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CHAPTER 12
Investments
LEARNING OBJECTIVES
1. DISCUSS WHY CORPORATIONS INVEST IN DEBT AND
STOCK SECURITIES.
2. EXPLAIN THE ACCOUNTING FOR DEBT INVESTMENTS.
3. EXPLAIN THE ACCOUNTING FOR STOCK INVESTMENTS.
4. DESCRIBE THE USE OF CONSOLIDATED FINANCIAL
STATEMENTS.
5. INDICATE HOW DEBT AND STOCK INVESTMENTS ARE
REPORTED IN FINANCIAL STATEMENTS.
6. DISTINGUISH BETWEEN SHORT-TERM AND LONG-TERM
INVESTMENTS.
7. DESCRIBE THE FORM AND CONTENT OF CONSOLIDATED
FINANCIAL STATEMENTS AS WELL AS HOW TO
PREPARE THEM.
CHAPTER REVIEW
Why Corporations Invest
1. (L.O. 1) Corporations purchase investments because (1) they may have excess cash, (2) they
Accounting for Debt Investments
2. (L.O. 2) Debt investments are investments in government and corporation bonds. At acquisition,
3. Interest revenue must also be recorded on debt investments. Assume Bodhi Company (fiscal year
ends December 31) receives $2,000 interest every six months on a debt investment purchased
April 1, 2015. The following entries are required:
Oct. 1 Cash ......................................................................... 2,000
Interest Revenue ............................................... 2,000
Dec. 31 Interest Receivable ................................................... 1,000
Interest Revenue ............................................... 1,000
Apr. 1 Cash ......................................................................... 2,000
Interest Receivable ............................................ 1,000
Interest Revenue ............................................... 1,000
4. When bonds are sold, it is necessary to credit the Investment account for the cost of the bonds,
Accounting for Stock Investments
5. (L.O. 3) Stock investments are investments in the capital stock of corporations. The accounting
for stock investments differs depending on the degree of influence the investor has over the issuing
Investor’s Ownership Interest Presumed Influence
in Investee’s Common Stock on Investee Accounting Guidelines
Less than 20% Insignificant Cost Method
Between 20% and 50% Significant Equity Method
More than 50% Controlling Consolidated financial
statements
Holdings Less than 20%
6. In accounting for stock investments of less than 20%, the cost method is used. Under the cost
method, the investment is recorded at cost and revenue is recognized only when cash dividends
are received.
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 12-3
a. At acquisition, the historical cost principle applies and Stock Investments is debited and Cash is
credited.
b. When dividends are received, Cash is debited and Dividend Revenue is credited.
c. When stock is sold, Cash is debited, Stock Investments is credited, and any difference between
the income statement.
Holdings Between 20% and 50%
7. When an investor owns between 20% and 50% of the common stock of a corporation, it is
generally presumed that the investor has a significant influence over the financial and operating
credited.
b. Each year, the investor records its share of the investee’s income (investee’s income X % of
ownership in investee) with a debit to Stock Investments and a credit to Revenue from Stock
to Stock Investments.
Holdings of More Than 50%
8. (L.O. 4) A company that owns more than 50% of the common stock of another entity is known
controlling interest in the subsidiary company.
9. When a company owns more than 50% of the common stock of another company, consolidated
financial statements are usually prepared. Consolidated financial statements present the assets
companies.
Valuation and Reporting Investments
are classified into two categories.
a. Trading securities are securities bought and held primarily for sale in the near term to
generate income on short-term price differences.
hold to maturity.
11. The valuation guidelines for all debt securities and stock investments in which the holdings are
less than 20% are as follows:
Trading Available-for-Sale Held-to-Maturity
net income holders’ equity section
Trading Securities
12. When the trading securities are not sold, the difference between the total cost of the securities
and their total fair value is reported as unrealized gains or losses in the income statement. The
revenues and gains or Other expenses and losses, respectively.
Available-for-Sale
13. If available-for-sale securities are held with the intent to sell them within the next year or operating
14. The available-for-sale securities adjusting entry is made in the same way as the trading securities
15. (L.O. 6) Short-term investments are securities held by a company that are (a) readily marketable
16. An investment is readily marketable when it can be sold easily whenever the need for cash
Balance Sheet Presentation
17. Short-term investments are listed immediately below cash in the current assets section of the
accounted for under the equity method are reported at equity.
18. In the income statement, the following items are reported in the nonoperating section:
Other Revenue and Gains Other Expenses and Losses
Interest Revenue Loss on Sale of Investments
Dividend Revenue Unrealized Loss—Income
Gain on Sale of Investments
Unrealized Gain—Income
of stockholders’ equity.
*Preparing a Consolidated Balance Sheet
*19. (L.O. 7) Consolidated balance sheets are prepared from the individual balance sheets of the
(intercompany transactions).
affect the ledger accounts.
*Cost Above Book Value
*21. When the cost of acquiring the common stock of another company is above the book value, this
*Consolidated Income Statement
*22. The consolidated income statement shows the results of operations of affiliated companies as though
they are one economic unit. Once again, all intercompany revenue and expense transactions must
be eliminated.
LECTURE OUTLINE
A. Why Corporations Invest.
1. Corporations purchase investments in debt or stock securities for one of
three reasons:
a. To house excess cash until needed.
b. To generate earnings from investments.
B. Accounting for Debt Investments.
1. Companies record investments in debt securities when they purchase bonds,
2. At acquisition, the historical cost principle applies; cost includes all
plus brokerage fees (commissions).
3. When a company sells debt investments, it records as a gain or loss
any difference between the net proceeds from the sale (sales price less
brokerage fees) and the cost of the investment.
C. Accounting for Stock Investments.
investments are:
Investor’s Ownership
Interest in Investee
Less than 20%
Between 20 and 50%
More than 50%
Presumed Influence
on Investee
Insignificant
Significant
Controlling
Accounting
Guidelines
Cost method
Equity method
Consolidated financial
statements
a credit to Dividend Revenue.
b. When a company sells a stock investment, it recognizes as a gain
or a loss the difference between the net proceeds from the sale
(sales price less brokerage fees) and the cost of the investment.
3. When an investor owns between 20% and 50% of the common stock of
b. Each year, the investor debits the investment account and credits
revenue for its share of the investee’s net income.
c. The investor records dividends received with a debit to Cash and a
credit to the investment account.
4. A company that owns more than 50% of the common stock of another
financial statements.
5. Consolidated financial statements present the total assets and liabilities
controlled by the parent company. They also present the total revenues
of the companies under common control.
ACCOUNTING ACROSS THE ORGANIZATION
Recently, Procter & Gamble acquired Gillette Company for $53.4 billion. The
Gillette Company?
Answer: Because Procter & Gamble owns all of Gillette, P&G does not report
Gillette in the investment section of its balance sheet. Instead, Gillette’s
liabilities of Procter & Gamble.
D. Valuing and Reporting Investments.
1. Companies classify all debt securities and stock investments in which
reporting purposes: (1) trading securities, (2) available-for-sale securities
and (3) held-to-maturity securities.
c. Held-to-maturity securities are debt securities that the investor has
the intent and ability to hold to maturity.
