CH Investments

Accounting Principles
Thirteenth Edition
Weygandt Kimmel Kieso
Chapter 16
Investments
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Investments
Chapter Outline
3
Why Companies Invest
Companies purchase investments in debt or share
securities generally for one of three reasons.
1. Company may have excess cash
2. Generate earnings from investment income
3. For strategic reasons
Invest Temporary
Sell Investments
Cash
Accounts
Receivable Inventory
ILLUSTRATION 16.1
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Why Corporations Invest
Which of the following is not a primary reason why
companies invest in debt and equity securities?
a. They wish to gain control of a competitor.
b. They have excess cash.
c. They wish to move into a new line of business.
d. They are required to by law.

Accounting for Debt Investments
Investments in government and company bonds.
Entries are made to record
1. the acquisition
2. the interest revenue
3. the sale

Recording Acquisition of Bonds
Cost includes all expenditures necessary to acquire these
investments, such as the price paid plus brokerage fees
(commissions), if any.
Illustration: Kuhl NV acquires 50 Doan SA 8%, 10-year, €1,000
bonds on January 1, 2020, for €50,000. The entry to record
the investment is:
Debt Investments (50 × €1,000) 50,000
Cash 50,000

Recording Bond Interest
Calculate and record interest revenue based upon the
• carrying value of bond
• times interest rate
• times portion of year bond is outstanding

Illustration: The Doan SA bonds pay interest of €4,000
annually on January 1 (€50,000 × 8%). If Kuhl NV’s fiscal year
ends on December 31, it accrues the interest earned since
January 1. Calculate the accrued interest.
€50,000 x 8% = €4,000
The adjusting entry is:
Interest Receivable 4,000
Interest Revenue 4,000

Kuhl reports Interest Receivable as a current asset in the
statement of financial position. It reports Interest Revenue
under “Other income and expense” in the income statement.
Kuhl reports receipt of the interest on January 1 as follows.
Cash 4,000

Recording Sale of Bonds
Assume that Kuhl receives net proceeds of €54,000 on the
sale of the Doan SA bonds on January 1, 2021, after receiving
the interest due. Prepare the entry to record the sale of the
bonds.
Cash 54,000
Debt Investments 50,000
Gain on Sale of Debt Investments 4,000

Debt investments are initially recorded at:
a. cost.
b. cost plus dividends.
c. par value.
d. face value.

Anatolian A.S. receives net proceeds of ₺42,000 on the
sale of share investments that cost ₺39,500. This
transaction will result in reporting in the income
statement a:
a. loss of ₺2,500 under “Other income and expense.”
b. loss of ₺2,500 under “Operating expenses.”
c. gain of ₺2,500 under “Other income and expense.”
d. gain of ₺2,500 under “Operating revenues.”

DO IT! 1 Debt Investments (1 of 6)
Waldo AG had the following transactions pertaining to debt
investments.
Jan. 1, 2020 Purchased 30, €1,000 Hillary AG 10% bonds for
€30,000. Interest is payable annually on
January 1.
Dec. 31, 2020 Accrued interest on Hillary AG bonds in 2020.
Jan. 1, 2021 Received interest on Hillary AG bonds.
Jan. 1, 2021 Sold 15 Hillary AG bonds for €14,600.
Journalize the above transactions, including the accrual of
interest on December 31, 2020.
investments.
Jan. 1, 2020 Purchased 30, €1,000 Hillary AG 10% bonds for
€30,000. Interest is payable annually on
January 1.
Journalize the above transaction.
Debt Investments 30,000
Cash 30,000

investments.
Calculate the amount of the accrued interest.
€30,000 x 10% = €3,000
Record the accrual of the interest.

investments.
Jan. 1, 2021 Received interest on Hillary AG bonds.
Record the receipt of the interest.
Cash 3,000

investments.
Jan. 1, 2021 Sold 15 Hillary AG bonds for €14,600.
Record the sale of the bonds.
Cash 14,600
Loss on Sale of Debt Investments 400
Debt Investments (€30,000 x ½) 15,000

investments.
Calculate the amount of the accrued interest.
€15,000 x 10% = €1,500
Record the accrual of the interest.

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JURNAL DASAR
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JURNAL DASAR
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JURNAL DASAR
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JURNAL DASAR
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Share Investments
Ownership Percentages
0 --------------------20% ----------------- 50% ----------------------- 100%

No significant Significant Control usually exists
influence influence (50%+ owned)
usually exists usually exists
Investment valued on
Investment Investment parent’s books using Cost
valued using valued using Method or Equity Method
Cost Method Equity (investment eliminated in
Method Consolidation)
The accounting depends on the extent of the investor’s influence over the
operating and financial affairs of the issuing company (investee).
Accounting for Share Investments
Holdings of Less than 20%
• Companies use the cost method
• Investment is recorded at cost and revenue
recognized only when cash dividends are received
• Cost includes all expenditures necessary to acquire
these investments, such as the price paid plus any
brokerage fees (commissions)

Recording Acquisition of Shares
Illustration: Assume that on July 1, 2020, Lee Ltd. acquires
1,000 shares (10% ownership) of Beal Ltd. Lee pays HK$405
per share. The entry for the purchase is:
Share Investments (1,000 x HK$405) 405,000
Cash 405,000

Recording Dividends
Illustration: During the time Lee owns the shares, it makes
entries for any cash dividends received. If Lee receives a
HK$20 per share dividend on December 31, the entry is:
Cash (1,000 x HK$20) 20,000
Dividend Revenue 20,000

Recording Sale of Shares
Illustration: Assume that Lee Ltd. receives net proceeds of
HK$395,000 on the sale of its Beal shares on February 10, 2021.
Because the shares cost HK$405,000, Lee incurred a loss of
HK$10,000. The entry to record the sale is:
Cash 395,000
Loss on Sale of Share Investments 10,000
Share Investments 405,000

Holdings Between 20% and 50%
Equity Method: Investor records the investment at cost
and subsequently adjust the amount each period for the
• proportionate share of earnings (losses)
• dividends received

Illustration: Milar plc acquires 30% of the ordinary shares of Beck
plc for £120,000 on January 1, 2020. For 2020, Beck reports net
income of £100,000 and paid dividends of £40,000. Prepare the
entries for these transactions.
Jan. 1 Share Investments 120,000
Cash 120,000
Dec. 31 Share Investments 30,000
Revenue from Investments 30,000
Dec. 31 Cash 12,000

Illustration: Milar plc acquires 30% of the ordinary shares of Beck
plc for £120,000 on January 1, 2020. For 2020, Beck reports net
income of £100,000 and paid dividends of £40,000.
After Milar posts the transactions for the year, its investment and
revenue accounts will show the following.
Share Investments Revenue from Share Investments

Jan. 1 120,000 Dec. 31 12,000 Dec. 31 30,000
Dec. 31 30,000
Bal. 138,000 Bal.
ILLUSTRATION 16.4
Investment and revenue accounts after posting

The equity method of accounting for long-term investments
in shares should be used when the investor has significant
influence over an associate and owns:
a. between 20% and 50% of the associate’s ordinary
shares.
b. 30% or more of the associate’s ordinary shares.
c. more than 50% of the associate’s ordinary shares.
d. less than 20% of the associate’s ordinary shares.

Holdings of More than 50%
Controlling Interest - When one company acquires a
voting interest of more than 50 percent in another
company
Dipelajari di
• Investor is referred to as parent advance
accounting
• Investee is referred to as subsidiary
• Investment in subsidiary is reported on parent’s
books as a long-term investment
• Parent generally prepares consolidated financial
statements.
Holdings of More than 50%
Consolidated statements indicate the magnitude and
scope of operations of the companies under common
control.
Unilever (NLD) adidas (DEU) The Disney Company (USA)
Hellmann’s Reebok Capital Cities/ABC, Inc.
Lipton Rockport Disneyland, Disney World
Bertolli TaylorMade Mighty Ducks
Knorr Ashworth Anaheim Angels
ESPN
ILLUSTRATION 16.5
Examples of consolidated companies and their subsidiaries

DO IT! 2 Stock Investments
Presented below are two independent situations.
1. Rho Jean Ltd. acquired 5% of the 400,000 ordinary shares of
Stillwater Ltd. at a total cost of NT$60 per share on May 18,
2020. On August 30, Stillwater declared and paid a NT$750,000
dividend. On December 31, Stillwater reported net income of
NT$2,440,000 for the year. Prepare all necessary entries for
2020.
May 18 Share Investments (400,000 x 5% x NT$60) 1,200,000
Cash 1,200,000
Aug. 30 Cash (NT$750,000 x 5%) 37,500
Dividend Revenue 37,500
2. Natal, Ltd. obtained significant influence over North Sails by
buying 40% of North Sails’ 60,000 outstanding ordinary shares
at a cost of NT$120 per share on January 1, 2020. On April 15,
North Sails declared and paid a cash dividend of NT$450,000.
On December 31, North Sails reported net income of
NT$1,200,000 for the year. Prepare all necessary entries for
2020.
Jan. 1 Share Investments (60,000 x 40% x NT$120) 2,880,000
Cash 2,880,000
Apr. 15 Cash (NT$450,000 x 40%) 180,000
Dec. 31 Share Investments (NT$1,200,000 x 40%) 480,000
Revenue from Investments 480,000
Latihan Soal
Investasi pada Saham Biasa
PT. XYZ memiliki transaksi berikut yang berkaitan dengan investasi
biasa saham. (dlm USD)
1 Jan Membeli 2.500 saham biasa PT. ABC (5%) seharga 142.100.
1 Juli Menerima dividen tunai sebesar 2,80 per saham.
1 Des Menjual 500 saham biasa PT. ABC seharga 31,200.
31 Des Menerima dividen tunai sebesar 2,90 per saham.
Instruksi: Buatlah jurnal transaksinya.
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Valuing and Reporting Investments

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Trading Securities
• Companies hold with intention of selling in a short
period of time
• Trading means frequent buying and selling
• Reported at fair value
• Changes from cost are reported in the income
statement as unrealized gains or losses

Trading Securities
Illustration: Cost and fair values for investments of Pace SA
classified as trading securities on December 31, 2020.
Unrealized
Investments Cost Fair Value Gain (Loss)
Yorkville Company bonds € 50,000 € 48,000 €(2,000)
Kodak Company shares 90,000 99,000 9,000
€140,000 €147,000 € 7,000
ILLUSTRATION 16.7
Adjusting entry for Pace is:
Dec. 31 Fair Value Adjustment—Trading 7,000
Unrealized Gain or Loss—Income 7,000

Akun Current Asset yang menyesuaikan
dapat menambah atau mengurangi akun
investment
Other income pada laporan

Income summary

Non-Trading Securities
• Held with intent of selling sometime in future
• Classified as current assets or as non-current assets,
depending on intent of management
• Reported at fair value
• Changes from cost are reported in stockholders’
equity as unrealized gains or losses

Illustration: Assume that Ingrao AG has two securities that are
classified as non-trading.
Unrealized
Investments Cost Fair Value Gain (Loss)
Rachel Soup AG shares € 93,537 € 103,600 €10,063
Zeller Company shares 200,000 180,400 (19,600)
Total €293,537 €284,000 € (9,537)
ILLUSTRATION 16.9
Prepare the adjusting entry for Ingrao.
Dec. 31 Unrealized Gain or Loss—Equity 9,537
Fair Value Adjustment—Non-Trading 9,537

Other comprehensive income pada
laporan Income summary
Akun Current Asset yang

menyesuaikan dapat menambah atau
mengurangi akun investment

Illustration: Shelton’s unrealized loss of €9,537 would appear
in the comprehensive income statement as follows.
Shelton Corporation
Comprehensive Income Statement
For the Year Ended December 31, 2020
Net income €126,200
Other comprehensive income
Unrealized loss on non-trading securities (9,537)
Comprehensive income €116,663
ILLUSTRATION 16.10

DO IT! 3a Trading and Non-Trading
Securities (1 of 3)
The cost and fair value of Chengdu Ltd.’s investments, at December
31, 2020, are shown below.
Unrealized
Cost Fair Value Gain (Loss)
Trading securities ¥936,000 ¥949,000 ¥13,000
Non-trading securities ¥488,000 ¥514,000 ¥26,000
At December 31, 2019, the Fair Value Adjustment—Trading account
had a debit balance of ¥92,000, and the Fair Value Adjustment—
Non-trading account had a credit balance of ¥57,500. Prepare the
required journal entries for each group of securities for December
31, 2020.
Securities (2 of 3)
Unrealized
Available-for-sale securities ¥488,000 ¥514,000 ¥26,000
At December 31, 2019, the Fair Value Adjustment—Trading account
had a debit balance of ¥92,000, and the Fair Value Adjustment—
Non-trading account had a credit balance of ¥57,500. Prepare the
journal entries for the trading securities at December 31, 2020.
Unrealized Loss—Income (¥92,000 - ¥13,000) 79,000
Fair Value Adjustment—Trading 79,000

Securities (3 of 3)
Unrealized
Available-for-sale securities ¥488,000 ¥514,000 ¥26,000
At December 31, 2019, the Fair Value Adjustment—Trading account had a

debit balance of ¥92,000, and the Fair Value Adjustment—Non-trading
account had a credit balance of ¥57,500. Prepare the journal entries for the
non-trading securities at December 31, 2020.
Fair Value Adjustment—Non-Trading (¥57,500 + ¥26,000) 83,500
Unrealized Gain or Loss—Equity 83,500

Statement of Financial Position Presentation
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.

Presentation of Realized and
Unrealized Gain or Loss
Other Income and Expense
Interest Revenue Loss on Sale of Investments
Dividend Revenue Unrealized Loss
Gain on Sale of Investments
Unrealized Gain
ILLUSTRATION 16.16
Nonoperating items related to investments

Presentation of Realized and
Unrealized Gain or Loss
Unrealized gains or losses on non-trading securities are
reported as a separate component of stockholders’ equity.
ILLUSTRATION 16.17

ILLUSTRATION 16.18
DO IT! 3b Financial Statement
Presentation of Investments
Identify where each of the following items would be reported in
the financial statements.

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Accounting Principles

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0 --------------------20% ----------------- 50% ----------------------- 100%

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Share Investments Revenue from Share Investments

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Instruksi: Buatlah jurnal transaksinya.

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Other income pada laporan

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Akun Current Asset yang

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At December 31, 2019, the Fair Value Adjustment—Trading account had a

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