Chapter12Camtasiapart1.pdfChapter12Camtasiapart2.pdf11LecturesLecturesCalifornia State University, Northridge351AccountingChapter 12 – Part 12InvestmentsHeld to Held to MaturityMaturityTrading Trading SecuritiesSecuritiesAvailable Available for Salefor Sale2020--50%50%ConsolidationConsolidationLess than 20%Less than 20%Debt Debt securitiessecuritiesNot heldNot held--toto--maturity or maturity or trading trading securities.securities.Expected to Expected to be traded be traded within 3 within 3 months.months.Significant influenceSignificant influenceControlControlFor investments with less than a 20% ownership, what was For investments with less than a 20% ownership, what was managementmanagement’’s intent when making the investment?s intent when making the investment?Equity MethodEquity MethodOver 50%Over 50%Mark to Mark to MarketMarketMark to Mark to MarketMarketAmortized CostAmortized CostASC 320ASC 320--1010--2525ASC 323ASC 323--1010--15 and 3515 and 353Held to MaturityAlpha purchased 10%, 10Alpha purchased 10%, 10--year year $100,000$100,000Beta bonds on July 1 for Beta bonds on July 1 for $88,530$88,530when when otherotherbonds are paying bonds are paying 12%.12%.Interest is paid on Interest is paid on June 30 and December 31.June 30 and December 31.$5,000$5,000xx11.4699211.46992==$100,000 x .31180 $100,000 x .31180 = = $57,350$57,35031,18031,180$88,530 $88,530 Discount = $100,000 Discount = $100,000 --$88,530 = $11,470 $88,530 = $11,470 11,47011,470Discount on Bond InvestmentDiscount on Bond Investment100,000100,000Investment in HeldInvestment in Held--toto--Maturity SecuritiesMaturity Securities88,53088,530CashCashThe bonds sell for $88,530 or 88.53The bonds sell for $88,530 or 88.53(future interest revenue) (future interest revenue) (88.53% of $100,000)(88.53% of $100,000)11,47011,470Discount on Bonds PayableDiscount on Bonds Payable88,53088,530CashCash100,000100,000Bonds PayableBonds Payable324If purchased on April 1 If purchased on April 1 (in between interest payment dates):(in between interest payment dates):100,000100,000Investment in HeldInvestment in Held--toto--Maturity SecuritiesMaturity Securities91,030*91,030*CashCash2,5002,500Interest Receivable Interest Receivable ($100,000 x 10% x ($100,000 x 10% x ¼¼))11,47011,470Discount on Bond InvestmentDiscount on Bond InvestmentOn June 30, Alpha will receive $5,000 (6 months) of interest butOn June 30, Alpha will receive $5,000 (6 months) of interest butwill have will have earned only $2,500 (3 months) of interest.earned only $2,500 (3 months) of interest.Alpha will prepay the interest ($2,500) that wonAlpha will prepay the interest ($2,500) that won’’t be earned by June 30.t be earned by June 30.5,0005,000CashCash2,5002,500Interest ReceivableInterest ReceivableJune 30June 30[$100,000 x 10% x = $5,000][$100,000 x 10% x = $5,000]6612122,5002,500Interest RevenueInterest RevenueApril 1April 1*$88,530 + $2,500 = $91,030*$88,530 + $2,500 = $91,0305312312Interest RevenueInterest Revenue312312Discount on Bond InvestmentDiscount on Bond InvestmentDec 31Dec 31312312Discount on Bond InvestmentDiscount on Bond Investment5,3125,312Interest RevenueInterest Revenue5,0005,000CashCash5,000 5,000 Interest RevenueInterest Revenue5,0005,000CashCashOr the following compound entry:Or the following compound entry:$11,470 discount/20 periods = $574$11,470 discount/20 periods = $574RoundedRounded$88,530 x 6% = $5,312 $88,530 x 6% = $5,312 --$5,000 =$5,000 =$312 $312 RoundedRounded(Effective Interest Method)(Effective Interest Method)(Straight(Straight--line Method)line Method)Balance SheetBalance Sheet$ 88,530$ 88,53011,47011,470Less: Less: Discount on Bond InvestmentDiscount on Bond Investment$100,000$100,000Investment in HTM SecuritiesInvestment in HTM Securities6312312Interest RevenueInterest Revenue312312Discount on Bond InvDiscount on Bond Inv88,53088,530CashCash100,000100,000Investment in HTMSInvestment in HTMS5,0005,000Interest RevenueInterest Revenue5,0005,000CashCash$88,530x6%$88,530x6%--$5,000 = $312 $5,000 = $312 RoundedRounded331331Interest RevenueInterest Revenue331331Discount on Bond InvDiscount on Bond Inv($88,530+312)x6%($88,530+312)x6%--$5,000 = $331$5,000 = $331In 6 monthsIn 6 monthsBond interest rate = 10%Bond interest rate = 10%Market interest rate = 12%Market interest rate = 12%377377377377112,463112,463CashCash100,000100,000Investment in HTMSInvestment in HTMS6,0006,000Interest RevenueInterest Revenue6,0006,000CashCash$6,000$6,000––($112,463x5%) = $377 ($112,463x5%) = $377 RoundedRounded$6,000 $6,000 --($112,463($112,463––377)x5%377)x5%==$396$396In 6 monthsIn 6 monthsBond interest rate = 12%Bond interest rate = 12%Market interest rate = 10%Market interest rate = 10%Premium on Bond InvPremium on Bond InvInterest RevenueInterest Revenue396396396396Premium on Bond InvPremium on Bond InvInterest RevenueInterest Revenue11,47011,470Discount on Bond InvDiscount on Bond Inv12,46312,463Premium on Bond InvPremium on Bond Inv6378Trading SecuritiesCostCostCompanyCompany$15,000$15,000AA8,0008,000BB10,00010,000CC$33,000$33,000TotalTotal33,00033,000Investment in Trading SecuritiesInvestment in Trading Securities33,00033,000CashCashCostCostCompanyCompany$15,000$15,000AA8,0008,000BB10,00010,000CC$33,000$33,000TotalTotalMarket ValueMarket Value$13,000$13,0005,0005,00012,00012,000$30,000$30,0003,0003,000Unrealized Loss on Trading SecuritiesUnrealized Loss on Trading Securities3,0003,000Fair Value Adjustment Fair Value Adjustment ––Trading SecuritiesTrading SecuritiesPurchased the Purchased the following equity following equity securities.securities.End of year 1End of year 1898,0008,000Investment in Trading SecuritiesInvestment in Trading Securities7,0007,000CashCashCostCostCompanyCompany$15,000$15,000AA10,00010,000CC$25,000$25,000TotalTotalMarket ValueMarket Value$19,000$19,0008,0008,000$27,000$27,0005,0005,000Unrealized Gain on Trading SecuritiesUnrealized Gain on Trading Securities5,0005,000Fair Value Adjustment Fair Value Adjustment ––Trading SecuritiesTrading SecuritiesIn year 2, sold the B securities for $7,000 In year 2, sold the B securities for $7,000 End of year 2End of year 21,0001,000Loss on Sale of Trading SecuritiesLoss on Sale of Trading SecuritiesFair Value Adjustment Fair Value Adjustment ––Trading SecuritiesTrading Securities3,0003,000Year 1 Ending BalanceYear 1 Ending Balance2,0002,000Year 2 Ending BalanceYear 2 Ending Balance5,0005,000Required entry in Year 2Required entry in