Investments in Stocks

1. 0 14 Investments in Stocks

2. 0 14-5 Accounting for Investments in Stocks Like individuals, businesses have a variety of reasons for investing in stocks, called equity securities. A business may purchase stocks as a means of earning a return on excess cash that it does not need for its normal operations.

3. 0 14-5 Trading securitiesare securities that management intends to actively trade for profit. Available-for-sale securities are securities that management expects to sell in the future, but which are not actively traded for profit.

4. 0 14-5 When a business invests in available-for-sale securities, such investments are classified as temporary investments or marketable securities.

5. 0 14-5 Marketable securities must meet two conditions: • The securities must be readily marketable, and can be sold for cash at any time. • Management must intend to sell the securities when the business needs cash for operations.

6. 0 14-5 On June 1, Crabtree Company purchased 2,000 shares of Inis Corporation common stock at $89.75 per share plus a brokerage fee of $500. The firm paid $180,000 [($89.75 x 2,000 shares) + $500]. June 1 Marketable Securities 180 000 00 Cash 180 000 00 Purchased 2,000 shares of Inis Corporation common stock. 62

7. 0 14-5 On October 1, Inis declared a $0.90 per share dividend payable on November 30. Nov 30 Cash 1 800 00 Dividend Revenue 1 800 00 Received dividends on Inis Corporation common stock (2,000 shares x $0.90). 63

8. 0 14-5 Unrealized Holdings Gain or Loss On the balance sheet, temporary investments are reported at their fair market value. Any difference between the fair market value and their cost is an unrealized holding gain or loss.

9. 0 14-5 The Crabtree Co.’s portfolio of temporary investments was purchased during 2008 and has the following fair market values and unrealized gains and losses on December 31, 2008. Unrealized Common Stock Cost Market Gain (Loss) Edwards Inc. $150,000 $190,000 $40,000 SWS Corp. 200,000 200,000 — Inis Corporation 180,000 210,000 30,000 Bass Co. 160,000 150,000(10,000) Total $690,000 $750,000 $60,000 65

10. 0 14-5 Temporary Investments on the Balance Sheet 66

11. 0 14-5 Long-Term Investments in Stocks Long-term investments are not intended as a source of cash in the normal operations of the business. Rather, such investments are often held for their income, long-term gain potential, or influence over another business entity.

12. 0 14-5 Accounting for Long-Term Stock Investments Is there a significant influence over the investee? No Yes Account for the investment as an available-for-sale security Account for the investment by using the equity method 70

13. 0 14-5 On January 2, Hally Inc. pays cash of $350,000 for 40% of the common stock and net assets of Brock Corporation. Jan. 2 Investment in Brock Corp. Stock 350 000 00 Cash 350 000 00 Purchased 40% of Brock Corp. common stock. 71

14. 0 14-5 For the year ending December 31, Brock Corporation reports net income of $105,000. Dec. 31 Investment in Brock Corp. Stock 42 000 00 Income of Brock Corp. 42 000 00 Recorded 40% share of Brock Corp. net income of $105,000. 72

15. 0 14-5 14-5 On December 31, Brock Corporation pays $45,000 in dividends. Dec. 31 Cash 18 000 00 Investment in Brock Corp.Stock 18 000 00 Recorded 40% share of Brock Corp. dividends. 73

16. 0 14-5 14-5 Investments and Dividends 74

17. 0 14-5 14-5 Sale of Investments in Stocks On March 1, an investment in Drey Inc. stock that had a carrying amount of $15,700 is sold for $17,500. Mar. 1 Cash 17 500 00 Investment in Drey Inc. Stock 15 700 00 Gain on Sale of Investments 1 800 00 75

18. Example Exercise 14-6 0 14-5 Phillips Company purchased 30% of the outstanding stock of Singh Company on January 1, 2008. Singh reported net income of $90,000 and declared dividends of $15,000 during 2008. How much would Phillips adjust their investment in Singh Company under the equity method? 76