CHAPTER 9Investments purpose as line of business idle cash strategic financial instruments stocks bonds derivatives2Mugan-Akman 2007Classification Debt Instruments Trading Securities Available for Sale Securities Held to Maturity Securities Equity Instruments Trading Securities Available for Sale Securities Affiliates Subsidiary3Mugan-Akman 2007Investor CorporationMinority, Active Investments (typically between 20% and 50% ownership)Majority, Active Investments (greater than 50% ownership)Minority, Passive Investments (less than 20% ownership)held as current assets, (trading Securities)held as long-term Investments (available for sale)The accounting for investments depends on the purpose of the investment and the percentage of voting stock held.Types of Investments-StocksAFFILIATEAFFILIATESUBSIDIARYSUBSIDIARY4Mugan-Akman 2007Short-Term Investments-Trading Securitiesusually consist of : marketable equity securities (stocks of other companies) investment funds precious metals like gold government bonds treasury bills asset securitized bonds private bonds Characterized by frequent and active buying and selling with the object of generating profitTypically only financial institutions hold trading securitiesSince 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.5Mugan-Akman 2007Accounting for Trading Securities Accounting for trading securities has the following key points: Recording of purchase, Dividends or interest received, Valuation at the end of the accounting period, and Sale of securities.6Mugan-Akman 2007Accounting for Trading Equity Securities Purchase price + commissions+taxes Dividend revenue when declared Marking to market at the end of the accounting period7Mugan-Akman 2007Accounting for Marketable Equity SecuritiesBizim Bank acquires 1.000 shares of Is Bankasi (C) for TL 150 each plus TL 2.000 for taxes and commissions IS Bankasi declares dividends of TL 15.000 on 15 April 2007 to Bizim Bank receives cash for the dividends declared 8Mugan-Akman 2007Adjusting 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) carrying value = fair value at the latest reporting date if the fair value of the securities is greater than the cost - unrealized holding gain if the fair value is less than the cost - unrealized holding loss any unrealized gains or losses on trading securities are charged to income statement securities are reported at the fair value in the balance sheet9Mugan-Akman 2007End of period entries-exampleSonsan A.S. acquired the following equity securities as short-term investments as trading securities during 200710Mugan-Akman 2007End of period entries-exampleSonsan A.S. acquired the following equity securities as short-term investments as trading securities during 200711Mugan-Akman 2007End of the period-example31 March 2007 Gross Unrealized Holding GainTL 30 ISC Gross Unrealized Holding Loss(70) DG TL 30 and VS TL 40 Net Unrealized Holding Gain (Loss) TL (40)12Mugan-Akman 2007End of period entries-exampleSonsan A.S. acquired the following equity securities as short-term investments as trading securities during 200713Mugan-Akman 2007End of the period-exampleAssume that no securities are purchased or sold during the second quarter of 2007. At the end of June:14Mugan-Akman 2007End of period entries-exampleSonsan A.S. acquired the following equity securities as short-term investments as trading securities during 2007During August the company sold all shares of Dogan for TL 320. 15Mugan-Akman 2007Sale of Trading SecuritiesSonsan A.S. sold all DG shares for TL 320 in August 2007 16Mugan-Akman 2007End of period entries-exampleSonsan A.S. acquired the following equity securities as short-term investments as trading securities during 200717Mugan-Akman 200718Mugan-Akman 2007Accounting for Marketable Debt Securities same as the accounting for marketable equity securities both are trading securities carrying value of these securities will be compared to the market or fair value at the reporting dates carrying value = the market value or fair value at the latest reporting date unrealized holding gains or losses will be reflected in the income statement 19Mugan-Akman 2007Available 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 measured at fair value in the balance she