Investments accounting
INVESTMENTS
Short term i investment t t Long term investment 2
WHY CORPORATIONS INVEST Corporations generally invest in debt or stock securities for one of three reasons. 1.
Corporation may have excess cash.
2.
To generate earnings from investment income.
3 3.
For strategic reasons. reasons
Temporary investments and the operating cycle
SHORT-T TERM INVESTMENTS (MARKETABLE SECURITIES) |Management
intends to convert to cash within one year or the operating ti cycle l whichever hi h is i longer.
|Are
readily convertible to cash. 4
INVESTMENTS . . . |Debt
Securities reflect creditor relationship (notes, bonds, etc.)
|Equity
Securities reflect owner relationship (stock). (stock)
5
DEBT SECURITIES INVESTMENTS . . . |Held-To-Maturity Held To Maturity |Trading
Securities
Securities
|Available-For-Sale Available For Sale
Securities
6
HELD-TO-MATURITY SECURITIES |Debt
securities that management intends to hold to th i maturity their t it whose h cash h value l is not needed until that date.
|Carried
cost. t
on the Balance Sheet at
7
TRADING SECURITIES |Debt
securities that are bought and held principally for the purpose of being sold in the near term. term
|Frequently F e e tl
bo bought ght a and d sold old to generate profits on short-term changes h in i their h i prices. i
8
TRADING SECURITIES |Entire
portfolio of trading securities iti iis reported t d att its it market value with a “realizable value adjustment” from the cost of the portfolio. p 9
TRADING SECURITIES |Any
unrealized gain (or loss) f from a change h in i the th realizable li bl value of the portfolio of trading securities during a period is reported p on the income statement. 10
AVAILABLE-FOR-SALE SECURITIES |Debt
securities not classified as t di or h trading held-to-maturity ld t t it securities.
11
Accountingg For Held to maturity debt securities investment
VALUATION OF BONDS INVESTMENT
Values a bond at the present value of its expected future cash flows, which consist of (1) interest and (2) principal.
PV= FV * 1/ (1+r)ⁿ + FV *SR * (1-1/ (1+r) ⁿ)/r p FV- Face value or Principal R- Market rate SR- stated rate n- Period
INTEREST RATES AND BOND PRICES Issued Market Rates when: 8%
Bonds Bought at: Premium
BOND
stated
INTEREST RATE 10%
10%
12%
Face (Par) Value
Discount
BONDS ISSUED AT A FACE VALUE Journal entry on date of bought, Jan. 1, 2011. Held to maturity securities
1000
Cash
1000
Journal entry to record accrued interest revenue at Sep. 30, 2011. Interest receivable (1000 x 10%)
25
Bond interest revenue
25
Journal entry to record first receipt of interest on Jan. 1, 2012. Cash Cas Interest receivable
50 50 LO 3
EFFECTIVE-INTEREST METHOD Bond issued at a discount - amount paid at maturity is more than the issue amount.
Bonds issued at a premium - company pays less at maturity relative to the issue price. Adjustment to the cost is recorded as bond interest expense over the life of the bonds through a process called amortization. Required procedure for amortization is the two method 1. Straight line method 2 Effective-interest 2. Eff ti i t t method th d
A $1,000, 10% bond is purchase on January 1 of 2011. It receives interest annually and will mature in two years. years The market value was 8%
$100 Interest payment
Endd off Year E Y 1
Today
$92.59
$100 x 0.92592
$85.73
$100 x 0.85733 0 85733 $1,000 x 0.85733
$855 73 $855.73 $1035.65 (rounded)
$100 $1,000
Interest 10% payable payment annually
Endd off Year E Y 2
BONDS ISSUED AT A PREMIUM Journal entry on date of purchase, Jan. 1, 2011.
Held to maturity securities 1035.65 C h Cash
1035 65 1035,65
STRAIGHT LINE METHOD Amortization amount= Bonds investment premium/ n= 35 65/ 2=17.825/4= 35.65/ 2=17 825/4= 4456 4456.25 25
Journal entry to record accrued interest at sep. 30, 2011. Interest receivable
25
Held to maturity securities
4.456
Interest revenue
20.544
Journal entry to record first receipt of revenue on Jan. 1, 2012. Cash Cas Interest receivable
50 50
SHEDULE OF BOND PREMIUM AMORTIZATION Date
Cash receipt
Interest revenue
Premium Premium amortized account balance
2011.06.01
35.65
Carrying amount of bonds 1035.65
2012.06.01
100
1035.65*8 %=82.85
10035.651035.6582.85=17. 17.15=18.50 17.15=101 15 8.5
2012.12.31
100
1018.5*8% =81.5
10018.5-18.5=0 81.5=18.5
1018.518.5=1000
Journal entry to record accrued interest at sep. 30, 2011. Interest receivable
25
Held to maturity securities
17.15/4=4.288
Interest revenue
20.712
Accountingg For Trading debt securities investment
|Focus
Co. purchases short-term investments in trading securities on July 01, 2011. Interest payment each 3 month. month
Face value 12,000₮, 12 000₮ 10%10% 100 units purchased for 1160,000₮. Paid brokers fee 20 20,000₮. 000₮ At December 31 31, 2011 2011, these securities had a market value of a 11 000₮ B. a.11,000₮ B 13000₮
Trading Securities
Let’s record the purchase. 07/01 T Trading din ssecurities iti s Cash P Purchase h of f Trading T d Securities
1180 000 1180,000 1180,000
Trading Securities
Let’s record the receipt of interest. 09/30 C Cash sh Interest revenue R Record d receipt of f interest
30 000 30,000 30,000
Trading Securities
Let’s record the receipt of interest. 12/31
Cash C sh Interest revenue R Record d receipt of f interest
30 000 30,000 30,000
Trading Securities 1.
Prepare the 12/31/11 year-end adjusting entry for the trading securities’ portfolio. (Year-end value = 11,000₎)
12/31 Unrealized loss Realizable l l value l adj. d To record realizable value adjustment. dj t t
100,000 100,000
Trading Securities 2. Prepare the 12/31/11 year-end adjusting entry for the trading securities’ portfolio. (Year-end value = 13,000₎)
12/31 Realizable value adj. Unrealized l d Gain To record realizable value adjustment. dj t t
100,000 100,000
Balance sheet. sheet Current assets:
Balance sheet. sheet Current assets:
Trading securities 1180,000 Realizable value adjustment Realizable value (100,000)
1080,000
Trading securities 1180,000 R li bl value Realizable l adjustment Realizable value 1280,000 100 000 100,000 28
Trading Securities Sold 40 units for 12500â‚Ž to each securities on feb.01.2012.
02/01 Cash Trading d securities Realized gain To record sell of trading securities.
500,000 472,000 4 2 000 28,000
Adjusting available-forsale debt securities to market.
A $1,000, 10% bond is purchase on January 1 of 2011. It receives interest annually and will mature in two years. years The market value was 8%
$100 Interest payment
Endd off Year E Y 1
Today
$92.59
$100 x 0.92592
$85.73
$100 x 0.85733 0 85733 $1,000 x 0.85733
$855 73 $855.73 $1035.65 (rounded)
$100 $1,000
Interest 10% payable payment annually
Endd off Year E Y 2
BONDS ISSUED AT A PREMIUM
Journal entry on date of purchase, Jan. 1, 2011.
Available for-sale securities 1035.65 C h Cash
1035 65 1035,65
STRAIGHT LINE METHOD Amortization amount= Bonds investment premium/ n= 35 65/ 2=17.825 35.65/ 2=17 825
Journal entry to record accrued interest at Dec. 31, 2011. Interest receivable
100
Available for-sale securities Interest revenue
17.825 82,175
Journal entry to record first receipt of revenue on Jan. 1, 2012. Cash Cas Interest receivable
100 00 100
SHEDULE OF BOND PREMIUM AMORTIZATION Date
Cash receipt
Interest revenue
Premium Premium amortized account balance
2011.01.01
35.65
Carrying amount of bonds 1035.65
2011.12.31
100
1035.65*8 %=82.85
10035.651035.6582.85=17. 17.15=18.50 17.15=101 15 8.5
2012.12.31
100
1018.5*8% =81.5
10018.5-18.5=0 81.5=18.5
Journal entry to record accrued interest at Dec. 31, 2011. Interest receivable Available for-sale securities Interest revenue
100 17.15 82,85
1018.518.5=1000
Trading Securities 1.
Prepare the 12/31/11 year-end adjusting entry for the available for sale securities’ portfolio. (Year-end value : a. 980$ b. 1050$.
12/31 Unrealized loss Realizable l l value l adj. d To record realizable value adjustment. dj t t
20 20
Trading Securities 2. Prepare the 12/31/11 year-end adjusting entry for the trading securities’ portfolio. (Year-end value : a. 980$ b. 1050$.
12/31 Realizable value adj. Unrealized l d Gain To record realizable value adjustment. dj t t
50 50
Exh. 7.17
DEBT SECURITIES INVESTMENT
Held To Maturity
T di Trading
Available for Sale
Debt securities held to maturity.
Debt securities actively traded.
Debt securities not in the other two categories.
Cost.
Realizable value.*
Realizable value.**
*Unrealized gains/losses reported on the income statement. **Unrealized gains/losses reported in the equity section of the balance sheet.