Accounting Chapter 9 Selling Investments With Significant Influence when Sold Gain | Course Paper

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Financial and Managerial Accounting, 9th Edition

APPENDIX C

INVESTMENTS

Related Assignment Materials

Student Learning Objectives

Questions

Quick

Studies*

Exercises*

Problems*

AA, BTN, DA

C1. Distinguish between debt and

equity securities and between

short-term and long-term

investments.

1, 2, 4, 5

C-1, C-2,

C-14

C-1, C-15,

C-16

C2. Describe how to report equity

securities with controlling

influence.

C-13, C-18

C-17, C-18

BTN C-3

and record transactions listed in

a foreign currency. (Appendix

C-A online only)

A1. Compute and analyze the

components of return on total

assets.

C-15, C-18,

C-19

C-14, C-19

AA C-1, AA C-2,

AA C-3

C-16

P2. Account for debt securities as

4, 5, 9

C-6, C-14

BTN C-1, BTN C-3,

BTN C-4

P3. Account for debt securities as

4, 6, 7, 8

C-7, C-8,

C-14

C-5, C-6,

C-16

C-2, C-3,

GL C-2

BTN C-1, BTN C-3

with insignificant influence.

C-13, C-14

C-10, C-11,

GL C-1

BTN C-4, DA C-1,

DA C-2, DA C-3

C-15, C-16

P5. Account for securities with

significant influence.

4, 10, 11

C-15, C-16,

C-17

C-14, C-15,

C-16

C-5

*See additional information on next page that pertains to these quick studies, exercises, and problems.

SP refers to the Serial Problem

AA refers to Accounting Analysis

Additional Information on Related Assignment Material

See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in

Financial and Managerial Accounting, 9th Edition

C-2

Connect

Available on the instructor’s course-specific website, Connect:

• All numerical Quick Studies, all Exercises and Problems Set A.

o Connect also provides algorithmic versions for Quick Study, Exercises, and Problems.

Hints/Guided Examples

Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without

Need-to-Know Videos

LO

Need–to-Know

Title

Time

P1

C-1

Trading Securities

3:23

P2

C-2

Held-to-Maturity Securities

1:03

P3

C-3

Available-for-Sale Securities

3:08

P4

C-4

Stock Investments with Insignificant Influence (<20%)

3:11

P5

C-5

Equity Method Investments

3:39

Influence

Concept Overview Videos

LO

Title

Time

C1

Distinguish between debt and equity securities and between short-term

investments and long-term investments.

Purposes and Types of Investments

1:30

Classification and Reporting

1:22

Describe how to report equity securities with controlling influence.

Equity Securities with Controlling Influence

1:17

Comprehensive Income

0:52

Compute and analyze the components of return on total assets.

1:24

1:36

P1

Account for debt securities as trading.

Trading Securities

1:48

Valuing and Reporting Trading Securities

2:37

Selling Trading Securities

1:09

P2

Account for debt securities as held-to-maturity.

0:42

Account for debt securities as available-for-sale.

Available-for-Sale (AFS) Securities

0:36

Financial and Managerial Accounting, 9th Edition

C-3

Debt Securities: Accounting Basics

1:48

Valuing and Reporting Debt Securities

3:00

Selling AFS Securities

1:50

0:25

1:22

0:20

0:55

0:44

3:31

Synopsis of Chapter Revisions

All content updated for new investment rules per GAAP.

Revised and simplified Exhibit C.2 for new standard on investments.

Financial and Managerial Accounting, 9th Edition

C-4

Chapter Outline

I. Basics of Investments

A. Purposes and Types of Investments—three reasons:

(1) Companies invest their extra cash in investments to earn more income.

1. Short-Term Investments—current assets

a. Short-term investments (or marketable securities)—current assets that must meet these 2

requirements:

c. Cash equivalents are not short-term investments they usually mature within 3 months.

i. Intended to be converted into cash within one year or the operating cycle, whichever is

2. Long-Term Investments

assets not used in operations.

3. Debt Securities versus Equity Securities—Investments in securities can include both debt and

equity securities.

B. Classification and Reporting—accounting for investments in securities depends on three factors:

3. Percentage of ownership in the other company’s equity securities

1. Security type—either debt or equity

C. Classifications of investments and reporting approach:

1. Trading securities (debt)—reported at fair value.

D. Debt Investments—Basics

1. Debt Investments—also called debt securities

a. Recording Acquisition—recorded at cost. Debit is to Debt Investments.

b. Recording Interest—recorded when earned. Debit Cash and credit Interest Revenue.

between cost and maturity value is amortized over remaining life of the security.

Financial and Managerial Accounting, 9th Edition

C-5

II. Debt Investments: Trading Always reported as current assets.

Company intends to actively buy and sell for profit. These are always current assets. Any

unrealized gain (or loss) from change in fair value of portfolio of trading securities is reported on

income statement.

1. Recording Fair Value—difference between cost and fair value is an unrealized gain (or loss)

because it is not yet an actual sale. Recorded with an adjusting entry at period end.

III. Debt Investments: Held-to-Maturity – company intends and is able to hold until maturity. Reported

in current assets if maturity dates within one year; otherwise, classified as long-term investments.

IV. Debt Investments: Available-for-Sale – not classified as trading or held-to–maturity. Classified as

either short-term or long-term.

1. Recording Fair Value—year-end adjusting entry records fair value.

V. Equity Investments

1. Recording acquisition—recorded at cost when acquired, including commissions and brokerage

fees.

VI. Equity Investments: Insignificant Influence, under 20%

1. Recording Acquisition

2. Recording Dividends—Cash is debited and Dividend Revenue is credited when dividends are

received.

VII. Equity Investments: Significant Influence, 20% to 50%—investor has significant influence over the

investee. Equity method is used.

1. Recording Acquisition—recorded at cost in an Equity Method Investments account.

2. Recording Share of Earnings—when investee reports its earnings investor records its share in its

Financial and Managerial Accounting, 9th Edition

C-6

VIII. Equity Investments: Controlling Influence, More Than 50%

A. Investment in securities with controlling influence—means investor has controlling influence over

the investee.

3. Investor also reports consolidated financial statements (subject for advanced course) to the

1. The consolidation method is used.

2. The controlling investor is called the parent company and the investee company is called the

B. Summary of Accounting for Investments in Securities

See Exhibit C.8.

C. Comprehensive Income—is all changes in equity for a period except those due to owner

investments and dividends.

2. Can be reported in financial statements in one of two ways:

1. Includes: Unrealized gains and losses on AFS securities, foreign currency adjustments and

comprehensive income).

IX. Decision Analysis—Components of Return on Total Assets

A. Assesses financial performance and can be separated into two components:

1. Profit margin (net income divided by net sales) reflects the percentage of net income in each

dollar of net sales.

Financial and Managerial Accounting, 9th Edition

C-7

Appendix C Alternate Demonstration Problem

2021

Jan

1

Investor Corporation purchased 8,000 shares (20%) of Investee

Company’s outstanding stock at a cost of $150,000.

May

31

Investee Company declared and paid a cash dividend of $1.50 per share.

$100,000.

2022

1

Investee Company declared and paid a cash dividend of $1.00 per share.

31

Investee Company announced that its net income for the year was

$80,000.

2023

Jan

1

Investor Corporation sold all of its shares of Investee Company for

$178,000 cash.

Required:

1. Prepare journal entries on Investor Corporation’s books using the equity method,

which assumes that Investor has significant influence over Investee Company.

2. Prepare journal entries on Investor Corporation’s books using the cost method,

Financial and Managerial Accounting, 9th Edition

C-8

Appendix C Solution: Alternate Demonstration Problem

Part 1

2021

Jan

1

Equity Method Investments

150,000

Cash

150,000

May

Cash

Equity Method Investments

Dec

Equity Method Investments

2022

Oct

1

Cash

8,000

Equity Method Investments

8,000

Dec

Equity Method Investments

2023

Jan

1

Cash

178,000

Equity Method Investments

166,000

Gain on Sale of Stock Investments

Financial and Managerial Accounting, 9th Edition

C-9

Appendix C Solution: Alternate Demonstration Problem

Part 2

2021

Jan

1

Stock Investments

150,000

Cash

150,000

May

Cash

Dividends Revenue

Dec

2022

Oct

1

Cash

8,000

Dividends Revenue

8,000

Dec

Jan

1

Cash

Stock Investments

150,000

Gain on Sale of Stock Investments

28,000

Note that the total income statement effect is the same under both methods:

Part 1:

$20,000

earnings in 2021

16,000

earnings in 2022

$48,000

Part 2:

$12,000

$48,000