appendix d investments mcgraw-hill/irwin © the mcgraw-hill companies, inc
TRANSCRIPT
Appendix D
Investments
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.
LO1 Why Companies Invest in Other Companies
o Companies invest in other companies for a variety of reasons:o Equity securities
o Provide dividend income and appreciation of stock.
o Growth companies reinvest their earnings.
o Debt Securitieso Provide interest revenue.
o Companies invest in other companies for a variety of reasons:o Equity securities
o Provide dividend income and appreciation of stock.
o Growth companies reinvest their earnings.
o Debt Securitieso Provide interest revenue.
D-2
Part A
Equity Investments
D-3
Accounting for Equity Investments
Accounting for such investments depend on the degree of influence an investor has over the investee.
Accounting for such investments depend on the degree of influence an investor has over the investee.
0%
MethodConsolidation
InfluenceControllingSignificant
Influence
MethodEquity
Investor‘s equity ownership
ReportingMethod
Degreeof Influence
20% 50% 100%
Influence
MethodFair Value
Insignificant
D-4
LO2 Equity Investments with Insignificant Influence
o Ownership of less than 20% of the voting stock.
o Fair Value method of accounting is used.o Equity Investments classified as:
o Trading securities.o Available-for-sale securities.
o Basic Investment transactions:o Purchase of an investmento Receipt of cash dividendso Sale of the investment
o Ownership of less than 20% of the voting stock.
o Fair Value method of accounting is used.o Equity Investments classified as:
o Trading securities.o Available-for-sale securities.
o Basic Investment transactions:o Purchase of an investmento Receipt of cash dividendso Sale of the investment
D-5
Adjust to Fair Value: Trading securities
o Equity Investments adjusted to Fair Value at the end of every period.
o After selling 20 shares, Nathan’s still owns 80 shares of Canadian Falcon, originally purchased for $30 per share. If Canadian Falcon’s stock at the end of 2012 has a current price of $32, then:
o Equity Investments adjusted to Fair Value at the end of every period.
o After selling 20 shares, Nathan’s still owns 80 shares of Canadian Falcon, originally purchased for $30 per share. If Canadian Falcon’s stock at the end of 2012 has a current price of $32, then:
December 31, 2012 Debit Credit
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160Unrealized Holding Gain—Net Income . . . . . . . 160
(Increase investments to Fair Value)($160 = $2 x 80 shares)
D-6
Adjust to Fair Value: Available-for-sale securities
o Available-for-sale securities are not acquired for the purpose of profiting from short-term price changes.
o Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as other comprehensive income.
o Referring to our previous example, if Nathan’s accounts for its investment in Canadian Falcon as available-for-sale securities, it will report the $2 increase in fair value as part of other comprehensive income.
o Available-for-sale securities are not acquired for the purpose of profiting from short-term price changes.
o Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as other comprehensive income.
o Referring to our previous example, if Nathan’s accounts for its investment in Canadian Falcon as available-for-sale securities, it will report the $2 increase in fair value as part of other comprehensive income.
December 31, 2012 Debit Credit
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160Unrealized Holding Gain - Other Comprehensive Income . . . . 160
(Increase Investments to Fair Value)($160 = $2 x 80 shares)
D-7
LO3 Equity Investments with Significant Influence
o Ownership of between 20% and 50% of the voting stock.
o Equity method of accounting is used.o Investment is recorded as if the investee is a
part of the company.o Investment transactions discussed:
o Purchase of an investmento Recognize Equity Incomeo Receive Cash Dividends
o Ownership of between 20% and 50% of the voting stock.
o Equity method of accounting is used.o Investment is recorded as if the investee is a
part of the company.o Investment transactions discussed:
o Purchase of an investmento Recognize Equity Incomeo Receive Cash Dividends
D-8
LO4 Equity Investments with Controlling Influence
o Ownership of more than 50% of the Voting stock.
o The investor is referred to as the Parent; the investee as the subsidiary.
o Consolidation method of accounting is usedo Parent prepares consolidated financial
statements.o Consolidated financial statements combine the
parent’s and subsidiary’s operating activities as if they were a single reporting company.
o Ownership of more than 50% of the Voting stock.
o The investor is referred to as the Parent; the investee as the subsidiary.
o Consolidation method of accounting is usedo Parent prepares consolidated financial
statements.o Consolidated financial statements combine the
parent’s and subsidiary’s operating activities as if they were a single reporting company.
D-9
Part B
DEBT INVESTMENTS
D-10
LO5 Accounting for Debt Investments
o One party borrows by issuing a debt instrument, while another party lends by investing in the debt instrument.
o One party borrows by issuing a debt instrument, while another party lends by investing in the debt instrument.
D-11
Adjust to Fair Value
o Debt investments are classified as:o Held-to-maturity securities
o Securities that the company expects to hold until they mature.
o Trading securitieso Securities that the investor expects to sell (trade) in the
near future.o These are adjusted to fair value with the unrealized gain
or loss included in net income.
o Available-for-sale securitieso They are not expected to be sold in the near future nor
expected to be held to maturity either.o These are adjusted to fair value with the unrealized gain
or loss included in comprehensive income.
o Debt investments are classified as:o Held-to-maturity securities
o Securities that the company expects to hold until they mature.
o Trading securitieso Securities that the investor expects to sell (trade) in the
near future.o These are adjusted to fair value with the unrealized gain
or loss included in net income.
o Available-for-sale securitieso They are not expected to be sold in the near future nor
expected to be held to maturity either.o These are adjusted to fair value with the unrealized gain
or loss included in comprehensive income.
D-12
End of Appendix D
D-13