Transactions and portfolio

adjustment of investments for two

successive periods
 Motivation for Investments
1. Companies invest
extra cash into
investments to
produce higher
income.
2. Some companies
are set up to
produce income
from investments.
3. Companies make
investments for
strategic reasons.
 Short-Term Investments
Short-term investments are
securities that:
• Management intends
to convert to cash
within one year or the
operating cycle,
whichever is longer.
• Are readily convertible
to cash.

Short-term investments do not include cash

equivalents. Cash equivalents are investments that are
both readily converted to known amounts of cash and
mature within three months.
 Long-Term Investments
Long-term investments:
• are not readily
convertible to cash.
• are not intended to
be converted to cash
in the short term.
• are reported in the
noncurrent section of
the balance sheet,
often in its own
category.
4
 Investments of Selected
Companies
Short-Term (S-T) and Long-Term (L-T)
Investments as a Percent of Total Assets

5
Debt Securities Equity Securities
• Reflect a creditor • Reflect an owner
relationship relationship
• Examples: Investments • Examples: Investments in
in notes, bonds, and CDs shares of stock
• May be issued by • Issued by companies
governments,
companies, or
individuals

6
 Classification and Reporting
Accounting for Investments depends on three factors:
1. Security type: debt or equity
2. Intent to hold the security short or long term
3. Percentage ownership in another company’s equity
securities
 Debt Investments –
Held-to-Maturity
1. Debt securities
2. Intent and ability to hold until maturity
3. Reported as:
a) Current assets if maturity dates are within one
year or the operating cycle, whichever is
longer.
b) Noncurrent investments if their maturity dates
are longer.
4. Portfolio of HTM securities reported at amortized
cost.
5. No fair value adjustment to the portfolio.
• Debt investments are recorded at cost.
• On July 1, 2019, Ling Co. paid $30,000 to
buy Dell’s 7%, 2-year bonds payable with a
$30,000 par value.
• The bonds pay interest semiannually on
December 31 and June 30.

• Interest revenue is recorded when earned.

• $30,000 par value × 7% × 6/12 = $1,050 interest
earned from July 1 to December 31.
 Debt Investments: Maturity
When the bonds mature, Ling Co. will receive
the amount of the par value in cash.
 Debt Investments – Trading
The slide outlines the key features of Debt Investments –
Trading:
1.Debt investments: These are securities that represent a
debt owed to the investor.
2.Actively managed for profit: These investments are
bought and sold frequently with the goal of generating short-
term profits.
3.Always current assets: Trading securities are classified as
current assets because they are intended to be sold in the
near term.
4.Portfolio reported at fair value: The portfolio of trading
securities is reported on the balance sheet at its fair value.
5.Unrealized gain or loss: Changes in the fair value of these
securities (gains or losses not yet realized through sale) are
reported in the income statement.
 Debt Investments – Trading
Recording and Reporting Fair Value
• TechCom’s portfolio of trading securities had a total cost of
$11,500, and a fair value of $13,000, on December 31,
2019, the first year the securities were held.
• The $1,500 difference between the cost of $11,500 and
the fair value of $13,000 is an unrealized gain.
 Debt Investments – Trading
Selling Trading Securities
• Assume TechCom sells trading securities that
had cost $100 for $120 cash, on January 9, 2020.
• The gain is reported in the Other Revenues and
Gains on the Income Statement.
• A loss would be reported in Other Expenses and
Losses.
 Debt Investments –
Available-for-Sale
1. Debt investments not classified as trading or held-
to-maturity.
2. Reported as:
a) Short-term investments if intent to sell within one
year or the operating cycle, whichever is longer.
b) Long-term investments if securities do not meet
short-term criteria.
3. Valued at fair value.
4. Unrealized gains or loss reported in the equity
section of the balance sheet as part of
comprehensive income.
 Available-for-Sale:
Recording Fair Value
• Mitsu Co. had no prior investments.
• In the current period, it acquired two available-
for-sale securities as shown below.
• At December 31, 2019 the year-end adjusting
entry to record fair value is shown.
 Available-for-Sale:
Reporting Fair Value
Music City
Partial Balance Sheet
December 31, 2019
Assets
Debt investments‒AFS (at cost) $ 73,000
Fair value adjustment–AFS 1,550
Debt investments‒AFS (at fair value) $ 74,550

Equity
Add unrealized gain on AFS securities $ 1,550
 Available-for-Sale: Reporting for
Next Year
Let’s extend our example and assume that at December 31,
2020, Mitsu’s portfolio of long-term AFS securities has an
$81,000 cost and an $82,000 fair value.
 Classification and Reporting
Accounting for Investments depends on three factors:
1. Security type: debt or equity
2. Intent to hold the security short or long term
3. Percentage ownership in another company’s equity
securities
 Cost Method Investments
Investor Ownership of
Investee Shares Outstanding
Cost or
Market
Value Equity Consolidated Financial
Method Method Statements

0% 20% 50% 100%

Investor lacks significant influence or control if they
own less than 20% of a company’s voting stock.
• Equity investments are recorded at cost when
acquired, including any commissions or brokerage
fees paid.
• ITI purchased 100 shares of Lynx for $7,000.

• On 11/1, ITI receives $10 in dividends.

• Cash is debited and Dividend Revenue is
credited.
• ITI’s portfolio of stock investments with insignificant influence, has a
cost of $7,000.
• Fair value is $9,000 on 12/31/19.
• First year securities held.
• Unrealized gain = $9,000 - 7,000 = $2,000.

• Unrealized gain is reported in Other Revenues and Gains (or Expenses and
Losses) on the Income Statement.
• Fair Value Adjustment – Stock, permanent asset which reports adjustments
in portfolio.
• Total cost kept in one account and fair value adjustment kept in separate
account. Reported in assets as shown below:
• When sold, difference between net proceeds and
cost recorded as gain or loss.
• Prior-period fair value adjustments not used to
compute gain or loss from sale of individual stocks.
• 3/9/20: ITI sold individual stock with cost of $500 for
$800.
• Gain: $800 net proceeds - $500 cost = $300.
Berkshire Co. purchases investments in trading securities at a cost of $130 on December 15, 20X1. (This is its first
and only purchase of such securities.) On December 28, Berkshire received a $15 cash dividend from the stock
purchased on December 15. At December 31, 20X1, the trading securities had a fair value of $140.
a. Prepare the December 15 acquisition entry for the trading securities’ portfolio.
b. Prepare the December 28 receipt of cash dividends entry for the trading securities’ portfolio.

20X1 General Journal Debit Credit

Dec. 15 Short-term investments - Trading 130
Cash 130

Dec. 28 Cash 15
Dividend revenue 15

Short-term investments - Trading

Dec. 15 130
Berkshire Co. purchases investments in trading securities at a cost of $130 on December 15, 20X1. (This is its first
and only purchase of such securities.) On December 28, Berkshire received a $15 cash dividend from the stock
purchased on December 15. At December 31, 20X1, the trading securities had a fair value of $140.
a. Prepare the December 15 acquisition entry for the trading securities’ portfolio.
b. Prepare the December 28 receipt of cash dividends entry for the trading securities’ portfolio.
c. Prepare the December 31 year-end adjusting entry for the trading securities’ portfolio.

Short-term investments - Trading Fair value adjustment - Trading

Dec. 15 130 Unadjusted 0
Adjustment 10
Dec. 31 130 Adjusted 10
Step 1: Determine what the current account balance equals. $0
Step 2: Determine what the current account balance should equal. $10
Step 3: Record an adjusting entry to get from step 1 to step 2. $10

20X1 General Journal Debit Credit

Dec. 31 Fair value adjustment - Trading 10
Unrealized gain - Income 10
Berkshire Co. purchases investments in trading securities at a cost of $130 on December 15, 20X1. (This is its first
and only purchase of such securities.) On December 28, Berkshire received a $15 cash dividend from the stock
purchased on December 15. At December 31, 20X1, the trading securities had a fair value of $140.
a. Prepare the December 15 acquisition entry for the trading securities’ portfolio.
b. Prepare the December 28 receipt of cash dividends entry for the trading securities’ portfolio.
c. Prepare the December 31 year-end adjusting entry for the trading securities’ portfolio.
d. Explain how each account in entry c) is reported in financial statements.

Short-term investments - Trading Fair value adjustment - Trading

Dec. 15 130 Unadjusted 0
Adjustment 10
Dec. 31 130 Adjusted 10

20X1 General Journal Debit Credit

Dec. 31 Fair value adjustment - Trading 10
Unrealized gain - Income 10

Balance Sheet Income Statement

Current assets: Other revenues and gains:
Short-term investments - Trading $130 Dividend revenue $15
Fair value adjustment - Trading 10 Unrealized gain - Income 10
Short-term investments - Trading (at fair value) $140
Berkshire Co. purchases investments in trading securities at a cost of $130 on December 15, 20X1. (This is its first
and only purchase of such securities.) On December 28, Berkshire received a $15 cash dividend from the stock
purchased on December 15. At December 31, 20X1, the trading securities had a fair value of $140.
a. Prepare the December 15 acquisition entry for the trading securities’ portfolio.
b. Prepare the December 28 receipt of cash dividends entry for the trading securities’ portfolio.
c. Prepare the December 31 year-end adjusting entry for the trading securities’ portfolio.
d. Explain how each account in entry c) is reported in financial statements.
e. Prepare the January 3, 2018, entry when a portion of its trading securities (that had originally cost $33) is
sold for $36.

Short-term investments - Trading Fair value adjustment - Trading

Dec. 31 130 Dec. 31 10
Jan. 3 33
Jan. 3 97

20X2 General Journal Debit Credit

Jan. 3 Cash 36
Short-term investments - Trading 33
Gain on sale of short-term investments 3
 Investor Ownership of
Investee Shares Outstanding
Cost or
Market
Value Equity Consolidated Financial
Method Method Statements

0% 20% 50% 100%

Investor lacks significant influence or control if they
own less than 20% of a company’s voting stock.
 Investments in Equity Securities
with Significant Influence
➢Original investment is recorded at cost.
➢The investment account is increased by a
proportionate share of investee’s earnings.
➢The investment account is decreased by dividends
received.
 On January 1, 2016, Micron Co. records the
purchase of 3,000 shares (30%) of Star Co. common
stock at a total cost of $70,650 cash.

For 2016, Star reports net income of $20,000, and pays

total cash dividends of $10,000 on January 9, 2016.
30
Prepare entries to record the following transactions of Garcia Company.
20X1
Jan. 1 Purchased 400 shares of Lopez Co. common stock for $3,000 cash. Lopez has 1,000
shares of common stock outstanding, and its policies will be significantly influenced
by Garcia.
Aug. 1 Lopez declared and paid a cash dividend of $2 per share.
Dec. 31 Lopez announced that net income for the year is $2,500.

20X2
Aug. 1 Lopez declared and paid a cash dividend of $2.25 per share.
Dec. 31 Lopez announced that net income for the year is $2,750.

20X3
Jan. 1 Garcia sold 100 shares of Lopez for $1,300 cash.

Long-term investments - Lopez Lopez (Investee) Retained Earnings

Net income % of NI Net income XXXX
Net Loss % of NL Net Loss XXXX
Dividends % of Div Dividends XXXX
20X1
Purchased 400 shares of Lopez Co. common stock for $3,000 cash. Lopez has 1,000
Jan. 1
shares of common stock outstanding, and its policies will be significantly influenced
by Garcia.
Aug. 1 Lopez declared and paid a cash dividend of $2 per share. (1,000 shares @ $2 = total $2,000)
Dec. 31 Lopez announced that net income for the year is $2,500.

Long-term investments - Lopez Lopez (Investee) Retained Earnings

1/1/20X1 3,000 1/1/20X1 XXXX
8/1/20X1 800 8/1/20X1 2,000
12/31/20X1 1,000 12/31/20X1 2,500

General Journal Debit Credit

1/1/20X1 Long-term investments - Lopez 3,000
Cash 3,000

8/1/20X1 Cash (400 shares @ $2) 800

Long-term investments - Lopez 800

12/31/20X1 Long-term investments – Lopez ($2,500 x 40%) 1,000

Earnings from Long-Term Investments 1,000
20X2
Aug. 1 Lopez declared and paid a cash dividend of $2.25 per share. (total $2,250)
Dec. 31 Lopez announced that net income for the year is $2,750.

20X3
Jan. 1 Garcia sold 100 shares of Lopez for $1,300 cash.

Long-term investments - Lopez Lopez (Investee) Retained Earnings

1/1/20X1 3,000 1/1/20X1 XXXX
8/1/20X1 800 8/1/20X1 2,000
12/31/20X1 1,000 12/31/20X1 2,500
8/1/20X2 900 8/1/20X2 2,250
12/31/20X2 1,100 12/31/20X2 2,750
1/1/20X3 3,400

General Journal Debit Credit

8/1/20X2 Cash (400 shares @ $2.25) 900
Long-term investments - Lopez 900

12/31/20X2 Long-term investments – Lopez ($2,750 x 40%) 1,100

Earnings from Long-Term Investments 1,100

1/1/20X3 Cash 1,300

Long-term investments - Lopez ($3,400 x 100/400) 850
Gain on sale of investment 450
Comprehensive Income
All changes in equity during a period except those resulting
from investments by owners and distributions to owners.

Includes:

◆ all revenues and gains, expenses and losses reported in net

income, and

◆ all gains and losses that bypass

net income but affect stockholders’
equity.

LO 7
Comprehensive Income

Net Income
Income Statement (in thousands) Other Comprehensive
Sales
Cost of goods sold
$ 285,000
149,000 + Income
Gross profit 136,000 ◆ Unrealized gains and
Operating expenses:
losses on available-for-
Selling expenses 10,000
Administrative expenses 43,000
sale securities.
Total operating expense 53,000 ◆ Translation gains and
Income from operations 83,000 losses on foreign
Other revenue (expense):
currency.
Interest revenue 17,000
Interest expense (21,000) ◆ Plus others
Total other (4,000)
Income before taxes 79,000
Reported in Stockholders’
Income tax expense 24,000
Net income $ 55,000 Equity

LO 7
• Trading Purposes Investment in Equity
Investment in equity at a cost of 1,000 for trading purposes.

Dr Investment 1,000
Cr Cash 1,000

At the end of the financial period, the market price of the investment was 1,150

Dr Fair value adjustment 150

Cr Unrealized holding gain- Income 150

• Investment in Equity at a cost of 1,000 for non trading purposes

Dr Investment 1,000
Cr Cash 1,000

At the end of the financial period, the market price of the investment was 1,250
Dr Fair value adjustment 250
Cr Unrealized holding gain- Equity 250
• Statement of comprehensive Income
Sales
- COGS
Gross Profit
- Operating expenses
- Other Income and expenses
- unrealized holding gain and loss - Income
Div Revenue
Revenue from investment
Net income
Other comprehensive Income
Unrealized holding gain and loss –Equity
Comprehensive Income

Question
Gains and losses that bypass net income but affect
stockholders' equity are referred to as

a. comprehensive income.

b. other comprehensive income.

c. prior period income.

d. unusual gains and losses.

LO 7
Comprehensive Income

Companies must display the components of other

comprehensive income in one of two ways:

1. A single continuous statement (one statement approach)

or

2. two separate, but consecutive statements of net income

and other comprehensive income (two statement
approach).

LO 7
 Comprehensive Income

One Statement
Approach

Advantage – does
not require the
creation of a new
financial statement.

Disadvantage - net
income buried as a
subtotal on the ILLUSTRATION 4-20
statement. One Statement Format: Comprehensive Income

LO 7
 Comprehensive Income

Two Statement ILLUSTRATION 4-19

Approach

ILLUSTRATION 4-21
Two Statement Format:
Comprehensive Income
 Statement of Financial position

Assets
Non current assets
-Long term Investment
Equity Investment
Debt Investment
Intangible assets
PPE

Current Asset
Inventory
A/R
- Short term Investment
Equity Investment (trading )
Debt Investment ( Trading )

Liabilities
xxx

Equity
Share capital
Retained Earning
Accumulated Other comprehensive Income xxx xxxx