equity section rather than charged to the income statement.

Chapter 17-19

Loxley Company has the following portfolio of securities at September 30, 2007, its last reporting date.



On Oct. 10, 2007, the Fogelberg shares were sold at a price of $54 per share. In addition, 3,000 shares of Los Tigres common stock were acquired at $59.50 per share on Nov. 2, 2007. The Dec. 31, 2007, fair values were: Petra $96,000, Los Tigres $132,000, and the Weisberg common $193,000.

Chapter 17-20


Portfolio at September 30, 2007


538,000$ 519,000$

Securities Fair Value Adjustment - creditSecurities Fair Value Adjustment - credit ($19,000)($19,000)

Unrealized holding loss - equity 19,000Available for sale Securities 19,000

Chapter 17-21

Prepare the journal entries to record the sale, purchase, and adjusting entries related to the trading securities in the last quarter of 2007.


Cash (5,000 x $54) 270,000Avail. For sale securities 200,000

October 10, 2007 (Fogelberg):

Gain on sale 45,000

Avail. For sale securities(3,000 x $59.50)178,500Cash 178,500

November 2, 2007 (Los Tigres):

Unrealized holding loss – equity 25,000

Chapter 17-22

Portfolio at December 31, 2007


Unrealized

Trading Securities Cost Fair Value Gain (Loss)

Petra, I nc. pref erred 140.000$ 96.000$ (44.000)$

Tim Weisberg Corp. common 179.000 193.000 14.000

Los Tigres common 178.500 132.000 (46.500)

497.500$ 421.000$ (76.500)

Unrealized holding loss - income 76,500 Avail. For sale securities 76,500

December 31, 2007:

Chapter 17-23

Financial Statement PresentationFinancial Statement PresentationFinancial Statement PresentationFinancial Statement Presentation

Report trading securities at aggregate fair value as current assets.

Report held-to-maturity and available-for-sale securities as current or noncurrent.

Chapter 17-24

Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%Holdings Between 20% and 50%

An investment (direct or indirect) of 20 percent or more of the voting stock of an investee should lead to a presumption that in the absence of evidence to the contrary, an investor has the ability to exercise significant influence over an investee.

In instances of “significant influence,” the investor must account for the investment using the equity method.

Chapter 17-25


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.

Chapter 17-26

On January 1, 2007, Pennington Corporation purchased 30% of the common shares of Edwards Company for $180,000. During the year, Edwards earned net income of $80,000 and paid dividends of $20,000.

Instructions

Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2007.


Chapter 17-27

Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2007.

Investment in Associates 180,000Cash 180,000

Cash 6,000 Investment in Associates 6,000

Investment in Associates 24,000 Investment Revenue 24,000


($20,000 x 30%)

($80,000 x 30%)

Chapter 17-28

Holdings of More Than 50%Holdings of More Than 50%Holdings of More Than 50%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 along with its solo financial statements.

Chapter 17-29

Investments at the Date of Investments at the Date of AcquisitionAcquisitionInvestments at the Date of Investments at the Date of AcquisitionAcquisitionRecording Investments at Cost (Parent’s Books)Stock investment is recorded at cost as measured

by fair value of the consideration given or consideration received, whichever is more clearly evident.

Consideration given may include cash, other assets, debt securities, stock of the acquiring company.

Chapter 17-30

Exercise: On January 1, 2008, Polo Company purchased 100% of the common stock of Save Company by issuing 40,000 shares of its (Polo’s) $10 par value common stock with a market price of $17.50 per share. The stockholders’ equity section of the two company’s balance sheets on December 31, 2007, were:

Common stock, $10 par value $350,000 $320,000

Other contributed capital 590,000 175,000

Retained earnings 380,000 205,000

Polo Save

Investments at the Date of Investments at the Date of AcquisitionAcquisitionInvestments at the Date of Investments at the Date of AcquisitionAcquisition

Chapter 17-31

Exercise: Prepare the journal entry on the books of Polo Company to record the purchase of the common stock of Save Company and related expenses.

Investment in Save (40,000 x $17.50) 700,000

Common Stock 400,000 Other Contributed Capital 300,000

Investments at the Date of Investments at the Date of AcquisitionAcquisitionInvestments at the Date of Investments at the Date of AcquisitionAcquisition

Chapter 17-32

Assets and liabilities are summed, regardless of whether the parent owns 100% or a smaller controlling interest.

Consolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapersConsolidated Balance Sheets: Use of Consolidated Balance Sheets: Use of WorkpapersWorkpapers

Minority interests are reflected as a component of owners’ equity.

Eliminations must be made to cancel the effects of transactions among the parent and its subsidiaries.

A work-paper is frequently used to summarize the effects of various additions and eliminations.

Chapter 17-33


Intercompany receivable (payable)

Intercompany payable (receivable)Against

Advances to subsidiary (from subsidiary)

Advances from parent (to parent)Against

Interest revenue (interest expense)

Interest expense (interest revenue)Against

Dividend revenue (dividends declared)

Dividends declared (dividend revenue)Against

Management fee received from subsidiary

Management fee paid to parentAgainst

Sales to subsidiary (purchases of inventory from subsidiary)

Purchases of inventory from parent (sales to parent)

Against

Parent’s AccountsSubsidiary’s

AccountsInvestment in subsidiary Equity accountsAgainst

Intercompany Accounts to Be Eliminated

Chapter 17-34

Balance Sheet P Company S CompanyCash 40,000$ 40,000$ Other current assets 280,000 100,000 Plant and equipment 240,000 80,000 Land 80,000 40,000 Investment in Sill 160,000

Total assets 800,000$ 260,000$

Liabilities 120,000$ 100,000$ Common stock 400,000 100,000 Other Contributed capital 80,000 20,000 Retained earnings 200,000 40,000

Total Liab. and Equity 800,000$ 260,000$


Price paid $160,000

% acquired 100%

Fair value 160,000

Book value 160,000

Difference $0

Fair value = Book value=Purchase Price

Illustration: Assume that on January 1, 2007, P Company acquired all the outstanding stock (10,000 shares) of S Company for cash of $160,000. What journal entry would P Company make to record the shares of S Company acquired?

Chapter 17-35


ConsolidatedBalance Sheet P Company S Company Debit Credit BalancesCash 40,000$ 40,000$ 80,000$ Other current assets 280,000 100,000 380,000 Plant and equipment 240,000 80,000 320,000 Land 80,000 40,000 120,000 Investment in Sill 160,000 160,000

Total assets 800,000$ 260,000$ 1,060,000$

Liabilities 120,000$ 100,000$ 220,000$ Common stock 400,000 100,000 500,000 Other Contributed capital 80,000 20,000 100,000 Retained earnings 200,000 40,000 240,000

Total Liab. and Equity 800,000$ 260,000$ 1,060,000$

Eliminations

Adjusting and eliminating entries are made on the workpaper for the preparation of consolidated statements.

Chapter 17-36


ConsolidatedBalance Sheet P Company S Company Debit Credit BalancesCash 40,000$ 40,000$ 80,000$ Other current assets 280,000 100,000 380,000 Plant and equipment 240,000 80,000 320,000 Land 80,000 40,000 120,000 Investment in Sill 160,000 160,000 -

Total assets 800,000$ 260,000$ 900,000$

Liabilities 120,000$ 100,000$ 220,000$ Common stock 400,000 100,000 100,000 400,000 Other Contributed capital 80,000 20,000 20,000 80,000 Retained earnings 200,000 40,000 40,000 200,000

Total Liab. and Equity 800,000$ 260,000$ 160,000$ 160,000$ 900,000$

Eliminations

Chapter 17-37


1. The investment account and related subsidiary’s stockholders’ equity have been eliminated and the subsidiary’s net assets substituted for the investment account.

2. Consolidated assets and liabilities consist of the sum of the parent and subsidiary assets and liabilities in each classification.

3. Consolidated stockholders’ equity is the same as the parent company’s equity.

Chapter 17-38

Purchase Cost Exceeds Fair Value of Subsidiary Company’s Equity—Partial Ownership.


Illustration: Assume that on January 1, 2007, P Company acquired 80% (8,000 shares) of the stock of S Company for $148,000. What journal entry would P Company make to record the shares of S Company acquired?

Investment in S Company $148,000

Cash $148,000

Chapter 17-39


Balance Sheet P Company S CompanyCash 52.000$ 40.000$ Other current assets 280.000 100.000 Plant and equipment 240.000 80.000 Land 80.000 40.000 Investment in Sill 148.000

Total assets 800.000$ 260.000$

Liabilities 120.000$ 100.000$ Common stock 400.000 100.000 Other Contributed capital 80.000 20.000 Retained earnings 200.000 40.000 Noncontrolling interest

Total Liab. and Equity 800.000$ 260.000$

The balance sheets of both companies immediately after the acquisition of shares is as follows:

Chapter 17-40


ConsolidatedBalance Sheet P Company S Company Debit Credit BalancesCash 52.000$ 40.000$ 92.000$ Other current assets 280.000 100.000 380.000 Plant and equipment 240.000 80.000 320.000 Land 80.000 40.000 120.000 Investment in Sill 148.000 148.000 - Goodwill 20.000 20.000

Total assets 800.000$ 260.000$ 932.000$

Liabilities 120.000$ 100.000$ 220.000$ Common stock 400.000 100.000 100.000 400.000 Other Contributed capital 80.000 20.000 20.000 80.000 Retained earnings 200.000 40.000 40.000 200.000 Minority interest 32.000 32.000

Total Liab. and Equity 800.000$ 260.000$ 180.000$ 180.000$ 932.000$

Eliminations

The work-paper to consolidate the balance sheets for P and S on Jan. 1, 2007, date of acquisition, is presented below:

Chapter 17-41

On January 1, 2007, Parker Company purchased 95% of the outstanding common stock of Sid Company for $160,000. At that time, Sid’s stockholders’ equity consisted of common stock, $120,000; other contributed capital, $10,000; and retained earnings, $23,000.

Required:

A. Prepare a consolidated statements workpaper on Dec. 31, 2007.

LO 3 Use of workpapers.LO 3 Use of workpapers.

Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Year of Acquisition

Chapter 17-42

On December 31, 2007, the two companies’ trial balances were as follows at right:

Required A. Prepare a consolidated statements workpaper on December 31, 2007.

Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Consolidated Statements After Consolidated Statements After AcquisitionAcquisition

Parker SidCash 62,000$ 30,000$ Accounts receivable 32,000 29,000 Inventory 30,000 16,000 Investment in Sid 160,000 - Plant and equipment 105,000 82,000 Land 29,000 34,000 Dividends declared 20,000 20,000 Cost of goods sold 130,000 40,000 Operating expenses 20,000 14,000

Total debits 588,000$ 265,000$

Accounts payable 19,000$ 12,000$ Other liabilities 10,000 20,000 Common stock 180,000 120,000 Other contributed capital 60,000 10,000 Retained earnings 40,000 23,000 Sales 260,000 80,000 Dividend income 19,000 -

Total credits 588,000$ 265,000$

LO 5 Workpapers eliminating entries.LO 5 Workpapers eliminating entries.

Chapter 17-43

Parker Sid Elimination ConsolidatedSales 260.000 80.000 340.000 COGS 130.000 - 40.000 - 170.000 - Operating Expenses 20.000 - 14.000 - 34.000 - Dividend Income 19.000 - 19.000 - - Minority Interest - - 1.300 - 1.300 - Net Income 129.000 26.000 20.300 - 134.700

Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Consolidated Statements After Consolidated Statements After AcquisitionAcquisition

Chapter 17-44

Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Consolidated Statements After Consolidated Statements After AcquisitionAcquisition Parker Sid Elimination Consolidated

Cash 62.000 30.000 92.000 Accounts Receivable 32.000 29.000 61.000 Inventory 30.000 16.000 46.000 Investments 160.000 - 160.000 - - PP&E 134.000 116.000 250.000 Goodwill - - 14.650 14.650 Total Assets 418.000 191.000 145.350 - 463.650

Accounts Payable 19.000 12.000 31.000 Other Liabilities 10.000 20.000 30.000 Share Capital 180.000 120.000 120.000 - 180.000 Other Capital 60.000 10.000 10.000 - 60.000 Retained Earnings 20.000 3.000 3.000 - 20.000 Net Income 129.000 26.000 20.300 - 134.700 Minority Interest - - 7.950 7.950 Total Liab. &SHEquity 418.000 191.000 145.350 - 463.650

Documents

Chapter 17-1 InvestmentsInvestments. Chapter 17-2 Investments in Debt Securities Investments in Equity Securities Held-to-maturity securities Available-for-sale