INVESTMENT 1

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.