Financial accounting IFRS 4 kieoso ch13 PPT

Financial Accounting
IFRS 4th Edition

Weygandt ● Kimmel ● Kieso

Chapter 13

Investments


Chapter Outline
Learning Objectives
LO 1

Explain how to account for debt investments.

LO 2

Explain how to account for share investments.

LO 3

Indicate how debt and share investments are reported in financial statements.

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Learning Objective 1
Explain How to Account for Debt Investments

LO 1

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Why Companies Invest
Corporations purchase investments in debt or share securities for one of three reasons

1.

Company may have excess cash.

2.

To generate earnings from investment income.

3.

For strategic reasons.

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Why Companies Invest

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Accounting for Debt Investments
Debt investments are investments in government and company bonds.
Entries are made to record

1.

the acquisition,

2.

the interest revenue, and

3.

the sale.

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Recording Acquisition of Bonds (1 of 2)
At acquisition, investments are recorded at cost.
Cost includes all expenditures necessary to acquire these investments, such as the price paid
plus brokerage fees (commissions), if any.

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Recording Acquisition of Bonds (2 of 2)
Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000 bonds on January 1, 2020, at a cost of €50,000. The entry to record
the investment is:

Jan. 1

Debt Investments (50 ì 1,000)

50,000

Cash

50,000

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Recording Bond Interest (1 of 3)
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.

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Recording Bond Interest (2 of 3)
Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000 bonds on January 1, 2020, for €50,000. The bonds pay interest of
€4,000 annually on January 1 (€50,000 × 8%). If Kuhl NV’s fiscal year ends on December 31, it accrued the interest of
€4,000 earned since January 1.
The entry to accrue interest on Doan SA bonds is:

Dec. 31

Interest Receivable

4,000

Interest Revenue

4,000

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Recording Bond Interest (3 of 3)
Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000 bonds on January 1, 2020, for €50,000. The bonds pay interest of
€4,000 annually on January 1 (€50,000 × 8%). The entry to record receipt of accrued interest on January 1 is:

Jan. 1

Cash

4,000
Interest Receivable

4,000

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Recording Sale of Bonds (1 of 2)

•

Credit the investment account for the cost of the bonds.

•

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.

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Recording Sale of Bonds (2 of 2)
Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000 bonds on January 1, 2020, for €50,000. The bonds pay interest of
€4,000 annually on January 1 (€50,000 × 8%). Assume that Kuhl NV receives net proceeds of €54,000 on the sale of
the Doan SA bonds on January 1, 2021, after receiving the interest due. The entry to record the sale of the bonds is:

Jan. 1

Cash

54,000
Debt Investments

50,000

Gain on Sale of Debt Investments

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4,000

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DO IT! 1: Debt Investments (1 of 4)
Waldo AG had the following transactions pertaining to debt investments.
Jan. 1, 2020

Purchased 30, €1,000 Hillary AG 10% bonds for

€30,000. Interest is payable

annually on January 1.
Dec. 31, 2020

Accrued interest on Hillary AG bonds in 2020.

Jan. 1, 2021 Received interest on Hillary AG bonds.
Jan. 1, 2021 Sold 15 Hillary AG bonds for €14,600.
Dec. 31, 2021

Accrued interest on Hillary AG bonds in 2021.

Journalize the transactions.

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DO IT! 1: Debt Investments (2 of 4)
Jan. 1, 2020

Purchased 30, €1,000 Hillary AG 10% bonds for

€30,000. Interest is payable

annually on January 1.
Debt Investments 30,000
Cash

Dec. 31, 2020

30,000

Accrued interest on Hillary AG bonds in 2020.

Interest Receivable 3,000
Interest Revenue (€30,000 × 10%)

3,000

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DO IT! 1: Debt Investments (3 of 4)
Jan. 1, 2021 Received interest on Hillary AG bonds.
Cash 3,000
Interest Receivable

3,000

Jan. 1, 2021 Sold 15 Hillary AG bonds for €14,600.
Cash 14,600
Loss on Sale of Debt Investments

400

Debt Investments (30,000 ì 15/30)

15,000

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DO IT! 1: Debt Investments (4 of 4)
Dec. 31, 2021

Accrued interest on Hillary AG bonds in 2021.

Interest Receivable

1,500

Interest Revenue (€15,000 × 10%)

1,500

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Learning Objective 2
Explain How to Account for Share Investments

LO 1

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Accounting for Share Investments
Investor’s Ownership Interest in Investee’s Ordinary Shares

Insignificant influence on

Significant influence on

Controlling influence on

LessInvestee

than 20%

Betweeninvestee
20% and 50%

Moreinvestee
Than 50%

Cost method with adjustment
for fair value

Equity method

Consolidated financial
statements

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

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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 the price
paid plus any brokerage fees (commissions), if any.

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Recording Acquisition of Share Investments (2 of 4)

On July 1, 2020, Lee Ltd. acquires 1,000 shares (10% ownership) of Beal Ltd. Lee pays HK$405 per share. The entry
for the purchase is:

July 1

Share Investments (1,000 ì HK$405)
Cash

405,000
405,000

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Recording Dividends (3 of 4)
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 (1,000 ì HK$20)

20,000

Dividend Revenue

20,000

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Recording Sales of Shares (4 of 4)
Assume that Lee Corporation receives net proceeds of HK$395,000 on the sale of its Beal shares on February 10,
2021. Because the shares cost HK$405,000, Lee incurred a loss of HK$10,000. The entry to record the sale is:

Feb. 10

Cash (1,000 × HK$395)

395,000

Loss on Sale of Share Investments
Share Investments

10,000
405,000

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Holdings Between 20% and 50% (1 of 5)

•

Companies use the equity method.

•

Investment is recorded at cost and subsequently adjusts the investment account each period for
the:

• investor’s share of the associate’s net income and
ã dividends received by the investor.

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Recording Acquisition of Share Investments (2 of 5)

Milar plc acquires 30% of the ordinary shares of Beck plc for ₤120,000 on January 1, 2020. The entry to record the
transaction is:

Jan. 1

Share Investments

120,000

Cash

120,000

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