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16-1
Chapter 16
Investments
Chapter
16-2 Accounting Principles, Ninth Edition
Study Objectives
Chapter
16-3
Long-Term Liabilities
Chapter
16-4
Why Corporations Invest
Temporary
investments
and the
operating cycle
Chapter
16-5 SO 1 Discuss why corporations invest in debt and stock securities.
Why Corporations Invest
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.
Chapter
16-6 SO 1 Discuss why corporations invest in debt and stock securities.
Accounting for Debt Instruments
Chapter
16-7 SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Sale of Bonds
Credit the investment account for the cost of the
bonds and 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.
Chapter
16-8 SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Exercise: Issel Corporation had the following transactions
pertaining to debt investments.
Jan. 1 Purchased 60, 8%, $1,000 Hollis Co. bonds for
$60,000 cash plus brokerage fees of $900.
Interest is payable semiannually on July 1 and
January 1.
July 1 Received semiannual interest on Hollis Co. bonds.
July 1 Sold 30 Hollis Co. bonds for $34,000 less $500
brokerage fees.
Instructions: (a) Journalize the transactions. (b) Prepare
the adjusting entry for the accrual of interest at December
31.
Chapter
16-9 SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Cash 33,500 **
Debt investments 30,450 ***
Gain on sale 3,050
* ($30,000 x 8% x ½ = $1,200)
Chapter
16-12 SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Question
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.
Chapter
16-13 SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Question
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.
Chapter
16-14 SO 2 Explain the accounting for debt investments.
Accounting for Stock Investments
Ownership Percentages
Chapter
16-16 SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Chapter
16-17 SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
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.
Question
Under the equity method, the investor records
dividends received by crediting:
a. Dividend Revenue.
b. Investment Income.
c. Revenue from Investment.
d. Stock Investments.
Chapter
16-21 SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Instructions:
Prepare the entries for Pennington to record the
purchase and any additional entries related to this
investment in Edwards Company in 2008.
Chapter
16-22 SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Cash 6,000
Stock investments ($20,000 x 30%) 6,000
Chapter
16-23 SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Chapter
16-25 SO 4 Describe the use of consolidated financial statements.
Chapter
16-26
Valuing and Reporting Investments
Categories of Securities
Companies classify debt and stock investments
into three categories:
Trading securities
Available-for-sale securities
Held-to-maturity securities
Trading Securities
Companies hold trading securities with the
intention of selling them in a short period.
Trading means frequent buying and selling.
Companies report trading securities at fair
value, and report changes from cost as part of
net income.
Available-for-Sale Securities
Companies hold available-for-sale securities
with the intent of selling these investments
sometime in the future.
These securities can be classified as current
assets or as long-term assets, depending on the
intent of management.
Companies report securities at fair value, and
report changes from cost as a component of the
stockholders’ equity section.
Chapter SO 5 Indicate how debt and stock investments
16-29
are reported in financial statements.
Valuing and Reporting Investments
Question
Marketable securities bought and held primarily for
sale in the near term are classified as:
a. available-for-sale securities.
b. held-to-maturity securities.
c. stock securities.
d. trading securities
Question
An unrealized loss on available-for-sale securities is:
a. reported under Other Expenses and Losses in
the income statement.
b. closed-out at the end of the accounting period.
c. reported as a separate component of
stockholders' equity.
d. deducted from the cost of the investment.
Short-Term Investments
Also called marketable securities, are securities
held by a company that are
(1) readily marketable and
(2) intended to be converted into cash within the
next year or operating cycle, whichever is
longer.
Chapter
16-38 SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Chapter
16-39 SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Chapter
16-40 SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Classified Balance Sheet (partial)
Illustration 16-12
Chapter
16-41 SO 6 Distinguish between short-term and long-term investments.
Copyright
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use of these programs or from the use of the information
contained herein.‖
Chapter
16-42