John Wiley & Sons, Inc.,Financial Accounting, 5e,Prepared by Kurt M. Hull, MBA CPA California State University, Los Angeles,Weygandt, Kieso, & Kimmel,CHAPTER 13 INVESTMENTS,STUDY OBJECTIVES After studying this chapter, you should understand:,STUDY OBJECTIVE 1 WHY CORPORATIONS INVEST,Debt investments = government and corporate bonds. Entries required for acquisition, interest revenue, and sale. Kuhl Corporation acquires 50 Doan Inc. 8%, 10-year, $1,000 bonds on January 1, 2006, for $54,000, including brokerage fees of $1,000. The entry to record the investment is:,Date,Account Titles and Explanation,Debit,Credit,Jan. 1,Debt Investments,Cash,(To record purchase of 50 Doan Inc. bonds),54,000 54,000,STUDY OBJECTIVE 2 ACCOUNTING FOR DEBT INVESTMENTS,Cost principle applies,Cost includes all expenditures to acquire investment.,The bonds pay $2,000 interest on July 1 and January 1 ($50,000 x 8% x ). The July 1 entry is:,It is necessary to accrue $2,000 interest earned since July 1 at year-end. The December 31 entry is:,Date,Account Titles and Explanation,Debit,Credit,July 1,Cash,Interest Revenue,(To record receipt of interest on Doan Inc.,bonds),2,000 2,000,Date,Account Titles and Explanation,Debit,Credit,Dec. 31,Interest Receivable,Interest Revenue,(To accrue interest on Doan Inc. bonds),2,000 2,000,RECORDING BOND INTEREST,Date,Account Titles and Explanation,Debit,Credit,Jan. 1,Cash,Interest Receivable,(To record receipt of accrued interest),When the interest is received on January 1, the entry is:,2,000 2,000,RECORDING BOND INTEREST,On January 1, 2007, Kuhl Corporation receives net proceeds of $58,000 on the sale of the Doan Inc. bonds. The entry to record the sale and recognize the gain is:,Date,Account Titles and Explanation,Debit,Credit,Jan. 1,Cash,Debt Investments,Gain on Sale of Debt Investments,(To record sale of Doan Inc. bonds),58,000 54,000 4,000,RECORDING SALE OF BONDS,PROCEEDS COST = GAIN or LOSS,REVIEW QUESTION,On February 6, Hanes Company sells debt investments costing $26,000 for $28,000. Prepare the journal entry to record the sale.,26,000,Debt Investments,2,000,Gain on Sale,28,000,Cash,Feb 6,Credit,Debit,Accounts,Date,Proceeds Cost = Gain or Loss,Investors Ownership,Presumed,Interest in Investees,Influence,Accounting,Common Stock,on Investee,Guidelines,Less than 20%,Insignificant,Cost method,Between 20%,Significant,Equity method,and 50%,More than 50%,Controlling,Consolidated financial,statements,Stock investments = capital stock of corporations.,STUDY OBJECTIVE 3 ACCOUNTING FOR STOCK INVESTMENTS,On July 1, 2006, Sanchez Corporation acquires 1,000 shares (10%) of Beal Corporation common stock for $40 per share plus brokerage fees of $500. The entry for the purchase is:,Date,Account Titles and Explanation,Debit,Credit,July 1,Stock Investments,Cash,(To record purchase of 1,000 shares of Beal,Corporation common stock),40,500 40,500,RECORDING STOCK INVESTMENTS HOLDINGS 20%,COST METHOD Record investment at cost. Recognize revenue when cash dividends are received.,Date,Account Titles and Explanation,Debit,Credit,Dec. 31,Cash (1,000 x $2),Dividend Revenue,(To record receipt of a cash dividend),2,000 2,000,RECORDING DIVIDENDS HOLDINGS 20%,On December 31, Sanchez Corporation receives a $2 per share cash dividend.,Dividend revenue is reported on the income statement under “Other revenues and gains.”,On February 10, 2007, Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal stock. The cost of the Beal stock was $40,500 on July 1, 2006. The entry to record the sale and loss is:,Date,Account Titles and Explanation,Debit,Credit,Feb. 10,Cash,Loss on Sale of Stock Investments,Stock Investments,(To record sale of Beal common stock),39,500 1,000 40,500,RECORDING A SALE HOLDINGS 20%,PROCEEDS COST = GAIN or LOSS,RECORDING STOCK INVESTMENTS HOLDINGS BETWEEN 20% & 50%,EQUITY METHOD Record investment at cost. Investment account adjusted annually for dividends received and share of investee net income.,Percent of investee net loss,Percent of investee net income,Dividends received,Cost of investment,Credit,Debit,On January 1, 2006, Milar Corporation acquires 30% of the common stock of Beck Company for $120,000. The entry to record this transaction is:,Date,Account Titles and Explanation,Debit,Credit,Jan. 1,Stock Investments,Cash,(To record purchase of Beck common,stock),