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					     CHAPTER   13

Investments in
Debt and Equity
Securities
           Learning Objective 1


Understand why
companies invest in
other companies.
                       A Cash Flow Pattern
        Companies often need cash flow from
      sources other than their own operations
       because the company’s own cash flow
     might vary greatly over the course of a year.

                                       Insufficient cash
      1/1                       6/30   (relieved by        12/31
                                       short-term
                                       borrowing)
Average
 Cash
 Needs
            Excess cash
            (used for short-            Actual Cash on Hand
            term investments)
What Are Some Other Reasons
Companies Invest Their Excess
           Cash?
       Learning Objective 2

Understand the
different
classifications for
securities.
        Define Two Classifications for
                 Securities.

Debt Securities



Equity Securities (Stock)
   Classifying Securities


       Investments



Debt                 Equity
              Securities—Matching
         Equity Method Securities
         Held-to-Maturity Securities


Debt securities purchased by an investor with the
intent of holding the securities until they mature.


Method used to account for an investment in the
stock of another company when significant
influence can be imposed (presumed when 20 to
50 percent of the outstanding voting stock is
owned).
               Securities—Matching
           Trading Securities
           Available-for-Sale Securities

Debt and equity securities purchased with the
intent of selling them should the need for cash
arise or to realize short-term gains.


Debt and equity securities not classified as
trading, held-to-maturity, or equity method
securities.
       Classifying Securities


                  Investments


           Debt                 Equity



Held-to-     Trading    Available-       Equity
Maturity                 for-Sale        Method
      Classifying Securities


                  Investments


           Debt                 Equity



Held-to-                Available-       Equity
Maturity      Trading    for-Sale        Method
              Classifying Securities—
                  Fill in the Chart
                              Reporting of
Classification Disclosed at   Changes in FMV

  Trading

 Available-
  for-Sale
 Held-to-
 Maturity
  Equity
  Method
      Learning Objective 3

Account for the
purchase, recognition of
revenue, and sale of
trading and available-
for-sale securities.
             Purchase of Securities
      Caribou Corp. purchased the
      following securities on January 1,
      2006. Record the appropriate entry.
                                        Cost
                                     (including
    Type      Classification       broker’s fees)
1   Debt      Trading               $ 3,000
2   Equity    Trading                15,500
3   Debt      Available-for-sale     10,000
4   Equity    Available-for-sale      7,300
             Purchase of Securities
                                         Cost
                                      (including
    Type      Classification        broker’s fees)
1   Debt       Trading               $ 3,000
2   Equity     Trading                15,500
3   Debt       Available-for-sale     10,000
4   Equity     Available-for-sale      7,300
 Accounting for Return Earned on
         an Investment
Buffalo Corp. earned the following return on
their owned securities. Record the journal
entry.
   Security    Interest    Dividends
1   Debt         $270
2   Equity                   $895
3   Debt          920
4   Equity                     560
           Accounting for the Sale of
                  Securities
    Buffalo Corp. sold Security 2 for $17,000.
    The historical cost was $15,500. Record
    the entry.                      Cost
                                     (including
    Type      Classification       broker’s fees)
1   Debt      Trading                $ 3,000
2   Equity    Trading                 15,500
3   Debt      Available-for-sale      10,000
4   Equity    Available-for-sale       7,300
What Are Realized Gains and
         Losses?
      Learning Objective 4


Account for changes
in the value of
securities.
What Are Unrealized Gains
      and Losses?
     Accounting for Changes in Value
          — Trading Securities
    The following market values were recorded for
    Buffalo Corp.’s portfolio on December 31,
    2006. Record the changes in the values of the
    securities.
                     Historical   Market Value
    Type               Cost        12/31/06

1   Trading           $ 3,000       $ 2,800
3   Available-for-sale 10,000       10,500
4   Available-for-sale 7,300          9,250
     Accounting for Changes in Value
          — Available-for-Sale

                       Historical   Market Value
     Type                Cost        12/31/06

1 Trading               $ 3,000       $ 2,800
3 Available-for-sale     10,000       10,500
4 Available-for-sale      7,300         9,250
           Subsequent Changes
                in Value
  The following market values were recorded for
  Buffalo Corp.'s portfolio on December 31,
  2007. Record the subsequent change in the
  trading security.
                       Historical   Market Value
    Type                 Cost        12/31/07

1 Trading               $ 3,000     $ 3,100
3 Available-for-sale     10,000      10,300
4 Available-for-sale      7,300       9,500
        Expanded Material
       Learning Objective 5


Account for held-to-
maturity securities.
Initial Purchase of Held-to-
     Maturity Securities
The Moose Company purchased a 5-
year, $500,000 bond and received
interest payments of 10 percent, payable
semiannually. Assume the effective rate
is 12 percent. Record the investment.
         Initial Purchase of Held-to-
              Maturity Securities

1. Semiannual interest payments$ 25,000
   Present value of interest annuity    $184,002

2. Principal of bonds            $500,000
   Present value of bonds                    279,197

3. Present value of investment              $463,199
  Bonds Purchased
Between Interest Dates
Assume the bond purchased by the
Moose Company paid interest on July 1
and January 1 of each year. If the
Moose Company purchased the bond
on April 31, 2006, how will the purchase
be recorded?
       Define Amortization Methods
         for Bond Premiums and
                Discounts
Straight-Line Amortization



Effective-Interest Amortization
  Straight-Line Amortization
The Rhinoceros Company purchased a
12 percent, 5-year, $10,000 bond for
$8,658 on the issuance date. The
interest payments are made
semiannually. Using the straight-line
method, record the first interest
payment received.
Effective-Interest Amortization

The Rhinoceros Company purchased a
12 percent, 5-year, $10,000 bond for
$8,658 on the issuance date. The
interest payments are made
semiannually and the market rate is 16
percent. Using the effective-interest
method, record the first interest
payment received.
          Hint:
          Won’t you need an
          amortization table?
                 Effective-Interest
                   Amortization

Cash      Interest            Amortized Investment
Payment   Received   Earned   Amount    Balance
Effective-Interest Amortization
The Rhinoceros Company purchased a
12 percent, 5-year, $10,000 bond for
$8,658 on the issuance date. The
interest payments are made
semiannually and the market rate is 16
percent. Using the effective-interest
method, record the first interest
payment received.
 Sale or Maturity of Bonds

The Rhinoceros Company
holds the bond until maturity.
Record the entry for the receipt
of the bond principal.
  Sale or Maturity of Bonds

What journal entry is required if the
Rhinoceros Company sells the bond
for $9,900 before maturity when the
balance in the bond account is
$9,800?
       Expanded Material
      Learning Objective 6

Understand the
Basics of
Consolidated
Financial Statements
When Should the Equity Method
         Be Used?
  Illustrating the Equity Method

Brown Tree Co. purchased 100 shares of
Koala Corp. common shares at $2 per
share, representing a 20 percent
ownership in the company. Record
Brown Tree’s transactions using the
equity method.
Illustrating the Equity Method

Brown Tree Co. purchased 100
shares of Koala Corp. common
shares at $2 per share, representing
a 20 percent ownership in the
company. Record the $0.80 per
share dividend. Record the entry.
 Illustrating the Equity Method
Brown Tree Co. purchased 100 shares of
Koala Corp. common shares at $2 per
share, representing a 20 percent
ownership in the company. Koala Corp.
announces a $10,000 earnings for the
year. Record the appropriate entries.
What is the Objective of Consolidated
       Financial Statements?
  What are Notable Items
Concerning the Statements?
You Have Completed Chapter 13

				
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