Investmen

ts accounting

2

INVESTMENTS

Short term investment

Long term investment

Corporations generally invest in debt or stock securities for one of three reasons.

WHY CORPORATIONS INVESTWHY CORPORATIONS INVEST

1. Corporation may have excess cash.

2. To generate earnings from investment income.

3. For strategic reasons.

Temporary investments and the operating cycle

SHORT-TERM INVESTMENTS (MARKETABLE SECURITIES)

Management intends to convert to cash within one year or the operating cycle whichever is longer.

Are readily convertible to cash.

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INVESTMENTS . . .

Debt Securities reflect creditor relationship (notes, bonds, etc.)

Equity Securities reflect owner relationship (stock).

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DEBT SECURITIES INVESTMENTS . . .

Held-To-Maturity Securities

Trading Securities

Available-For-Sale Securities

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HELD-TO-MATURITY SECURITIES

Debt securities that management intends to hold to their maturity whose cash value is not needed until that date.

Carried on the Balance Sheet at cost.

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TRADING SECURITIES

Debt securities that are bought and held principally for the purpose of being sold in the near term.

Frequently bought and sold to generate profits on short-term changes in their prices. 8

TRADING SECURITIES

Entire portfolio of trading securities is reported at its market value with a “realizable value adjustment” from the cost of the portfolio.

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TRADING SECURITIES

Any unrealized gain (or loss) from a change in the realizable value of the portfolio of trading securities during a period is reported on the income statement.

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AVAILABLE-FOR-SALE SECURITIES

Debt securities not classified as trading or held-to-maturity securities.

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Accounting For Held to maturity

debt securities

investment

VALUATION OF BONDS INVESTMENTVALUATION 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)/rFV- Face value or Principal R- Market rate SR- stated rate n- Period

INTEREST RATES AND BOND PRICES

BOND

statedINTERESTRATE 10%

Issuedwhen:

8%

10%

12%

Premium

Face (Par)Value

Discount

Market Rates Bonds Bought at:

Journal entry on date of bought, Jan. 1, 2011.

BONDS ISSUED AT A FACE VALUEBONDS ISSUED AT A FACE VALUE

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 50

Interest receivable 50LO 3

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 method

EFFECTIVE-INTEREST METHODEFFECTIVE-INTEREST METHOD

A $1,000, 10% bond is purchase on January 1 of 2011. It receives interest annually and will mature in two years.

Today End of Year 1

End of Year 2

Interest payment

$100Interest payment

$100

$92.59 $100 x 0.92592

$1,00010% payable annually

$85.73 $100 x 0.85733

$1,000 x 0.85733$855.73

$1035.65 (rounded)

The market value was 8%

Journal entry on date of purchase, Jan. 1, 2011.

BONDS ISSUED AT A PREMIUMBONDS ISSUED AT A PREMIUM

Held to maturity securities 1035.65

Cash 1035,65

STRAIGHT LINE METHODSTRAIGHT LINE METHOD

Amortization amount= Bonds investment premium/ n=35.65/ 2=17.825/4= 4456.25

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 50

Interest receivable 50

SHEDULE OF BOND PREMIUM AMORTIZATION

Date Cash receipt

Interest revenue

Premium amortized

Premium account balance

Carrying amount of bonds

2011.06.01

35.65 1035.65

2012.06.01

100 1035.65*8%=82.85

100-82.85=17.15

35.65-17.15=18.50

1035.65-17.15=1018.5

2012.12.31

100 1018.5*8%=81.5

100-81.5=18.5

18.5-18.5=0

1018.5-18.5=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

Accounting For Trading

debt securities

investment

Focus Co. purchases short-term investments in trading securities on July 01, 2011. Interest payment each 3 month.

Face value 12,000₮, 10%- 100 units purchased for 1160,000₮. Paid brokers fee 20,000₮.

At December 31, 2011, these securities had a market value of a.11,000₮ B. 13000₮

Let’s record the purchase.

07/01 Trading securities 1180,000

Cash 1180,000

Purchase of Trading Securities

Trading Securities

Let’s record the receipt of interest.

09/30 Cash 30,000

Interest revenue 30,000

Record receipt of interest

Trading Securities

Let’s record the receipt of interest.

12/31 Cash 30,000

Interest revenue 30,000

Record receipt of interest

Trading Securities

12/31

Unrealized loss 100,000

Realizable value adj. 100,000

To record realizable value adjustment.

Trading Securities

1. Prepare the 12/31/11 year-end adjusting entry for the trading securities’ portfolio. (Year-end value = 11,000₮)

12/31

Realizable value adj. 100,000

Unrealized Gain 100,000

To record realizable value adjustment.

Trading Securities

2. Prepare the 12/31/11 year-end adjusting entry for the trading securities’ portfolio. (Year-end value = 13,000₮)

Balance sheet.Current assets:

Trading securities 1180,000

Realizable value adjustment

(100,000)

28

1080,000Realizable value

Balance sheet.Current assets:Trading securities

1180,000Realizable value adjustment

100,0001280,000Realizable value

02/01 Cash 500,000

Trading securities Realized gain

472,000 28,000

To record sell of trading securities.

Trading Securities

Sold 40 units for 12500₮ to each securities on feb.01.2012.

Adjusting available-for-

sale 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.

Today End of Year 1

End of Year 2

Interest payment

$100Interest payment

$100

$92.59 $100 x 0.92592

$1,00010% payable annually

$85.73 $100 x 0.85733

$1,000 x 0.85733$855.73

$1035.65 (rounded)

The market value was 8%

Journal entry on date of purchase, Jan. 1, 2011.

BONDS ISSUED AT A PREMIUMBONDS ISSUED AT A PREMIUM

Available for-sale securities 1035.65

Cash 1035,65

STRAIGHT LINE METHODSTRAIGHT LINE METHOD

Amortization amount= Bonds investment premium/ n=35.65/ 2=17.825

Journal entry to record accrued interest at Dec. 31, 2011.

Interest receivable 100

Available for-sale securities 17.825

Interest revenue 82,175

Journal entry to record first receipt of revenue on Jan. 1, 2012.

Cash 100

Interest receivable 100

SHEDULE OF BOND PREMIUM AMORTIZATION

Date Cash receipt

Interest revenue

Premium amortized

Premium account balance

Carrying amount of bonds

2011.01.01

35.65 1035.65

2011.12.31

100 1035.65*8%=82.85

100-82.85=17.15

35.65-17.15=18.50

1035.65-17.15=1018.5

2012.12.31

100 1018.5*8%=81.5

100-81.5=18.5

18.5-18.5=0

1018.5-18.5=1000

Journal entry to record accrued interest at Dec. 31, 2011.

Interest receivable 100

Available for-sale securities 17.15

Interest revenue 82,85

12/31

Unrealized loss 20

Realizable value adj. 20To record realizable value adjustment.

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

Realizable value adj. 50

Unrealized Gain 50To record realizable value adjustment.

Trading Securities

2. Prepare the 12/31/11 year-end adjusting entry for the trading securities’ portfolio. (Year-end value : a. 980$ b. 1050$.

Held To Maturity

Held To Maturity

Debt securities held to maturity.

Debt securities held to maturity.

Cost.Cost.

TradingTrading

Debt securities actively traded.

Debt securities actively traded.

Realizable value.*Realizable value.*

Available for Sale

Available for Sale

Debt securities not in the other two

categories.

Debt securities not in the other two

categories.

Realizable value.**Realizable value.**

*Unrealized gains/losses reported on the income statement.

**Unrealized gains/losses reported in the equity section of the balance sheet.

Exh. 7.17

DEBT SECURITIES INVESTMENT