Intermediate accounting 17e by kieso ch17
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Intermediate Accounting
Seventeenth Edition
Kieso ● Weygandt ● Warfield
Chapter 17
Investments
Learning Objectives
After studying this chapter, you should be able to:
1. Describe the accounting for investments in debt
securities.
2. Describe the accounting for investments in equity
securities.
3. Explain the equity and consolidation methods of
accounting.
4. Evaluate other major issues related to investments in
debt and equity securities.
Copyright ©2019 John Wiley & Sons, Inc.
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Preview of Chapter 17
Investments
Investments in Debt Securities
• Debt investment classifications
• Held-to-maturity securities
• Available-for-sale securities
• Trading securities
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Preview of Chapter 17
Investments
Investments in Equity Securities
• Holdings of less than 20%
• Holdings between 20% and 50%
• Holdings of more than 50%
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Preview of Chapter 17
Investments
Other Financial Reporting Issues
• Fair value option
• Impairment of value
• Reclassification adjustments
• Transfers related to debt
• Securities
• Summary
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Learning Objective 1
Describe the Accounting for
Investments in Debt Securities
LO 1
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Investment in Debt Securities
Different motivations for investing:
• To earn a high rate of return.
• To secure certain operating or financing
arrangements with another company.
LO 1
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Investment in Debt Securities
Summary of Investment Accounting Approaches
Companies account for investments based on
• the type of security (debt or equity) and
• their intent with respect to the investment.
Type of Security
Debt
Equity
LO 1
Management Intent
Valuation Approach
No plans to sell
Plan to sell
Amortized cost
Fair value
Plan to sell
Exercise some control
Fair value
Equity method
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Debt Investment Classifications
Debt securities represent a creditor relationship:
Type
Accounting Category
• U.S. government
securities
• Held-to-maturity
• Municipal securities
• Available-for-sale
• Corporate bonds
• Trading
• Convertible debt
• Commercial paper
LO 1
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Debt Investment Classifications
Accounting for Debt Securities by Category
Category Valuation
Held-to- Amortized
maturity cost
Unrealized Holding
Gains or Losses
Not recognized
Other Income Effects
Interest when earned;
gains and losses from sale.
Trading
Fair value
securities
Recognized in net
income
Interest when earned;
gains and losses from sale.
Available Fair value
-for-sale
Recognized as other
comprehensive income
and as separate
component of
stockholders’ equity
Interest when earned;
gains and losses from sale.
LO 1
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Investment in Debt Securities
Held-to-Maturity Securities (Amortized Cost)
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.
LO 1
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Held-to-Maturity Securities (Amortized
Cost)
Illustration: Robinson Company purchased $100,000 of 8
percent bonds of Bush Corporation on January 1, 2019, at a
discount, paying $92,278. The bonds mature January 1, 2024
and yield 10%; interest is payable each July 1 and January 1.
Robinson records the investment as follows:
January 1, 2019
Debt Investments
Cash
LO 1
92,278
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92,278
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Schedule of Interest Revenue and
Bond Discount Amortization—
Effective- Interest Method
LO 1
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Amortized Cost – July 1, 2019
Robinson Company records the receipt of the first
semiannual interest payment on July 1, 2019, as follows:
Cash
Debt Investments
Interest Revenue
LO 1
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4,000
614
4,614
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Amortized Cost – December 31, 2019
Robinson is on a calendar-year basis, it accrues interest and
amortizes the discount at December 31, 2019, as follows:
Interest Receivable
Debt Investments
Interest Revenue
LO 1
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4,000
645
4,645
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Amortized Cost
Reporting of Held-to-Maturity Securities
LO 1
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Amortized Cost – November 1, 2023
Reporting of Held-to-Maturity Securities
Robinson Company sells its investment in Evermaster bonds
on November 1, 2023, at 99¾ plus accrued interest. The
discount amortization from July 1, 2023, to November 1, 2023,
is $635 (4∕6 × $952). Robinson records this discount
amortization as follows.
Debt Investments
Interest Revenue
LO 1
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635
635
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Amortized Cost – November 1, 2023
Computation of Gain on Sale of Bonds
Robinson records the sale of the bonds as:
Cash
Interest Revenue
Debt Investments
Gain on Sale of Investments
LO 1
102,417
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2,667
99,683
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Available-for-Sale Securities (Fair Value
Through Other Comprehensive Income
Companies report available-for-sale securities at
• fair value, with
• unrealized holding gains and losses reported
as other comprehensive income, a separate
component of stockholder’s equity, until
realized.
Any discount or premium is amortized.
LO 1
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Available-for-Sale Debt Securities
Example: Single Security
Graff Corporation purchases $100,000, 10 percent, five-year
bonds on January 1, 2019, 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, 2019, as follows.
Debt Investments
Cash
LO 1
108,111
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108,111
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Schedule of Interest Revenue and
Bond Premium Amortization—
Effective-Interest Method
LO 1
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Single Security – July 1, 2019
The entry to record interest revenue on July 1, 2019, is as follows.
Cash
Debt Investments
Interest Revenue
LO 1
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5,000
676
4,324
34
Single Security – Dec. 31, 2019
The entry to record interest revenue on Dec. 31, 2019, is as follows.
Interest Receivable
Debt Investments
Interest Revenue
LO 1
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5,000
703
4,297
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Fair Value Adjustment – Dec. 31, 2019
To apply the fair value method to these debt securities, assume that
at December 31, 2019 the fair value of the bonds is $105,000. Graff
makes the following entry.
Unrealized Holding Gain or Loss—Equity
Fair Value Adjustment
LO 1
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1,732
1,732
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Available-for-Sale Debt Securities
Example: Portfolio of Securities
Webb Corporation has two debt securities classified as availablefor-sale. The following illustration identifies the amortized cost, fair
value, and the amount of the unrealized gain or loss.
LO 1
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