ACCT CH 15
three factors accounting for investments depend on:
1) Security type, either debt or equity; 2) the company's intent to hold the security either short term or long term; 3) the company's (investor's) percentage of ownership in the other company's (investee's) equity securities
fair value adjustment
A valuation account that when added to the amortized cost of the investment yields fair value; use of this account enables a company to maintain a record of its amortized cost of available-for-sale and trading securities.
Equity method
Accounting method used for long-term investments when the investor has "significant influence" over the investee.
INVESTOR'S BALANCE SHEET
Balance Sheet: Assets Investment in debt securities Investment in equity securities
INVESTEE'S BALANCE SHEET
Balance Sheet: Liabilities Notes Payable Bonds Payable Equity Common Stock Preferred Stock
An equity security is sold for $35,000 cash. The cost of the security was $30,000. What will the CREDITs be for the Journal Entries?
CR Long-Term Investments AFS for $30,000 CR Gain on Sale of Long-Term Investments $5,000
What would the Journal Entry be for a held-to-maturity security be when it reaches maturity?
Credit to Long-Term Investments - Held to Maturity
A company purchases 500 shares of common stock at par value for $15,000. Wendall records the purchase of available-for sale securities with what journal entry?
Debit to Long-Term Investments
Phoenix Co. paid $24,500 plus a $500 brokerage fee to buy a 5%, 2-yr bond payable with a $25,000 par value. The bonds pay interest semiannually. Phoenix intends to hold the bonds until they mature. What would the entry to reflect this purchase be?
Debit to Long-term investments for $25,000
Short-term investments
Debt and equity securities that management expects to convert to cash within the next 3 to 12 months (or the operating cycle if longer); also called temporary investments or marketable securities.
Held-to-maturity (HTM) securities
Debt securities that a company has the intent and ability to hold until they mature.
Alice Co. owns 1,000 shares of Ryder Inc. and classifies them as available-for-sale securities. On Sept. 2, Alice received $4,200 of cash dividends form Ryder. The journal entry to record this transaction would include a credit to which account?
Dividend Revenue
The group of trading securities is reported together as a portfolio at:_____________
Fair Value
The security is: available-for-sale the reporting will be:___________
Fair Value (unrealized gains and losses reported in the equity section of the balance sheet and in comprehensive income statement)
The security is: trading the reporting will be:___________
Fair Value (unrealized gains and losses reported on the income statement)
Consolidated financial statements
Financial statements that show all (combined) activities under the parent's control, including those of any subsidiaries.
Investee's Balance Sheet compared to nvestor's Balance Sheet
Investee's Bal. Sheet: Investor's Bal.Sheet: Liabilities N/P <---> Investment in debt securities B/P <------^ Equity Common Stock <-> invest. in equity securities Preferred Stock <----^
Available-for-sale (AFS) securities
Investments in debt and equity securities that are not classified as trading securities or held-to-maturity securities
Long-term investments
Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds.
Equity securities with controlling influence
Long-term investment when the investor is able to exert controlling influence over the investee; investors owning 50% or more of voting stock are presumed to exert controlling influence.
Equity securities with significant influence
Long-term investment when the investor is able to exert significant influence over the investee; investors owning 20 percent or more (but less than 50 percent) of voting stock are presumed to exert significant influence.
Comprehensive Income
Net change in equity for a period, excluding owner investments and distributions.
Where is unrealized gain/loss reported?
Other Revenues/Gains (Expenses/Losses) section on income statement
TechCom's portfolio of trading securities had a total cost of $11,500 and a fair value of $13,000 on December 31, 2016, the first year it held trading securities. What is the unrealized gain/loss?
The difference between the $11,500 cost and the $13,000 fair value reflects a $1,500 gain.
Music City paid $29,500 plus a $500 brokerage fee on June 30, 2016, to buy Dell's 7%, two-year bonds payable with a $30,000 par value. The bonds pay interest semiannually on January 1 and July 1. Music City intends to hold the bonds until they mature on June 30, 2018
They are classified as held-to-maturity (HTM). (If instead the maturity of the securities was short term, then they would be recorded in the Short-Term Investments—HTM account.) 6/30 DR Long-Term Invest.—HTM (Dell) 30,000 CR Cash 30,000 (Purchased bonds to be held to maturity) Assets=Liabilities+Equity (+30,000−30,000)
portfolio
a group of securities
The security is: Held-to-maturity the reporting will be:___________
amortized cost
The security is: controlling influence the reporting will be:___________
consolidation
Fierce Co. holds $50,000 in long-term debt securities. On Dec. 31, interest earned during the period on the securities equals $1,500. The adjusting entry to accrue interest will include:
debit to Interest Receivable credit to Interest Revenue
Trading securities
debt and equity securities that the company intends to actively trade for profit ALWAYS current assets
How do you find the book value of an investment under the equity method?
equals the cost of the investment plus the investor's share of earnings, minus its share of dividends, of the investee
The security is: significant influence the reporting will be:___________
equity method
Trading securities and available-for-sale securities are accounted for using what method?
fair value
Where do you report any unrealized gain (or loss) from a change in the fair value of the portfolio of trading securities?
income statement
income from influential investments is reported in the earnings from long term investment account. This account is a temporary account, closed to the______________ account.
income summary
Foreign exchange rate
price of one currency stated in terms of another currency
