Intermediate accounting 13th kieso warfield chapter 17

Chapter
17-1


CHAPTER

17

INVESTMENTS

Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Chapter
17-2


Learning
Learning Objectives
Objectives
1.

Identify the three categories of debt securities and describe the
accounting and reporting treatment for each category.

2.

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

3.

Identify the categories of equity securities and describe the accounting and
reporting treatment for each category.

4.

Explain the equity method of accounting and compare it to the fair value
method for equity securities.

5.

Describe the accounting for the fair value option.

6.

Discuss the accounting for impairments of debt and equity investments.

7.

Explain why companies report reclassification adjustments.

8.

Describe the accounting for transfer of investment securities between
categories.

Chapter
17-3

Investments
Investments

Investments in
Debt Securities

Investments in
Equity Securities

Other Reporting
Issues

Held-to-maturity
securities

Holdings of less than
20%

Impairment of value

Available-for-sale
securities

Holdings between 20%
and 50%

Trading securities

Holdings of more than
50%

Fair value option

Reclassification
adjustments
Transfers between
categories
Fair value
controversy
Summary

Chapter
17-4


Investment
Investment Accounting
Accounting Approaches
Approaches
Different motivations for investing:
To earn a high rate of return.
To secure certain operating or financing
arrangements with another company.

Chapter
17-5


Investment
Investment Accounting
Accounting Approaches

Approaches
Companies account for investments based on
 the type of security (debt or equity) and
 their intent with respect to the investment.
Illustration 17-1

Chapter
17-6


Investments
Investments in
in Debt
Debt Securities
Securities
Debt securities (creditor relationship):
Type

Accounting
Category

U.S. government
securities

Held-to-maturity

Municipal securities

Trading

Corporate bonds

Available-for-sale

Convertible debt
Commercial paper
Chapter
17-7

LO 1 Identify the three categories of debt securities and describe
the accounting and reporting treatment for each category.


Investments
Investments in
in Debt
Debt Securities
Securities
Accounting for Debt Securities by Category
Illustration 17-2

Chapter
17-8

LO 1 Identify the three categories of debt securities and describe
the accounting and reporting treatment for each category.


Held-to-Maturity
Held-to-Maturity Securities

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 effectiveinterest method unless the straight-line method yields
a similar result.
Chapter
17-9

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


Held-to-Maturity
Held-to-Maturity Securities
Securities
Illustration: KC Company purchased $100,000 of 8 percent
bonds of Evermaster Corporation on January 1, 2009, at a
discount, paying $92,278. The bonds mature January 1,
2014 and yield 10%; interest is payable each July 1 and
January 1. KC records the investment as follows:
January 1, 2009
Held-to-Maturity Securities

92,278

Cash

92,278
Chapter
17-10

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


Held-to-Maturity
Held-to-Maturity Securities
Securities
Illustration 17-3

Schedule of
Interest
Revenue and Bond
Discount
Amortization—
EffectiveInterest Method

Chapter
17-11

LO 2


Held-to-Maturity
Held-to-Maturity Securities
Securities
Illustration: KC Company records the receipt of the first

semiannual interest payment on July 1, 2009, as follows:
July 1, 2009
Cash

4,000

Held-to-Maturity Securities

614

Interest Revenue
4,614

Chapter
17-12

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


Held-to-Maturity
Held-to-Maturity Securities
Securities
Illustration: KC is on a calendar-year basis, it accrues
interest and amortizes the discount at December 31, 2009,
as follows:
December 31, 2009
Interest Receivable

4,000

Held-to-Maturity Securities

645

Interest Revenue
4,645

Chapter
17-13

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


Held-to-Maturity
Held-to-Maturity Securities
Securities
Reporting of Held-to-Maturity Securities
Illustration 17-4

Chapter
17-14

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


Held-to-Maturity
Held-to-Maturity Securities

Securities
Illustration: Assume that KC Company sells its investment
in Evermaster bonds on November 1, 2013, at 99.75 plus
accrued interest. KC records this discount amortization as
follows:
November 1, 2013
Held-to-Maturity Securities

635

Interest Revenue
635
$952 x 4/6 = $635
Chapter
17-15

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


Held-to-Maturity
Held-to-Maturity Securities
Securities
Computation of the realized gain on sale.

Cash

Illustration 17-5

102,417

Interest Revenue (4/6 x $4,000)
2,667
Chapter
17-16

Held-to-Maturity Securities
99,683

LO 2


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

Debt
Securities

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.

Chapter
17-17

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


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

Debt
Securities

Illustration (Single Security): Graff Corporation purchases
$100,000, 10 percent, five-year bonds on January 1, 2009,
with interest payable on July 1 and January 1. The bonds sell
for $108,111, which results in a bond premium of $8,111 and
an effective interest rate of 8 percent. Graff records the
purchase of the bonds on January 1, 2009, as follows.
Available-for-Sale Securities

108,111

Cash
108,111
Chapter
17-18

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


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

Debt
Securities
Illustration 17-6

Schedule of
Interest
Revenue and Bond
Premium
Amortization—
EffectiveInterest Method

Chapter
17-19

LO 2


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

Debt

Securities

Illustration (Single Security): The entry to record interest
revenue on July 1, 2009, is as follows.
Cash

5,000

Available-for-Sale Securities
676
Interest Revenue
4,324

Chapter
17-20

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


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

Debt
Securities

Illustration (Single Security): At December 31, 2009, Graff
makes the following entry to recognize interest revenue.
Interest Receivable

5,000

Available-for-Sale Securities
703
Interest Revenue
4,297

Graff reports revenue for 2009 of $8,621 ($4,324 + $4,297).

Chapter
17-21

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


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

Debt
Securities

Illustration (Single Security): To apply the fair value
method to these debt securities, assume that at year-end
the fair value of the bonds is $105,000 and that the
carrying amount of the investments is $106,732. Graff
makes the following entry.
Unrealized Holding Gain or Loss—Equity

Securities Fair Value Adjustment (AFS)

Chapter
17-22

1,732
1,732

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


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

Debt
Securities

Illustration (Portfolio of Securities): Webb Corporation
has two debt securities classified as available-for-sale. The
following illustration identifies the amortized cost, fair
value, and the amount of the unrealized gain or loss.
Illustration 17-7

Chapter
17-23

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

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

Debt
Securities

Illustration (Portfolio of Securities): Webb makes an
adjusting entry to a valuation allowance on December 31,
2010 to record the decrease in value and to record the loss
as follows.
Unrealized Holding Gain or Loss—Equity

9,537

Securities Fair Value Adjustment (AFS)

9,537

Webb reports the unrealized holding loss of $9,537 as other
comprehensive income and a reduction of stockholders’ equity.
Chapter
17-24

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

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

Debt
Securities

Sale of Available-for-Sale Securities
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
17-25

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