summer accounting CHAP 10
short term investment
(marketable securities or temporary investments) current assets. investments in debt and equity securities that are highly liquid and that the investor intends to sell in one year or less
parent company subsidiary company
-a company that owns a controlling interest in another company-controls the other -a company that is controlled by another corporation
gains and losses included in comprehensive income
-unrealized holding gains/losses on AFS -foreign currency transaltion adjustments -gains or losses from post retirement benefit plans -deferred gains or losses from derivatives (all do NOT determine net income, but reported as other comprehensive income)
Unrealized gain or losses- Realized gain or losses-
-when a comp adjusts an asset to fair value but has not yet disposed of the asset -when a comp disposes of an asset and represent the diff between the cash received at time of disposal and carrying amount of the investment
2 reasons companies invest in securities
1. comp may have short term excess cash that doesnt need for normal operations-wants to make use so invests to generate investment income (investment income from interest from debt investments, dividends from stock investments, or increases in market value of secur) 2. comp may invest to pursue certain bus strategy. (ex a comp may invest in key vendors securities to further enhance a bus relationship-strengthening the comps supply chain source)
2 ways comps can finance assets
1. debt-comp borrow money from creditors to purchase assets-creditors earn interest on money loaned 2. equity-comp receive cash or other assets from stockholders-sh invest in comp and hope to receive a return on their investment
3 categories for the accounting for Equity securities-->based on percentage of ownership of the investor
1. equity securities with less than 20% ownership (cost method) 2. equity securities with 20% or more, but less than 50% ownership (equity method) 3. equity securities with 50% or more ownership (consolidations)
debt securities purchased in 3 ways
1. face value 2. discount 3. premium *if purchased at discount or premium-->must be amortized when interest rev is earned
accounting method for each: 1. trading investments 2. HTM 3. AFS 4. Significant interest 5. controlling interest
1. fair value:unrealized holding gain or loss included in net income 2. amortized cost 3. fair value:unrealized included in Other Comprehensive income and reported as separate component of stockholder equity 4. equity 5. consolidation
classification of investments: FIRST classified by length: two types: THEN classified by 5 types:
1. short term investments AND long term investements THEN 1. trading investments 2. held to maturity (HTM) investments 3. available for sale (AFS) investments 4. Significant interest investments 5. controlling interest investment
ex: trading investment bought stock for 12000. dividend of 600. sold stock 12450. entry 1: entry 2: entry 3:
1. short term investments DR 1200 cash CR 1200 *purchased investment in stock 2. cash DR 600 dividend revenue CR 600 *received cash dividend 3. cash DR 12450 short term investments CR 12000 gain on disposal CR 450 *disposed of investment ins tock
chart: debt, equity, or both?
1. trading-BOTH 2. HTM-Debt 3. AFS-BOTH 4. significant interest-Equity 5. controlling interest-equity
which investment is most likely classified as HTM investment? 1. 80% stock ownership 2. 10 year bonds 3. 100% ownership in voting stock of supplier 4. none of the above
2. 10 year bond
the trading investment value of 24,000 recorded in the-->
Balance sheet. Current assets: Short term investments- trading (fair value;cost 26,160) $24,000
3. Disposition at maturity ex: comp disposes of the bonds at maturity and will receive face value of the bonds and record entry:
Cash DR 100,000 Long term investments-HTM CR 100,000 *disposed of bond at maturity
Dividend revenue ex: cash dividend .16 per share to stockholders. entry:
Cash DR 160 dividend revenue CR 160 *received cash dividend
dividends received and share of net income ex: comp receives 20,000 dividends from comp. entry:
Cash DR 20,000 Long term investments-comp CR 20,000 *received cash dividend (equity method)
entry:
Cash DR 40,000 Loss on disposal DR 3000 long term investments-comp CR 43,000 *disposed of part of investment in stock (equity method)
2. interest revenue ex: receive first interest payment on bond investment and record receipt of interest on Dec 31:
Cash DR 4500 Interest Revenue (100,000x.9x6/12) CR 4,500 *received cash interest (repeat this entry every six months for 5 years) interest rev= amount x%x time
disposition ex: when comp sells its investment in other comp-determine if gain or loss. sells 10% of common stock for 40,000:
Cash received 40,000 Less: book value on date of disposal (40,000 x.10) 43,000 Gain or loss ($3,000)
comp owns 25% of voting stock of comp, dividends received will be recorded as:
Credit to Long term investments
why dividends is Credited in long term investments
DECREASES the investees equity and Decreases investors investment. treated as a return of capital rather than earnings
AFS ex: comp reported long term AFS of 60,000. after review, comp determine market value increased to 64,000-->Unrealized Holding Gain of 4,000. entry:
Fair Value Adjustment-AFS DR 4,000 Unrealized Holding Gain-AFS CR 4,000 *adjusted available for sale investments to market value (now combined t accounts of long term assets (60,000) and fair value adjustment (4000) are 64,000 for the investment on the balance sheet)
^^^^net income for that year
INCREASED by 1050 (600 dividend +gain on disposal)
unrealized holding loss recorded in the-->
Income statement. Other Revenue and Expenses: Unrealized Holding Loss-Trading $(2,160)
^^^balance sheet for this section
Long term assets: Long term assets-AFS (fair value; cost60,000) $64,000 Accumulated Other Comprehensive Income: Unrealized Holding Gain-AFS $4,000
purchase of equity securities ex: buy 1000 shares of stock in comp for 26.26 per share. owns less than 20% voting tock and will hold stock for 2 years. AFS investment. entry:
Long term investments-AFS (26.26 per share x 1000 shares) DR 26160 Cash CR 26160 *purchased investment in stock
1. purchase of debt securities ex: pay 100,000 to buy 9% 5 year bonds on july 1. intend to hold bonds to maturity so record as HTM investments. record investment in debt securities at cost including any brokerage fees paid. entry:
Long term investments-HTM DR 100,000 Cash CR 100,000 *purchased investment in bonds
^^ex: comp reported net income 125,000 for the year. other comp (investor) received 40% of amount as an increase in the investment account. entry:
Long term investments-comp DR 50,000 revenue from investments CR 50,000 *recorded revenue earned from investment (equity method)
comprehensive income statement ex:
Net income $100,000 Other Comprehensive Income: Unrealized Holding Gain-AFS 4,000 Comprehensive Income $104,000
ex: comp reported trading investments of 26,160. after evaluation concluded that market value of trading investment was decreases to 24,000. comp has an UNrealized LOSS of 2,160 (24,000-26,160. adjusting entry:
Unrealized Holding Loss-Trading DR 2,160 Fair Value Adjustment-Trading CR 2,160 *adjusted trading investments to market value
Fair Value Adjustment account
a contra account that is SUBtraced from Short term investment account
1. trading investments
a debt security or an equity security in which the investor holds less than 20% of the voting stock and that the investor plans to sell in the very near future with intent of generating a profit on a quick sale. categorized as current assets
2. Held to Maturity investment (HTM)
a debt security the investor intends to hold until it matures. b/c equity securities dont mature, ONLY applies to debt securites. current OR long term assets
Rate of Return on total assets (return on assets)
a ratio that measures a companys success in using assets to earn income/profit. =(Net Income + INterest expense)/Average total assets *assets actually AVERAGED (so add them all and divide by how many) *11% ratio would mean comp earned $.11 in profits from each 1.00 invested
security
a share or interest representing financial value
purchase with 20% or more but less than 50% ex: comp A pays 400,000 to purchase 40% of the common stock in comp B. they are now
affiliated companies
2 ways to report comprehensive income
as a second income statement, OR combined with a traditional income statement into a combined statement of comprehensive income
in equity method, investor records when investee net income. DEBITS long term investments and CREDITS revenue from investments when investee reports income
as comps equity Increases, so does long term investments account on the investors books *long term investment on Balance sheet, revenue from investments on Income statement
1. trading investments (investor plants to sell in very near future) recorded
at cost and must be adjusted and reported at Fair value
1. equity securities with less than 20% ownership (cost method)
can be either trading investments or available for sale AFS investments. diff b/ween this and accounting for debt securities--> equity securities earn DIVIDEND revenue instead of INTEREST revenue
entry for above^^^^
cash DR 25,000 long term investment AFS CR 20928 gain on disposal 4072 *disposed of investment in stock
disposition ex: comp sells 800 shares for 25,000. compare cash received with the cost of the stock disposed of and record gain or loss
cash received 25,000 less: cost of stock disposed of (800 shares x 26.26) 20928 Gain or loss 4,072
comprehensive income
companys change in total stockholders equity from all source other than owners investments and dividends. (other comprehensive income adjusted to net income to find this) net income plus some specific gains and losses
3. Available for sale (AFS) investment
debt securit or an equity security in which the investor holds less than 20% of the voting stock and that ISNT a trading investment or HTM investment. reported as Current assets if the bus expects to sell within a year. not planned to be held until maturity. either long term or current assets
4. Significant interest investments
equity security in which the investor owns 20% or More, but Less than 50% of the investees voting stock. Long term assets on balance sheet
5. controlling interest investments
equity security in which the investor owns 50% or more of the investees voting stock. consolidated into the investors financial statements
consolidated statements
financial statements that combine the balance sheets, income statements, and cash flow statements of the parent company with those of its controlling interest affiliates. almost as if one entity
3. equity securities with 50% or more ownership (Consolidations)
if own 50% or more-own a Controlling interest. enables investor to elect a majority of the board of directors and thereby control the investee
long term investment
investments in debt or equity securities the investor intends to hold for longer than one year or debt securities not readily marketable (stock investment in a small comp that is not traded on any stock exchange)
entry for above^^^
long term investments DR 400,000 cash CR 400,000 *purchased investment in stock (equity method)
3 ways debt securities are accounted for
purchase of debt securities interest revenue disposition at maturity
3. Held to Maturity investments HTM
reported at amortized cost. reported as Current or Long term asset on balance sheet. interest revenue earned from HTM reported on income statement in Other Revenues and Expenses section.
1. Debt security
represents a credit relationship with another company or governmental entity; typically pays interest for a fixed period. ex: US governmental securities, municipal bonds, corporate bonds
2. Equity security
represents stock ownership in another company that sometimes pays dividends. ex: common and preferred stock
investee
the corporation that issued the stock to the investor
2. Equities securities with 20% or more, but less than 50% ownership (equity method)
the investor can Significantly Influence the investees decisions. may be helpful if investees and investors bus are related
investor
the owner of a bond or stock of a corporation. invest EITHER debt securities or equity securities
fair value
the price that would be used if the investments were sold on the market. these adjustments are recorded as Unrealized holding gain or loss and reported in the Other revenue and expenses section of income statement
Consolidation accounting
the way to combine the financial statements of two or more companies that have the same owners. prepared by the parent company.
how securities are reported depends on
type of investments and ownership percentage
2. Available For sale investments AFS
use Fair value method too. either current assets on balance sheet or long term. reported at Current Market Value. must be adjusted (like trading invests) but gains and losses NOT reported on income statement-->recorded as adjustment to Unrealized Holding Gain-AFS account which are included in Other Comprehensive Income on Statement of Comprehensive INcome, a component of Accumulated Other Comprehensive Income in stockholders equity of balance sheet. NOT included in net income-included in comprehens which adjust net income