Longterm Investments

1
Long-term Investments
2
Types of Investments and Accounting Methods
The accounting method depends on the type of
security and the levelof ownership (influence).
3
Learning Objectives
Analyze and report bond investmentsheld to
maturity.
LO1
4
Debt Held To Maturity Amortized Cost Method
Record at cost on acquisition date.
Record interest received
Amortize discount or premium
Record principal received at maturity
5
Debt Held To Maturity Amortized Cost Method
On July 1, 2008, Dow Jones paid the par value of
100,000 for 8 percent bonds that mature onJune
30, 2013. The 8 percent interest is paid on
eachJune 30 and December 31. Management
plansto hold the bonds until maturity.
6
Debt Held To Maturity Amortized Cost Method
7
Debt Held To Maturity Amortized Cost Method
8
Debt Held To Maturity Amortized Cost Method
9
Understanding the Business
A company may invest in the securities of another
company to
10
Types of Investments
Passive investments are made to earn a high rate
of return on funds that may be needed for future
purposes.
Investments in debt securities are always
considered passive investments.
11
Types of Investments
Passive investments are made to earn a high rate
of return on funds that may be needed for future
purposes.
Equity security investments are presumed passive
if the investing company owns less than 20 of
the outstanding voting shares.
Investor is notinterested in controllingor
influencing othercompany.
12
Types of Investments
Investments made with the intent of exerting
significant influence over another corporation.
SignificantInfluence 20 - 50outstanding
shares
13
Types of Investments
Investments made with the intent to exert control
over another corporation.
gt50outstanding shares Control
14
Learning Objectives
Analyze and report passive investments in
securities using the market value approach.
LO2
15
Passive Investments The Market Value Method
Unrealized holding gains and losses are
recognized.
Date of acquisition
Future measurement date
Investment is initially recorded at cost.
Investment carrying amount is adjusted to current
market value.
16
Passive Investments The Market Value Method

• IFNews and Dow Jones both produce film. Dow
  Jones wants to acquire an ownership interest in
  IFNews.
• On January 5, Dow Jones acquires 10,000 of the
  100,000 outstanding shares of IFNews on the open
  market at a cost of 60 per share. Dow Jones has
  no influence over IFNews, and does not plan to
  sell the shares in the near future.

17
Passive Investments The Market Value Method
18
Passive Investments The Market Value Method
On July 2, Dow Jones receives a 10,000 dividend
from IFNews. Prepare the journal entry to record
the dividend.
19
Passive Investments The Market Value Method
On July 2, Dow Jones receives a 10,000 dividend
from IFNews. Prepare the journal entry to record
the dividend.
20
Passive Investments The Market Value Method

• By December 31, Dow Jones fiscal year-end, the
  market value of IFNews shares has dropped from
  60 to 58 per share.
• How much has Dow Jones portfolio value changed?

The journal entry to recognize the change in
market value is . . .
21
Passive Investments The Market Value Method
The unrealized holding loss would be reported in
the stockholders equity section of Dow Jones
balance sheet.
22
Learning Objectives
Analyze and report investments involving
significant influence using the equity method.
LO3
23
Investments For Significant Influence Equity
Method

• Used when an investor can exertsignificant
  influence over an investee.
• It is presumed that the investmentwas made as a
  long-term investment.

24
Investments For Significant Influence Equity
Method
Unrealized holding gains and losses are not
recognized.
Date of acquisition
Future measurement date
Investment is initially recorded at cost.
Investment carrying amount is adjusted for
dividends received, and a percentage share of
the investees income.
25
Investments For Significant Influence Equity
Method
26
Investments For Significant Influence Equity
Method

• On January 2, TeleCom, Inc. acquires a 30
  interest in Sports.com at a cost of 2,000,000.
  Prepare the journal entry to record TeleComs
  investment.

27
Investments For Significant Influence Equity
Method

• On January 2, TeleCom, Inc. acquires a 30
  interest in Sports.com at a cost of 2,000,000.
  Prepare the journal entry to record TeleComs
  investment.

28
Investments For Significant Influence Equity
Method

• On March 31, Sports.com pays 200,000 in
  dividends, 60,000 (30) of which goes to
  TeleCom. Record TeleComs receipt of the
  dividend.

29
Investments For Significant Influence Equity
Method

• On March 31, Sports.com pays 200,000 in
  dividends, 60,000 (30) of which goes to
  TeleCom. Record TeleComs receipt of the
  dividend.

Dividends are not revenue under the equity
method. They are treated as a reduction of the
investment account.
30
Investments For Significant Influence Equity
Method

• Sports.com net income for the year is
  1,600,000. TeleComs 30 share is 480,000.
  Record TeleComs share of Sports.coms income.

31
Investments For Significant Influence Equity
Method

• Sports.com net income for the year is
  1,600,000. TeleComs 30 share is 480,000.
  Record TeleComs share of Sports.coms income.

TeleCom credits Income in Investee Earnings (an
income statement account) for its share of
Sports.coms earnings.
32
Learning Objectives
Analyze and report investmentsin controlling
interests.
LO4
33
Controlling Interests Mergers and Acquisitions
34
End of Chapter 12