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Investments
Financial Accounting,
Seventh Edition
Slide
12-1
Investments
Slide
12-2
Why Corporations Invest
Temporary
investments
and the
operating cycle
Slide
12-3 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.
Slide
12-4 SO 1 Discuss why corporations invest in debt and stock securities.
Accounting for Debt Instruments
Slide
12-5 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.
Slide
12-6 SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Slide
12-8 SO 2 Explain the accounting for debt investments.
Accounting for Debt Instruments
Cash 33,500 **
Debt investments 30,540 ***
Gain on sale 2,960
* ($20,000 x 8% x ½ = $800)
Slide
12-10 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.
Slide
12-11 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.
Slide
12-12 SO 2 Explain the accounting for debt investments.
Accounting for Stock Investments
Ownership Percentages
Slide
12-13 SO 3 Explain the accounting for stock investments.
Accounting for Stock Investments
Slide
12-14 SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Slide
12-15 SO 3 Explain the accounting for stock investments.
Holdings of Less than 20%
Slide
12-18 SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
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.
Slide
12-19 SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Instructions:
(a) Journalize the transaction
(b) Determine the amount to be reported as an
investment in Connors stock at December 31.
Slide
12-20 SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Cash 15,000
Stock investments ($60,000 x 25%) 15,000
Slide
12-21 SO 3 Explain the accounting for stock investments.
Holdings Between 20% and 50%
Slide
12-22 SO 3 Explain the accounting for stock investments.
Accounting for Stock Investments
Slide
12-23 SO 4 Describe the use of consolidated financial statements.
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.
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.
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.
Slide
12-35 SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Slide
12-36 SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Slide
12-37 SO 6 Distinguish between short-term and long-term investments.
Classified
Balance
Sheet
(partial)
Illustration 12-12
Slide
12-38 SO 6 Distinguish between short-term and long-term investments.
Balance Sheet Presentation
Solution on
Slide
notes page SO 6 Distinguish between short-term and long-term investments.
12-39