Финансовый учет. Ридер

3,0003,000

Cash Flows

$3,000

A credit to Interest Revenue at this time would be incorrect. Why? Because the company earned and accrued the interest revenue in the preceding accounting period.

Helpful Hint The accounting for short-term debt investments and long-term debt investments is similar. Any exceptions are discussed in more advanced courses.

RECORDING SALE OF BONDS

When Kuhl sells the bond investments, it credits the investment account for the cost of the bonds. The company records as a gain or loss any difference between the net proceeds from the sale (sales price less brokerage fees) and the cost of the bonds.

Assume, for example, that Kuhl Corporation receives net proceeds of $58,000 on the sale of the Doan Inc. bonds on January 1, 2013, after receiving the interest due. Since the securities cost $54,000, Kuhl has realized a gain of $4,000. It records the sale as follows.

Accounting for Stock Investments

Stock investments are investments in the capital stock of corporations. When a company holds stock (and/or debt) of several different corporations, the group of securities is an investment portfolio.

The accounting for investments in common stock depends on the extent of the investor’s influence over the operating and financial affairs of the issuing corporation (the investee). Illustration E-3 shows the general guidelines.

study objective 3

Explain the accounting for stock investments.

A = L + SE

2,000

2,000 Rev

Cash Flows

$2,000

During the time the company holds the stock, it makes entries for any cash dividends received. Thus, if Sanchez Corporation receives a $2 per share dividend on December 31, the entry is:

Sanchez reports Dividend Revenue under “Other revenues and gains” in the income statement.

Recording Sale of Stock

When a company sells a stock investment, it recognizes the difference between the net proceeds from the sale (sales price less brokerage fees) and the cost of the stock as a gain or a loss.

Assume, for instance, that Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal Corporation stock on February 10, 2013. Because the stock cost $40,500, Sanchez has incurred a loss of $1,000. It records the sale as:

Recording Revenue and Dividends

For 2012, Beck reports net income of $100,000. It declares and pays a $40,000 cash dividend. Milar must record (1) its share of Beck’s income, $30,000 (30% $100,000), and (2) the reduction in the investment account for the dividends received, $12,000 ($40,000 30%). The entries are:

After Milar posts the transactions for the year, the investment and revenue accounts are as shown in Illustration E-4.

A = L + SE

30,000

30,000 Rev

Cash Flows no effect

A = L + SE

12,00012,000

Cash Flows

$12,000

study objective 5

Indicate how debt and stock investments are valued and reported in the financial statements.

Valuing and Reporting Investments

The value of debt and stock investments may fluctuate greatly during the time they are held. For example, in a 12-month period, the stock of Time Warner hit a high of 5812 and a low of 9. In light of such price fluctuations, how should companies value investments at the balance sheet date? Valuation could be at cost, at fair value (market value), or at the lower-of-cost-or-market value.

Many people argue that fair value offers the best approach because it represents the expected cash realizable value of securities. Fair value is the amount for which a security could be sold in a normal market. Others counter that, unless a security is going to be sold soon, the fair value is not relevant because the price of the security will likely change again.

For purposes of valuation and reporting at a financial statement date, debt and stock investments are classified into three categories of securities:

1.Trading securities are bought and held primarily for sale in the near term to generate income on short-term price differences.

2.Available-for-sale securities are held with the intent of selling them sometime in the future.

3.Held-to-maturity securities are debt securities that the investor has the intent and ability to hold to maturity.3

Illustration E-5 shows the valuation guidelines for these securities. These guidelines apply to all debt securities and all stock investments in which the holdings are less than 20%.

International Note A recent U.S. accounting standard gives companies the “option” of applying fair value accounting, rather than historical cost, to certain types of assets and liabilities. This makes U.S. accounting closer to international standards.

Illustration E-5

Valuation guidelines

At fair value with changes reported in net income

Helpful Hint Companies report an unrealized gain or loss in the income statement because of the likelihood that the securities will be sold at fair value since they are a short-term investment.

The fact that trading securities are a short-term investment increases the likelihood that Pace will sell them at fair value for a gain. Pace records fair value and the unrealized gain through an adjusting entry at the time it prepares financial statements. In the entry, the company uses a valuation allowance account, Market Adjustment—Trading, to record the difference between the total cost and the total fair value of the securities. The adjusting entry for Pace Corporation is:

Both the adjusting entry and the reporting of the unrealized loss from Elbert’s available-for-sale securities differ from those illustrated for trading securities. The differences result because these securities are not going to be sold in the near term. Thus, prior to actual sale it is much more likely that changes in fair value may reverse the unrealized loss. Therefore, Elbert does not report an unrealized loss in the income statement. Instead, it reports it as a separate component of stockholders’ equity. In the adjusting entry, Elbert identifies the market adjustment account with available-for-sale securities, and identifies the unrealized gain or loss account with stockholders’ equity. The adjusting entry for Elbert Corporation to record the unrealized loss of $9,537 is:

Helpful Hint The entry is the same regardless of whether the securities are considered shortterm or long-term.

If total fair value exceeds total cost, Elbert would record the adjusting entry as an increase (debit) to Market Adjustment—Available-for-Sale and a credit to

Unrealized Gain or Loss—Equity.

For available-for-sale securities, the company carries forward the Unrealized Gain or Loss—Equity account to future periods. At each future balance sheet date, the account is adjusted with the market adjustment account to show the difference between cost and fair value at that time.

BALANCE SHEET PRESENTATION

For balance sheet presentation, companies must classify investments as either short-term or long-term.

Ethics Note Recently, the SEC accused investment bank Morgan Stanley of overstating the value of certain bond investments by $75 million. The SEC stated that, in applying fair value accounting, Morgan Stanley used its own more optimistic assumptions rather than relying on external pricing sources.

Short-Term Investments

Short-term investments (also called marketable securities) are securities held by a company that are (1) readily marketable and (2) intended to be converted into cash within the next year or operating cycle, whichever is longer. Investments that do not meet both criteria are classified as long-term investments. In a recent survey of 600 large U.S. companies, 202 reported short-term investments.

READILY MARKETABLE. An investment is readily marketable when it can be sold easily whenever the need for cash arises. Short-term paper4 meets this criterion because a company can readily sell it to other investors. Stocks and bonds traded on organized securities markets, such as the New York Stock Exchange, are readily marketable because they can be bought and sold daily. In contrast, there may be only a limited market for the securities issued by small corporations and no market for the securities of a privately held company.

INTENT TO CONVERT. Intent to convert means that management intends to sell the investment within the next year or operating cycle, whichever is longer.

Generally, this criterion is satisfied when the investment is considered a resource that the company will use whenever the need for cash arises. For example, a ski resort may invest idle cash during the summer months with the intent to sell the securities to buy supplies and equipment shortly before the next winter season. This

study objective 6

Distinguish between shortterm and long-term investments.

Helpful Hint Trading securities are always classified as shortterm. Available-for-sale securities can be either short-term or long-term.

Illustration E-8 Balance sheet presentation of short-term investments

investment is considered short-term even if lack of snow cancels the next ski season and eliminates the need to convert the securities into cash as intended.

Because of their high liquidity, companies list short-term investments immediately below Cash in the current assets section of the balance sheet. Short-term investments are reported at fair value. For example, Weber Corporation would report its trading securities as shown in Illustration E-8.

WEBER CORPORATION

Balance Sheet (partial)

Illustration E-9 Balance sheet presentation of long-term investments

Illustration E-10

Nonoperating items related to investments

Long-Term Investments

Companies generally report long-term investments in a separate section of the balance sheet immediately below “Current assets,” as shown in Illustration E-9. Long-term investments in available-for-sale securities are reported at fair value. Investments in common stock accounted for under the equity method are reported at equity.

WEBER CORPORATION

Balance Sheet (partial)

PRESENTATION OF REALIZED AND UNREALIZED GAIN OR LOSS

Companies must present in the financial statements gains and losses on investments, whether realized or unrealized. In the income statement, companies report gains and losses, as well as interest and dividend revenue, in the nonoperating activities section under the categories listed in Illustration E-10.

As indicated earlier, companies report an unrealized gain or loss on available- for-sale securities as a separate component of stockholders’ equity. To illustrate, assume that Muzzillo Inc. has common stock of $3,000,000, retained earnings of $1,500,000, and an unrealized loss on available-for-sale securities of $100,000.

Illustration E-11 shows the financial statement presentation of the unrealized loss.

MUZZILLO INC.

Balance Sheet (partial)

Illustration E-11

Unrealized loss in stockholders’ equity section

THE WALT DISNEY COMPANY

Statement of Cash Flows (partial) (in millions)

Illustration E-12

Statement of cash flows presentation of investment activities