Presentation Transcript

1. Chapter 9

   INVESTMENTS
2. THIS CHAPTER… focuses on shorttermandlongterminvestmentsthathelpcompaniesgenerateeraningswithidlecash.
3. Therearetwomaintypes of investments; Stocks (EquityInvestments) Bonds (DebtInvestments)
4. INVESTMENTS
5. The accounting for investments depends on the purpose of the investment and the percentage of voting stock held.
6. Types of Investments-Stocks Case I; Investorcorporationownslessthan 20% of thevotingstock of theinvestee Minority, passiveinvestment Usuallyaim of theinvestor is toearnshorttermreturns Thesetypes of investmentsarevalued at fairvalue
7. Types of Investments-Stocks Case II; Investorcorporationownsfrom 20% to 50% of thevotingstock of theinvestee Minority, activeinvestments Usuallyaim of theinvestor is toexertsignificantinfluenceovertheinvestee’sdecisions Equitymethodof accountingforinvestmentsshould be usedforvaluation Investee is called “affiliation”
8. Types of Investments-Stocks Case III; Investorcorporationownsgreaterthan 50% of thevotingstock of theinvestee Majority, activeinvestments Investorholdsfullcontrolovertheinvestee Investorandinvesteearetreated as a singleenterprise Investorshouldconsolidatethefinancialstatements (meansthattheyarerequiredtopresent a single set of financialstatements) Investor is referred as “parentcompany”; investee is referred as “subsidiary”
9. Investments(accordingto time period) Short-TermInvestments TradingSecurities MarketableEquitySecurities MarketableDebtSecurities AvailableforSaleSecurities Derivatives Long-TermInvestments LongTermInvestment in Equity LongTermInvestments in Bonds
10. TradingSecurities Alsoreferred as marketablesecuritiesortemporaryinvestments Characterized by frequent and active buying and selling with the object of generating profit Since trading securities are acquired for short-term profit, unrealized gains or losses that result from adjustments to market value pass through the income statement and increase or reduce net income before there is a sale of the securities.
11. TradingSecurities usually consist of : marketable equity securities (stocks of other companies) savings accounts (time deposits) investment funds precious metals like gold government bonds treasury bills asset securitized bonds private bonds
12. AccountingforTradingSecurities record them at the acquisition cost that includes the price of the security plus any brokerage commissions and applicable taxes, and other costs incurred record dividend revenue when dividends declared and later when cash is received adjust to fair market value at the end of the accounting period-adjusting entry
13. Adjusting Entries-Trading Securities at the end of an accounting period, cost/carrying value of the portfolio of marketable equity securities is compared with the fair value (market value) securities are reported at the current fair value in the statement of financial position carrying value = fair value at the latest reporting date if the current fair value of the securities is greater than the cost (or the carrying value)-unrealized holding gain if the current fair value is less than the cost (or the carrying value) - unrealized holding loss any unrealized gains or losses on trading securities are charged to revenue Mugan-Akman 2012
14. Available for Sale Securities neither as trading securities or held to maturity securities held by non-financial companies usually both equity and debt securities non-derivative financial assets that are initially designated by the management as available for sale (AFS) typically tied to a specific cash need usually classified as long-term assets Mugan-Akman 2012
15. Available for Sale Securities similar to Trading Securities measured at fair value in the statement of financial position unlike trading securities; any unrealized holding gains or losses - shown under the owners’ equity section with the name “Unrealized Holding Gains or Losses” realized gain or loss when these securities are sold appears in the income statement interest or dividend revenues received from AFS securities appear in the income statement Mugan-Akman 2012
16. Comparison - Trading and Available for Sale securities both are recorded at acquisition cost both are written up or down to market value (fair value) with adjusting entries at the reporting date both give rise to an unrealized holding gain or loss account upon adjustment unrealized holding gain or loss for trading securities is charged to revenues –when sold, realized gain or loss is determined by taking the difference between the carrying value and proceeds from the sale unrealized holding gain or loss for available for sale securities remains on the statement of financial position until such assets are sold-when sold, this account must then be closed and the realized gain or loss is computed by comparing the historical cost and proceeds from the sale Mugan-Akman 2012
17. ExampleforTradingSecurities On January 15, 2014 Bizim Bank acquires 1000 shares of İş Bankası (C) at 150TL plus 2.000 TL fortaxesandcommissions. Journalentryforthistransaction; TradingSecurities 152.000 Cash 152.000
18. Example-contd. İş Bankası declaresdividends of 15 TL pershare on April 15, 2014. Theentrythat Bizim Bank shouldmake at thisdate; DividendsReceivable 15.000 DividendsRevenue 15.000
19. Example-contd. Dividend is paid on May 15, 2014. Bizim Bank receivescashdividendfromtheinvestee. Theentrythat Bizim Bank shouldmake at thisdate; Cash 15.000 DividendsReceivable 15.000
20. Example-contd. December 31, 2014; fiscalyearend 1st step; Comparision of carryingvalue(cost) andfairvalue of thetradingsecurities Carryingvalue (cost): 152.000 TL Fair Market Value at thisdate: 158.000 TL Fair Market Value > CarryingValue (cost) Thereforethere is unrealized holding gain as of 6.000TL!!!!!
21. Example-contd. 2nd step; adjustingentry TradingSecurities 6.000TL Unrealized Holding Gain 6.000 TL chargedtorevenue, will be reported in theIncomeStatement
22. Example-contd. Instead of 158.000TL fair market value at theadjustingdate, assumethatfair market valuedroppedto 150.000 TL Carryingvalue (cost): 152.000 TL Fair Market Value at thisdate: 150.000 TL Fair Market Value > CarryingValue (cost) Thereforethere is unrealized holding loss as of 2.000TL!!!!!
23. Example-contd. adjustingentryforunrealized holding loss Unrealized Holding Loss 2.000TL TradingSecurities 2.000 TL
24. Example-contd. Whathappensto “TradingSecurities” account? Case I: Unrealized Holding Gain TradingSecurities 152.000TL 6.000TL 158.000TL FairValuewill be reported in theBalanceSheet
25. Example-contd. Whathappensto “TradingSecurities” account? Case II: Unrealized Holding Loss TradingSecurities 152.000TL 2.000TL 150.000TL FairValuewill be reported in theBalanceSheet
26. DO NOT FORGET!!!! unrealized holding gain or loss for trading securities is charged to revenues –when sold, realized gain or loss is determined by taking the difference between the carrying value and proceeds from the sale unrealized holding gain or loss for available for sale securities remains on the statement of financial position until such assets are sold-when sold, this account must then be closed and the realized gain or loss is computed by comparing the historical cost and proceeds from the sale