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REPORTING AND
ANALYZING
INVESTMENTS

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Financial Accounting, Seventh Edition


Learning
Learning Objectives
Objectives
After studying this chapter, you should be able to:

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1.

Identify the reasons corporations invest in stocks and debt securities.

2.

Explain the accounting for debt investments.

3.


investments
and the
operating cycle

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LO 1 Identify the reasons corporations invest in stocks and debt securities.


Why
Why Corporations
Corporations Invest
Invest

Question
Pension funds and banks regularly invest in debt and
stock securities to:
a. house excess cash until needed.
b. generate earnings.
c. meet strategic goals.
d. avoid a takeover by disgruntled investors.

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LO 1 Identify the reasons corporations invest in stocks and debt securities.


Accounting
Accounting for
for Debt

LO 2 Explain the accounting for debt investments.


Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10year, $1,000 bonds on January 1, 2014, for $50,000. The entry
to record the investment is:
Jan. 1

Debt investments
Cash

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50,000
50,000

LO 2 Explain the accounting for debt investments.


Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Illustration: Kuhl Corporation acquires 50 Doan Inc. 8%, 10year, $1,000 bonds on January 1, 2014, for $50,000. The bonds
pay interest semiannually on July 1 and January 1. The entry for


Interest revenue

2,000

Kuhl reports receipt of the interest on January 1 as follows.
Jan. 1

Cash

2,000

Interest receivable

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2,000

LO 2 Explain the accounting for debt investments.


Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Illustration: Assume that Kuhl corporation receives net
proceeds of $54,000 on the sale of the Doan Inc. bonds on
January 1, 2015, after receiving the interest due. Prepare the
entry to record the sale of the bonds.


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LO 2 Explain the accounting for debt investments.


Accounting
Accounting for
for Debt
Debt Instruments
Instruments
Question
When bonds are sold, the gain or loss on sale is the
difference between the:
a. sales price and the cost of the bonds.
b. net proceeds and the cost of the bonds.
c. sales price and the market value of the bonds.
d. net proceeds and the market value of the bonds.

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LO 2 Explain the accounting for debt investments.


Accounting
Accounting for
for Stock
Stock Investments
Investments
Ownership Percentages

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LO 3 Explain the accounting for stock investments.


Holdings
Holdings of
of Less
Less than
than 20%
20%
Companies use the cost method. Under the cost method,
companies record the investment at cost, and recognize
revenue only when cash dividends are received.
Cost includes all expenditures necessary to acquire these
investments, such as the price paid plus any brokerage fees
(commissions).

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LO 3 Explain the accounting for stock investments.


Holdings
Holdings of
of Less
Less than
than 20%
20%
Illustration: On July 1, 2014, Sanchez Corporation acquires


Dividend revenue

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2,000

LO 3 Explain the accounting for stock investments.


Holdings
Holdings of
of Less
Less than
than 20%
20%
Illustration: Assume that Sanchez Corporation receives net
proceeds of $39,500 on the sale of its Beal stock on February
10, 2015. Because the stock cost $40,000, Sanchez incurred
a loss of $500. The entry to record the sale is:
Feb. 10

39,500

Cash

Loss on sale of Stock Investments
Stock investments

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Between 20%
20% and
and 50%
50%
Question
Under the equity method, the investor records dividends
received by crediting:
a. Dividend Revenue.
b. Investment Income.
c. Revenue from Investment.
d. Stock Investments.

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LO 3 Explain the accounting for stock investments.


Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
Illustration: Milar Corporation acquires 30% of the common
shares of Beck Company for $120,000 on January 1, 2014. For
2014, Beck reports net income of $100,000 and paid dividends of
$40,000. Prepare the entries for these transactions.
Jan. 1

Stock investments

Holdings Between
Between 20%
20% and
and 50%
50%
Illustration: Milar Corporation acquires 30% of the common
shares of Beck Company for $120,000 on January 1, 2014. For
2014, Beck reports net income of $100,000 and paid dividends of
$40,000. Prepare the entries for these transactions.
After Milar posts the transactions for the year, its investment
and revenue accounts will show the following.
Illustration E-4

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LO 3 Explain the accounting for stock investments.


Holdings
Holdings of
of More
More Than
Than 50%
50%
Controlling Interest - When one corporation acquires a
voting interest of more than 50 percent in another
corporation

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Trading securities



Available-for-sale securities



Held-to-maturity securities

These guidelines apply to all debt securities and all stock investments in
which the holdings are less than 20%.

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LO 5 Indicate how debt and stock investments are
valued and reported in financial statements.


Valuing
Valuing and
and Reporting
Reporting Investments
Investments
Trading Securities

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