Accounting tools for business decision making 7 kieo app h
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Accounting: Tools for Business
Decision Making
Seventh Edition
Kimmel; Weygandt; Kieso
Appendix H
Reporting and Analyzing Investments
Prepared by
COBY HARMON
University of California, Santa Barbara
Westmont College
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Chapter Outline:
Learning Objectives
LO 1 Explain how to account for debt investments.
LO 2 Explain how to account for stock investments.
LO 3 Discuss how debt and stock investments are
reported in the financial statements.
Copyright ©2019 John Wiley & Sons, Inc.
2
Learning Objective 1
Explain How to Account for Debt
Investments
LO 1
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3
Reasons Corporations Invest
Corporations purchase investments in debt or stock
securities generally for one of three reasons
1. Corporation may have excess cash
2. Generate earnings from investment income
3. For strategic reasons
LO 1
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4
Why Corporations Invest
Review Question
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.
LO 1
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5
Why Corporations Invest
Review Question Answer
Pension funds and banks regularly invest in debt and stock
securities to:
a. house excess cash until needed.
b. Answer: generate earnings.
c. meet strategic goals.
d. avoid a takeover by disgruntled investors.
LO 1
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6
Accounting for Debt Investments
• Consist of investments in government and corporation
bonds
• Entries are made to record
• the acquisition
• the interest revenue, and
ã the sale
LO 1
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7
Recording the Acquisition of Bonds
• Cost includes all expenditures necessary to acquire these
investments
• Such as the price paid plus brokerage fees (commissions)
Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%,
10-year, $1,000 bonds on January 1, 2022, for $50,000.
Entry to record the investment
Jan. 1
LO 1
Debt Investments (50 ì $1,000)
Cash
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50,000
50,000
8
Recording Bond Interest (1 of 3)
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
LO 1
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9
Recording Bond Interest (2 of 3)
Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds
on January 1, 2022, for $50,000. The bonds pay interest annually
on January 1. If Kuhl Corporation’s fiscal year ends on December
31, prepare the entry to accrue interest earned by December 31.
Bond Interest = $50,000 × 8% = $4,000
Dec. 31
LO 1
Interest Receivable
Interest Revenue
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4,000
4,000
10
Recording Bond Interest (3 of 3)
• At December 31
• Interest Receivable reported as a current asset in the balance sheet
• Interest Revenue reported under “Other revenues and gains” in
the income statement
Entry for receipt of the interest on January 1 of the following
year
Jan. 1
LO 1
Cash
Interest Receivable
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4,000
4,000
11
Recording Sale of Bond Investments (1 of 2)
• Credit investment account for cost of bonds
• Record as a gain or loss any difference between
• Net proceeds from sale (sales price less brokerage
fees), and
ã Cost of bonds
LO 1
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12
Recording Sale of Bond Investments (2 of 2)
Assume that Kuhl corporation receives net proceeds of
$53,000 on the sale of the Doan Inc. bonds on January 1,
2023, after receiving the interest due. Prepare the entry to
record the sale of the bonds.
Jan. 1
LO 1
Cash
Debt Investments
Gain on Sale of Debt Investments
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53,000
50,000
3,000
13
Accounting for Debt Investments
Review Question 1
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.
LO 1
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14
Accounting for Debt Investments
Review Question 1 Answer
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. Answer: a change in the name of the firm issuing the
debt securities.
d. sale of the debt investment.
LO 1
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15
Accounting for Debt Investments
Review Question 2
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.
LO 1
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16
Accounting for Debt Investments
Review Question 2 Answer
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. Answer: 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.
LO 1
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17
Learning Objective 2
Explain How to Account for Stock
Investments
LO 2
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18
Accounting for Stock Investments (1 of 2)
The accounting depends on the extent of the investor’s influence over the
operating and financial affairs of the issuing corporation (investee).
LO 2
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19
Holdings of Less Than 20% (1 of 4)
• Companies use the cost method
• Investment is recorded at cost and revenue recognized
only when cash dividends are received
• Cost includes all expenditures necessary to acquire
these investments, such as price paid plus any brokerage
fees (commissions), if any
LO 2
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20
Holdings of Less Than 20% (2 of 4)
Recording Acquisition of Stock
Illustration: On July 1, 2022, Sanchez Corporation acquires
1,000 shares (10% ownership) of Beal Corporation common
stock. Sanchez pays $40 per share.
Entry for the purchase
Jul. 1
LO 2
Stock Investments ($40 ì 1,000)
Cash
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40,000
40,000
21
Holdings of Less Than 20% (3 of 4)
Recording Dividends
Illustration: During the time Sanchez owns the stock it makes
entries for any cash dividends received. Sanchez receives a $2
per share dividend on December 31.
Entry for receipt of dividends
Dec. 31
LO 2
Cash (1,000 × $2)
Dividend Revenue
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2,000
2,000
22
Holdings of Less Than 20% (4 of 4)
Recording Sale of Stock
Illustration: Assume that Sanchez Corporation receives net
proceeds of $39,500 on the sale of its Beal stock on February
10, 2023. Because the stock cost $40,000, Sanchez incurred a
loss of $500.
Entry to record the sale on February 10
Feb. 10 Cash
Loss on Sale of Stock Investments
Stock Investments
LO 2
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39,500
500
40,000
23
Holdings Between 20% and 50% (1 of 4)
• Equity Method
• Investor records the investment at cost and
subsequently adjust the amount each period for the
• proportionate share of the earnings (losses)
• dividends received
• If investor’s share of investee’s losses exceeds the
carrying amount of the investment, the investor ordinarily
should discontinue applying the equity method
LO 2
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24
Holdings Between 20% and 50% (2 of 4)
Illustration: Milar Corporation acquires 30% of the common
shares of Beck Company for $120,000 on January 1, 2022. For
2022, Beck reports net income of $100,000 and paid dividends of
$40,000.
Entry to record purchase
Jan. 1
Stock Investments
Cash
120,000
120,000
Entry to record share of net income
Dec. 31 Stock Investments ($100,000 × 30%)
Revenue from Stock Investments
LO 2
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30,000
30,000
25
