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Investments in Equity Securities. Presentations for Chapter 8 by Glenn Owen. Key Points. Criteria that must be met before a security can be listed in the current assets section of the balance sheet. - PowerPoint PPT Presentation
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Investments in Investments in Equity SecuritiesEquity Securities
Presentations for Chapter 8 by Glenn Owen
Key PointsKey Points Criteria that must be met before a security can be listed in the
current assets section of the balance sheet. Trading and available-for-sale securities and how the mark-to-
market rule is used to account for them. Why companies make long-term investments in equity securities. The mark-to-market method, the cost method, and the equity
method of accounting for long-term equity investments, and the conditions under which each method is used.
Consolidated financial statements, when they are prepared, and how they differ from financial statements that account for equity investments using the equity method.
Equity Securities Equity Securities Classified as CurrentClassified as Current
Existence of a ready market– Readily marketable meaning that a security can be sold
and converted into cash on demand Intention to convert
Trading and Trading and Available-For-Sale SecuritiesAvailable-For-Sale Securities
Purchasing trading and available-for-sale securities Declaration and receipt of cash dividends Sale of securities Price changes of securities on hand at the end of the
accounting period Reclassifications and permanent
market value declines Mark-to-market accounting and
comprehensive income
Purchasing Trading and Purchasing Trading and Available-for-sale SecuritiesAvailable-for-sale Securities
Dr. Cr. Trading Securities xxxAvailable-for Sale Securities xxx
Cash xxx
Purchased trading and available-for-sale securities for cash.
Declaration and Receipt of Declaration and Receipt of Cash DividendsCash Dividends
Dr. Cr. Dividends Receivable xxx
Dividend Income xxxRecognize declaration of dividend.
Cash xxxDividend Receivable xxx
Recognize declaration of dividend.
Sale of Trading SecuritiesSale of Trading SecuritiesDr. Cr.
Cash xxxTrading Securities xxxRealized Gain on Sale of Trading Securities xxx
Sold trading securities for a gainorCash xxxRealized Loss on Sale of Trading Securities xxx
Trading Securities xxxSold trading securities sold for a loss
Sale of Sale of Available-for-Sale SecuritiesAvailable-for-Sale SecuritiesDr. Cr.
Cash xxxAvailable-for-Sale Securities xxxRealized Gain on Sale of Available-for-Sale Securities xxx
Sold available-for-sale securities for a gainorCash xxxRealized Loss on Sale of Available-for-Sale Securities xxx
Available-for-Sale Securities xxxSold available-for-sale securities for a loss
Price Changes of Securities On Price Changes of Securities On Hand at the End of the PeriodHand at the End of the Period
Dr. Cr. Trading Securities xxx
Unrealized Gain on Trading Securities xxxRevalued trading securities to marketorUnrealized Loss on Trading Securities xxx
Trading Securities xxxRevalued trading securities to market
Price Changes of Securities On Price Changes of Securities On Hand at the End of the PeriodHand at the End of the Period
Dr. Cr. Available-for-Sale Securities xxx
Unrealized Gain on Available-for-Sale Securities xxx
Revalued available-for-sales securities to marketorUnrealized Loss on Available-for-Sale Securities xxx
Available-for-Sale Securities xxxRevalued available-for-sales securities to market
Long-Term Equity InvestmentsLong-Term Equity Investments The cost method
– Market value is indeterminable– Ownership is less than 20 percent– No change is made in the carrying value of the investment
The equity method– Significant influence (20 - 50 percent ownership)– Periodically increase(decrease) the carrying value of the investment by
the investor’s proportionate share of the net income (loss) of the investee.
– Decrease the carrying value of the investmentby dividends received.
Equity method cautions– This method will give rise to a difference between reported
net income (loss) and cash flow from operations.– It ignores market price.– 20-50 percent is not always a valid indication of significant
influence.– It generates off-balance sheet financing
Consolidated financial statements– Greater than 50 percent ownership– Purchase or pooling methods
Long-Term Equity InvestmentsLong-Term Equity Investments
Accounting for Equity SecuritiesAccounting for Equity Securities
Intend to liquidate within time period of current assets?
Marketable?
Proportion of voting shares
Accounting Treatment
Yes
Yes
Mark-to-Market
Mark-to-Market
Equity Method
Consoli-date
No
>50%20-50%<20%
Accounting for Equity SecuritiesAccounting for Equity Securities
Intend to liquidate within time period of current assets?
Marketable?
Proportion of voting shares
Accounting Treatment
No
No (implied)
CostMethod
Equity Method
Consoli-date
No
>50%20-50%<20%
Goodwill Accounting ControversyGoodwill Accounting Controversy Goodwill is defined as the excess amount paid for
a corporation over the fair market value of the acquired company’s assets and liabilities.
Goodwill appears on the balance sheet. Until recently, goodwill was amortized over a
future period not to exceed forty years. In July 2001, the FASB passed an accounting
standard with removes the requirementto amortize goodwill.
Securities Cost Market Value MV - Cost
*AAA $140 $170 $30 *BBB 375 350 (25)
**CCC 120 150 30
Mark-to-market journal entry on 12/31/xx for AAA:
* Trading security ** Available-for-sale security
Trading Securities (AAA) (+A) 30 Unrealized Gain on Trading Securities(R, +SE) 30
Review Problem I (a) Review Problem I (a)
Review Problem I (a) Review Problem I (a)
Securities Cost Market Value MV - Cost
*AAA $140 $170 $30 *BBB 375 350 (25)
**CCC 120 150 30
Mark-to-market journal entry on 12/31/xx for BBB:
* Trading security ** Available-for-sale security
Unrealized Loss on Trading Securities (Lo, -SE) 25 Trading Securities (BBB) (-A) 25
Securities Cost Market Value MV - Cost
*AAA $140 $170 $30 *BBB 375 350 (25)
**CCC 120 150 30
Mark-to-market journal entry on 12/31/99 for CCC:
* Trading security ** Available-for-sale security
Available-for-Sale Securities (CCC) (+A) 30 Unrealized Loss on Available-for-Sale Securities (+SE) 30
Review Problem I (a) Review Problem I (a)
Review Problem I (b) Review Problem I (b)
Securities Cost Market Value MV - Cost
*AAA $140 $170 $30 *BBB 375 350 (25)
**CCC 120 150 30
Sold all of AAA in 2000 for $180:
* Trading security ** Available-for-sale security
Cash (+A) 180 Trading Securities (-A) 170 Realized Gain on Trading Securities (Ga, +SE) 10
Securities Cost Market Value MV - Cost
*AAA $140 $170 $30 *BBB 375 350 (25)
**CCC 120 150 30
Sold 20% of BBB in 2000 for $65:
* Trading security ** Available-for-sale security
Cash (+A) 65Realized Loss on Trading Securities (Lo, -SE 5 Trading Securities (-A) 70
20%
Review Problem I (b) Review Problem I (b)
Securities Cost Market Value MV - Cost
*AAA $140 $170 $30 *BBB 375 350 (25)
**CCC 120 150 30
Received $60 in BBB dividends and $30 in dividends were declared on CCC stock:
* Trading security ** Available-for-sale security
Cash (+A) 60Dividends Receivable (+A) 30 Dividend Revenue (R, +SE) 90
Review Problem I (b) Review Problem I (b)
Securities Cost Market Value MV - Cost
*AAA $140 $170 $30 *BBB 375 350 (25)
**CCC 120 150 30
Revalued BBB shares to market 12/31/00:
* Trading security ** Available-for-sale security
Unrealized Loss on Trading Securities (Lo, -SE) 40 Trading Securities (BBB) (-A) 40
$2 per share x 20 shares.
Review Problem I (b) Review Problem I (b)
Securities Cost Market Value MV - Cost
*AAA $140 $170 $30 *BBB 375 350 (25)
**CCC 120 150 30
Revalued CCC shares to market 12/31/00:
* Trading security ** Available-for-sale security
Unrealized Price Increase on Available-for-Sale Securities (-SE) 15 Available-for-Sale Securities (CCC) (-A) 15
$1 per share x 15 shares.
Review Problem I (b) Review Problem I (b)
Review Problem I (c) Review Problem I (c)
Securities Cost Market Value MV - Cost
*AAA $140 $170 $30 *BBB 375 350 (25)
**CCC 120 150 30
Sold 20 shares of BBB stock during 2001:
* Trading security ** Available-for-sale security
Cash (+A) 260 Trading Securities (BBB) (-A) 240 Realized Gain on Trading Securities (R, +SE) 20Gain of $1 per share x 20 shares.
Securities Cost Market Value MV - Cost
*AAA $140 $170 $30 *BBB 375 350 (25)
**CCC 120 150 30
Sold 15 shares of CCC stock during 2001:
* Trading security ** Available-for-sale security
Cash (+A) 165Unrealized Gain on Available-for-Sale Securities (-SE) 15 Available-for-Sale Securities (CCC) (-A) 135 Realized Gain on Available-for-Sale Securities (Ga, +SE) 45
Review Problem I (c) Review Problem I (c)
C O P Y R I G H TC o p y r i g h t © 2 0 0 3 , J o h n W i l e y & S o n s , I n c . A l l r i g h t s r e s e r v e d .R e p r o d u c t i o n o r t r a n s l a t i o n o f t h i s w o r k b e y o n d t h a t p e r m i t t e d i n S e c t i o n 1 1 7 o f t h e 1 9 7 6 U n i t e d S t a t e s C o p y r i g h t A c t w i t h o u t t h ee x p r e s s w r i t t e n p e r m i s s i o n o f t h e c o p y r i g h t o w n e r i s u n l a w f u l . R e q u e s t f o r f u r t h e r i n f o r m a t i o n s h o u l d b e a d d r e s s e d t o t h e P e r m i s s i o n s D e p a r t m e n t , J o h n W i l e y & S o n s , I n c . T h e p u r c h a s e r m a y m a k e b a c k - u p c o p i e s f o r h i s / h e r o w n u s e o n l y a n d n o t f o r d i s t r i b u t i o n o r r e s a l e . T h e P u b l i s h e r a s s u m e s n o r e s p o n s i b i l i t yf o r e r r o r s , o m i s s i o n s , o r d a m a g e s , c a u s e d b y t h e u s e o f t h e s e p r o g r a m s o r f r o m t h e u s e o f t h e i n f o r m a t i o n c o n t a i n e d h e r e i n .