Fundamental-Accounting-Principles-(15)

InvestmentsandInternationalOperationsChapter15PowerPointEditor:BethKane,MBA,CPACopyright©2015McGraw-HillEducation.Allrightsreserved.NoreproductionordistributionwithoutthepriorwrittenconsentofMcGraw-HillEducation.15-C1:BasicsofInvestments2BasicsofInvestments1.Companiestransferexcesscashintoinvestmentstoproducehigherincome.2.Somecompaniesaresetuptoproduceincomefrominvestments.3.Companiesmakeinvestmentsforstrategicreasons.MotivationforInvestmentsC13InvestmentsofSelectedCompaniesShort-Term(S-T)andLong-Term(L-T)InvestmentsasaPercentofTotalAssetsC14Short-TermInvestmentsC1Short-terminvestmentsaresecuritiesthat:•Managementintendstoconverttocashwithinoneyearortheoperatingcycle,whicheverislonger.•Arereadilyconvertibletocash.Short-terminvestmentsdonotincludecashequivalents.Cashequivalentsareinvestmentsthatarebothreadilyconvertedtoknownamountsofcashandmaturewithinthreemonths.5Long-TermInvestmentsLong-terminvestments:•arenotreadilyconvertibletocash.•arenotintendedtobeconvertedtocashintheshortterm.•arereportedinthenoncurrentsectionofthebalancesheet,ofteninitsowncategory.C16DebtSecuritiesversusEquitySecuritiesDebtSecurities•Reflectacreditorrelationship•Examples:Investmentsinnotes,bonds,andCDs•Maybeissuedbygovernments,companies,orindividualsC1EquitySecurities•Reflectanownerrelationship•Examples:Investmentsinsharesofstock•Issuedbycompanies7ClassificationandReportingC1AccountingforInvestmentsdependsonthreefactors:1.Securitytype:debtorequity2.Intenttoholdthesecurityshortorlongterm3.Percentageownershipinanothercompany’sequitysecurities815-P2:Held-to-MaturitySecurities9DebtSecurities:AccountingBasicsDebtsecuritiesarerecordedatcostwhenpurchased.Interestrevenueforinvestmentsindebtsecuritiesisrecordedwhenearned.OnSeptember1,2014,MusicCitypaid$29,500plusa$500brokeragefeetobuyDell’s7%,2-yearbondspayablewitha$30,000parvalue.ThebondspayinterestsemiannuallyonAugust31standFebruary28th.MusicCityplanstoholdthebondsuntiltheymature(HTMsecurities).P210DebtSecurities:AccountingBasicsInterestearnedbutnotreceivedmustbeaccruedonDecember31,2014.$30,000parvalue×7%×4/12=$700interestearned.P211DebtSecurities:AccountingBasicsOnFebruary28,2015,MusicCitywillrecordthereceiptofthesemiannualinterest.Thecompany’saccountantswillmakethefollowingentry.$30,000parvalue×7%×6/12=$1,050(Interestreceived).P2$30,000parvalue×7%×4/12=$700(Interestearnedin2012).$30,000parvalue×7%×2/12=$350(Interestearnedin2013).12DebtSecurities:AccountingBasicsWhenthebondsmature,MusicCitywillreceivetheamountoftheparvalueincash.Thebondshavenowbeenretired.P21315-P1:ReportingofNoninfluentialInvestments14EquitySecurities:AccountingBasicsEquitysecuritiesarerecordedatcostwhenacquired,includingcommissionsorbrokeragefeespaid.AnycashdividendsreceivedarecreditedtoDividendRevenueandreportedintheincomestatement.Whenthesecuritiesaresold,salesproceedsarecomparedwithcost,andanygainorlossisrecorded.P115ReportingofNoninfluentialInvestmentsCompaniesmustvalueandreportmostnoninfluentialinvestmentsatfairvalue.Theexactreportingrequirementsdependonwhethertheinvestmentsareclassifiedas(1)trading,(2)held-to-maturity,or(3)available-for-sale.P116TradingSecurities1.Debtandequitysecurities2.Activelymanagedandtradedforprofit3.Frequentpurchasesandsalesexpected4.Reportedatfairvalue5.UnrealizedgainorlossreportedintheincomestatementP117TradingSecuritiesTechCom’sportfoliooftradingsecuritieshadatotalcostof$11,500,andafairvalueof$13,000,onDecember31,2014,thefirstyearthesecuritieswereheld.The$1,500differencebetweenthecostof$11,500andthefairvalueof$13,000isanunrealizedgain.P118TradingSecuritiesAssumeTechComsellstradingsecuritiesthathadcost$1,000for$1,200cash,onJanuary9,2015.ThegainisreportedintheOtherRevenuesandGainssectionoftheIncomeStatement.Likewise,alosswouldbereportedinOtherExpensesandLossessection.P119NEED-TO-KNOWBerkshireCo.purchasesinvestmentsintradingsecuritiesatacostof$130onDecember15,20X1.(Thisisitsfirstandonlypurchaseofsuchsecurities.)OnDecember28,Berkshirereceiveda$15cashdividendfromthestockpurchasedonDecember15.AtDecember31,20X1,thetradingsecuritieshadafairvalueof$140.a.PreparetheDecember15acquisitionentryforthetradingsecurities’portfolio.b.PreparetheDecember28receiptofcashdividendsentryforthetradingsecurities’portfolio.20X1DebitCreditDec.15Short-terminvestments-Trading130Cash130Dec.28Cash15Dividendrevenue15Dec.15130GeneralJournalShort-terminvestments-TradingP120NEED-TO-KNOWBerkshireCo.purchasesinvestmentsintradingsecuritiesatacostof$130onDecember15,20X1.(Thisisitsfirstandonlypurchaseofsuchsecurities.)OnDecember28,Berkshirereceiveda$15cashdividendfromthestockpurchasedonDecember15.AtDecember31,20X1,thetradingsecuritieshadafairvalueof$140.a.PreparetheDecember15acquisitionentryforthetradingsecurities’portfolio.b.PreparetheDecember28receiptofcashdividendsentryforthetradingsecurities’portfolio.c.PreparetheDecember31year-endadjustingentryforthetradingsecurities’portfolio.Dec.15130Unadjusted0Adjustment10Dec.31130Adjusted10Step1:Determinewhatthecurrentaccountbalanceequals.$0Step2:Determinewhatthecurrentaccountbalancesh