Acct Ch 14
What is the underlying objective of consolidated financial statements?
Consolidated financial statements attempt to portray the financial position, operating results, and cash flows of affiliated companies as a single economic unit so that the scope of the entire (whole) entity is more realistically conveyed.
marketable securities accounted for using equity method. (1) purchases 15,000 common shares at $8 cash per shares represent 25% ownership of Palepu. (2) receives a cash dividend of $0.80 per common share (3) Palepu reports annual net income of $120,000. (4) Healy sells all 15,000 common shares for $140,000 cash. a. Prepare journal entries to record these four transactions.
. 1 Investment in Palepu Co. (+A) ......................... 120,000 Cash (-A) ...................................................................... 120,000 2 Cash (+A) ..................................................................... 12,000 Investment in Palepu Co. (-A) ............................... 12,000 3 Investment in Palepu Co. (+A) .......................... 30,000 Investment revenue (+R, +SE) ............................... 30,000 4 Cash (+A) .................................................................. 140,000 Gain on sale of investment (+R, +SE) ................... 2,000 Investment in Palepu Co. (-A) ............................ 138,000
marketable securities accounted for using equity method. (1) Purchased 12,000 common shares at $9 cash per share; shares represent 30% ownership (2) Received a cash dividend of $1.25 per common share (3) Recorded income from stock investment when net income is $80,000. (4) Sold all 12,000 common shares for $120,500. a. Prepare journal entries to record these four transactions
1 Investment (+A) ............................................ 108,000 Cash (-A) ................................................................... 108,000 2 Cash (+A) ..................................................................... 15,000 Investment in Barth Co. (-A) ............................. 15,000 3 Investment in Barth Co. (+A) ......................... 24,000 Investment revenue (+R, +SE) .......................... 24,000 4 Cash (+A) ........................................................... 120,500 Gain on sale of investment (+R, +SE) .................. 3,500 Investment in Barth Co. (-A) ................................ 117,000
Four transactions involving investments in trading marketable securities classified (1) Purchased 6,000 common shares, for $12 cash per share (2) Received a cash dividend of $1.10 per common share (3) Year-end market price common stock is $11.25 per share. (4) Sold all 6,000 common shares for $66,900. a. Prepare journal entries to record the four transactions. b. Post the journal entries from part a to their respective T-accounts. c. Using the same transaction information as above and assuming classified as available-for-sale (i) prepare journal entries to record the transactions (ii) post the journal entries to their respective T-accounts.
1 Investment in Liu, Inc. (+A) .................................. 72,000 Cash (-A) ....................................................................... 72,000 2 Cash (+A) ..................................................................... 6,600 Dividend income (+R, +SE) ...................................... 6,600 3 Unrealized loss - AOCI (-SE) ............................ 4,500 Investment in Liu, Inc. (-A) ...................................... 4,500 4 Cash (+A) ................................................................... 66,900 Loss on sale of investment (+E, -SE) .................... 5,100 Unrealized loss - AOCI (+SE) ................................. 4,500 Investment in Liu, Inc. (-A) ..................................... 67,500
How can equity securities be categorized
1. Trading Securities - purchased with intention of selling in short term - recognized on income statement 2. Available for Sale - purchased with intention of selling in long run - recognized in other comprehensive income
Impact of Accounting for investments on Accounting Method
1. understand when gains/losses recognized in the income statement vs other comprehensive income 2. Investors must understand how the equity method impacts earnings 3. Consolidated financial reporting looks very different than the equity method 4. Be aware of the potential for earnings management with passive investments
Refer to the above and assume they did not intend to sell the stock in the near future. Record transactions and adjustments as an available-for-sale security.
2013 Investment in Lane, Inc. (+A) ......................... 170,000 Cash (-A) ................................................................. 170,000 Cash (+A) ................................................................... 10,000 Dividend income (+R, +SE) ................................ 10,000 Unrealized loss - AOCI (-SE)............................ 15,000 Investment in Lane, Inc. (-A) ............................. 15,000 2014 The adjusting entry can be done on the date of sale or 12/31/2014. Cash (+A) ................................................................... 150,000 Loss on sale of investment (+E, -SE) .............. 20,000 Unrealized loss - AOCI (+SE) ............................. 15,000 Investment in Lane, Inc. (-A) ............................ 155,000
stock investment classified as a trading security. 2015 Purchased 5,000 shares common stock at $16 per share plus a brokerage commission of $900. expects to sell the stock in the near future. Dec. 22 Received a cash dividend of $1.25 per share Dec. 31 Made the adjusting entry to reflect year-end fair value of the stock investment in Core. year-end market price of the common stock is $17.50 per 2016 Sold all 5,000 shares of common stock for $86,400. a. Prepare journal entries to record these transactions. Assume that when the shares were purchased, management did not intend to sell the stock in the near future. a. Prepare journal entries to record these transactions.
2015: 11/15 Investment in Core, Inc. (+A) ............ 80,900 Cash (-A) ................................................................ 80,900 12/22 Cash (+A) ........................................................... 6,250 Dividend income (+R, +SE) ................................... 6,250 12/31 Investment in Core, Inc. (+A) ...................... 6,600 Unrealized gain (+R, +SE) ........................................ 6,600 2016: 1/20 Cash (+A) ............................................................ 86,400 Loss on sale of investment (+E, -SE) .................... 1,100 Investment in Core, Inc. (-A) ............................ 87,500 ------------------------------- 2015: 11/15 Investment in Core, Inc. (+A) 80,900 Cash (-A) 80,900 12/22 Cash (+A) 6,250 Dividend income (+R, +SE) 6,250 12/31 Investment in Core, Inc. (+A) 6,600 Unrealized gain - AOCI (+SE) 6,600 2016: 1/20 Cash (+A) 86,400 Unrealized gain - AOCI (-SE) 6,600 Investment in Core, Inc. (-A) 87,500
What accounting method is used when a stock investment represents more than 50% of the investee company's voting stock? Explain.
A stock investment representing more than 50% of the investee company's voting stock is generally viewed as conferring "control" over the investee company. The investor and investee companies must be consolidated for financial reporting purposes.
What is an unrealized holding gain?
An unrealized holding gain (loss) is an increase (decrease) in the fair value of an asset (in this case, an investment security) that is still owned (i.e., that has not yet been sold).
Name and define the three categories for debt securities
trading securities - report at fair value on income statement available for sale securities - report at fair value with adjustments reported in other comprehensive income held to maturity - report at amortized cost
purchased, 10,000 shares of common stock for $15 cash per On December 31, 2016, net income of $80,000 for the year paid a cash dividend $1.10 per share market value of Leftwich's stock was $19 per share. a. Assume 15% of Leftwich's voting stock classifies it as available-for-sale. prepare journal entries b. 30% of Leftwich's voting stock equity method prepare journal entries,
Market Value Method (AFS Securities) 1 Investment in Leftwich Co. (+A) ..................... 150,000 Cash (-A) ..................................................................... 150,000 2 No entry 3 Cash (+A)...................................................................... 11,000 Dividend income (+R, +SE) ..................................... 11,000 4 Investment in Leftwich Co. (+A) .................... 40,000 Unrealized gain - AOCI (+SE) ............................ 40,000 Equity Value Method 1 Investment in Leftwich Co. (+A) .................... 150,000 Cash (-A) ......................................................... 150,000 2 Investment in Leftwich Co. (+A) ................. 24,000 Investment income (+R, +SE) ............................... 24,000 3 Cash (+A) ................................................................. 11,000 Investment in Leftwich Co. (-A) ......................... 11,000 4 No entry
P. At what amount is its available-for-sale investments reported on Cisco's 2011 balance sheet? B. How is its net unrealized gain reported by Cisco in its financial statements?
Original Cost + Unrecognized Gains - Unrealized Loses B. Appears in Stockholders Equity under Accumulated Other Comprehensive Income
Different degrees of control
Passive Influence: investor has little or no influence and generally less than 20% Significant Influence: investor can exert significant but not complete control and has between 20 but less than 50% Controlling Influence: the investor has control and 50% or more
What does significant influence imply regarding financial investments? Describe the accounting procedures used for such investments.
Significant influence gives the owner of the stock the ability to influence significantly the operating and financing activities of the company whose stock is owned. Normally, this is accomplished with a 20% through 50% ownership of the company's voting stock. The equity method is used to account for investments with significant influence. Such an investment is initially recorded at cost; the investment is increased by the proportionate share of the investee company's net income, and equity income is reported in the income statement; the investment account is decreased by dividends received on the investment; and the investment account is reported in the balance sheet at its book value. Unrealized appreciation in the market value of the investment is not recognized.
Where are unrealized holding gains and losses related to trading securities reported in the financial statements? Where are unrealized holding gains and losses related to availablefor-sale securities reported in the financial statements?
Unrealized holding gains and losses related to trading securities are reported in the current-year income statement (and also retained earnings). Unrealized holding gains and losses related to available-for-sale securities are reported as Other Comprehensive Income and are included in a component of stockholders' equity called Accumulated Other Comprehensive Income.
Stober Company purchases an investment purchase price of $1 million represents 30% of the book value of Lang. Lang reports net income of $100,000 Lang pays cash dividends of $40,000. At end of the year, fair value of the investment is $1.2 million a. At what amount is the investment reported on Stober's balance sheet at year-end? b. What amount of income from investments does Stober report? Explain. c. Stober's $200,000 unrealized gain in investment fair value (choose on to explain): 1. Is not reflected on either its income statement or balance sheet. 2. Is reported in current income. 3. Is reported on its balance sheet only. 4. Is reported in its other comprehensive income. d. Prepare journal entries to record the transactions and events above. e. Post the journal entries from part d to their respective T-accounts
a. -30% ownership = significant influence -use equity method The year-end balance of the investment account is computed as follows: Purchase Price................................................. $1,000,000 % income earned ($100,000 × 0.3)...................30,000 % Dividends received ($40,000 × 0.3).......... (12,000) Ending balance................................................. $1,018,000 b. $30,000 ($100,000 × 0.3) Equity earnings= investee net income x %ownership c. an unrealized gain is not reflected in either the balance sheet or the income statement. d. 1. Investment (+A) ............................................... 1,000,000 Cash (-A) ................................................................. 1,000,000 2. Investment (+A) ..................................................... 30,000 Investment income (+R, +SE) ................................ 30,000 3. Cash (+A) .................................................................... 12,000 Investment (-A) ........................................................... 12,000
Assume that Wasley Company purchases 6,000 common shares of Pincus Company for $12 cash per share. During the year, Wasley receives a cash dividend of $1.10 per common share from Pincus, and the year-end market price of Pincus common stock is $13 per share. How much income does Wasley report relating to this investment for the year if it accounts for the investment as: a. Available-for-sale investment? b. Trading investment?
a. dividends received = 6,000 shares × $1.10 per share --report as income on income statement --increase in the stock market price will not be recognized as income until the stock is sold. --Unrealized gains (losses) are reported as Accumulated Other Comprehensive Income in the stockholders' equity section of the balance sheet. b. --(#shares x dividend price) + ($change x #shares) --Both appear on Income Statement.
P Blouin Company had the following transactions and adjustment related to a trading security stock investment 2015 Nov. 15 Purchased 10,000 shares of Lane, Inc.'s common stock at $17 per share. Blouin expects to sell the stock in the near future. Dec. 22 Received a cash dividend of $1.00 per share of common stock from Lane. Dec. 31 Made the adjusting entry to reflect year-end fair value of the stock investment in Lane. The year-end fair value of the Lane common stock is $15.50 per share. 2016 Jan. 20 Sold all 10,000 shares of the Lane common stock for $150,000. a. Prepare journal entries to record these transactions. b. Post the journal entries from part a to their respective T-accounts.
a. 2015 Investment in Lane, Inc. (+A) .............................. 170,000 Cash (-A) ...................................................................... 170,000 Cash (+A) ........................................................................ 10,000 Dividend income (+R, +SE) ..................................... 10,000 Unrealized loss (+E, -SE) ......................................... 15,000 Investment in Lane, Inc. (-A) .................................. 15,000 2016 Cash (+A) ..................................................................... 150,000 Loss on sale of investment (+E, -SE) .................. 5,000 Investment in Lane, Inc. (-A) ............................... 155,000
a. Investments are classified as trading. (1) purchases 5,000 common shares at $16 cash per (2) receives cash dividend of $1.25 per common share (3) Year-end market price of common stock is $17.50 per (4) sells all 5,000 common shares for $86,400 cash. (i) prepare journal entries to record the four transactions b. Investments are classified as available-for-sale (i) prepare journal entries to record the transactions
a. Investments classified as trading securities 1 Investment (+A) .................................................... 80,000 Cash (-A) ...................................................................... 80,000 2 Cash (+A) ...................................................................... 6,250 Dividend income (+R, +SE) ....................................... 6,250 3 Investment (+A) .......................................................... 7,500 Unrealized gain (+R, +SE) ........................................... 7,500 4 Cash (+A) .................................................................... 86,400 Loss on sale (+E, -SE) .................................................... 1,100 Investment in Freeman, Co. (-A) ..........................87,500 Available for Sale Securities 1 Investment (+A) .................................................... 80,000 Cash (-A) .................................................................... 80,000 2 Cash (+A) ................................................................... 6,250 Dividend income (+R, +SE) .................................... 6,250 3 Investment (+A) ....................................................... 7,500 Unrealized gain - AOCI (+SE) .............................. 7,500 4 Cash (+A) ................................................................. 86,400 Unrealized gain - AOCI (-SE) ............................... 7,500 Gain on sale of investment (+R, +SE) ................. 6,400 Investment (-A) ......................................................... 87,500
What is the major difference between debt and equity securities
debt securities have a maturity date
what is equity investment control
degree of control that an investor company (i.e. the purchaser) can exert over the investee organization (i.e. the company whose securities are purchased) determines the method used to account for the investment Factors include % of voting ownership representation on board of directors interchange of key management personnel significant inter-company transactions
Accounting requirements for passive influence
reported on the balance sheet at fair value, based on a quoted price dividends are reported as income