May 5 2013 I Chapter 8 video notes a Video 1 1 Key terms a Investor 1 Entity that owns a corporation s stock b Investee 1 A corporation that issues stock 2 Investments on the balance sheet Balance sheet Current assets x xx x xx x xx x xx x xx Cash Short term investments Accounts receivable Inventories Prepaid expenses Total current assets Long term investments Property plant and equipment Intangible assets Other assets x xx x xx x xx x xx x xx Issuing corporation Bonds payable Interest expense 3 Bonds Investor Bondholder Investment in bonds Interest revenue a Notes 1 Investment in bonds is an asset 2 Interest revenue is earned 3 Bonds payable are liabilities 4 Interest expense is paid 4 Held to maturity investments a Recorded at amortized cost b Interest received semi annually c Issued in 1 000 denominations d Price is quoted as percent of par 1 Fluctuates with market interest rates a If market rate face rate sell at discount b If market rate face rate sell at premium e Examples 1 Bond is quoted at 100 so it is 100 of face a Face value is 1 000 1 1 000 1 1 000 a 1 000 is par or face 2 Bond is quoted at 103 so it is 103 of face a Face value is 1 000 1 1 000 1 03 1 030 a 1 030 is premium 3 Bond is quoted at 95 so it is 95 of face a Face value is 1 000 1 1 000 0 95 950 a 950 is discount f Accounting for held to maturity investments 1 Initially recorded at cost 2 Interest revenue recorded at semiannual interest payment date 3 Premium or discount is amortized a Carrying value is adjusted towards face value 4 Face value received at maturity a Example 1 Bond is quoted at 95 2 so it is 95 2 of face a Face value is 10 000 1 10 000 0 952 9 520 Discount Journal Date 04 01 Accounts and explanation Long term investment in bonds Debit 9 520 Cash 10 01 Cash 10 01 Interest revenue Long term investment in bonds Interest revenue 300 60 Credit 9 520 300 60 b Notes 1 10 000 0 06 year 300 2 10 000 9 520 48 months 6 months 60 g Amortization of held to maturity investments 1 Increases long term investment account as it reaches maturity 2 Records interest revenue earned from carrying amount increase b Video 2 1 Available for sale investments a May be debt securities not held to maturity or equity securities b Initially recorded at cost c Adjusted to current fair value at balance sheet date d Accounting for available for sale investments Percentage ownership by the investor Less than 20 20 50 Greater than50 GAAP accounting method Fair market value Equity Consolidation e Example 1 1 000 shares of stock at 44 per share 2 Intend to hold investment for longer than one year 3 Receive cash dividend of 0 20 Journal Date 04 01 Accounts and explanation Long term investment Debit 44 000 Cash 10 01 Cash 200 Dividend revenue Credit 44 000 200 a Notes 1 1 000 shares 44 per share 44 000 2 1 000 shares 0 20 200 f The fair value adjustment 1 Debit allowance to adjust investment and credit unrealized gain on investment a If market value is greater than carrying value 2 Debit unrealized gain on investment and credit allowance to adjust investment a If market value is less than carrying value g Carrying amount of investment 1 Original cost of investment Debit balance in allowance to adjust investments to 2 Original cost of investment Credit balance in allowance to adjust investments to market a If fair value cost market a If fair value cost h Unrealized gains and losses 1 Fair value declines a Debit unrealized loss on investment 2 Fair value increases a Credit unrealized gain on investment 3 Reported as element of comprehensive income i Selling an available for sale investment Date xx xx Unrealized gain on investment Accounts and explanation Journal Allowance to adjust investments to market xx xx Loss on sale of investment Long term investment 1 Notes j E8 13A a If cash cost Gain would be credited Debit x xx x xx Credit x xx x xx 1 Journalize the following long term available for sale security transactions of Roya Brothers Department Stores a Purchased 410 shares of Fordham Foods common stock at 35 per share with the intent of holding the stock for the indefinite future b Received a cash dividend of 1 80 per share on the Fordham investment c At year end adjusted the investment account to fair value of 42 per share d Sold the Fordham stock for the price of 27 per share Journal Accounts and explanation Date xx xx xx xx Cash Long term investment Cash Dividend revenue xx xx Allowance to adjust investments to market Unrealized gain on investment xx xx Unrealized gain on investment Allowance to adjust investments to market xx xx Cash Loss on sale of investment Long term investment 1 Notes a 410 shares 35 per share 14 350 Debit 14 350 Credit 14 350 738 2 870 2 870 11 070 3 280 738 2 870 2 870 14 350 b 410 shares 1 80 dividend per share 738 c 42 per share 35 per share 7 per share 1 410 shares 7 per share 2 870 d 410 shares 27 per share 11 070 e 14 350 11 070 3 280 c Video 3 1 Time value of money a Present value 1 What amount in the future is worth today 2 Often called discounting a Present value is less than future value 3 To simplify calculations a Present value tables b Excel software 4 Single amount of annuity 5 Factors relied on a Amount of payment or receipt b Length of time between investment and future receipt or payment c Interest rate 6 Present value of investments in bonds a Market value price of bonds equals 1 Present value of principal received at maturity a Single amount 2 Present value of interest payments a Annuity b Time value of money 1 Prefer payment now vs in the future due to interest factor 2 Applicable to both personal and business decisions 3 Factors a Principal amount p 1 Single lump sum 2 Annuity b Number of periods n c Interest rate i 1 Future value Present value 1 Interest rate c Formula d Examples 1 Simple interest calculation a Simple interest means that interest is calculated only on the principle amount b 10 000 6 simple interest 5 years Simple interest Year 1 2 3 4 5 Interest calculation 10 000 0 06 10 000 0 06 10 000 0 06 10 000 0 06 10 000 0 06 Total interest Simple interest 600 600 600 600 600 3 000 2 Compound interest calculation a Compound interest means that interest is calculated on the principle and on all interest earned to date Simple interest Year 1 2 3 4 5 Interest calculation …