Investment in Securities

Securities Short term Investment Long term Investment

Bonds Available for sale/Trading Held to matutrity
Stocks Available for sale/Trading <20% Cost methods
20%-50% Equity methods
must be adjusted to Fair Ownership
Value at the end of fiscal Equity methods
year >50% Consolidated
Statement

Held to maturity securities are debt securities which the enterprise has the intent and ability to hold to
maturity. These are reported at amortized cost.
Trading securities are debt and equity securities held principally for selling them in the near term.
They are reported at fair value, with unrealized gains and losses included in earnings.
Available for sale securities include all other debt and equity securities, and are reported at fair value.
Unrealized gains and losses are excluded from earnings and reported in a separate
component of shareholders’ equity.
Trading securities are current assets. Cash flows from trading securities are operating cash flows.
The usual current/noncurrent criteria are used to determine the category in which to report held to
maturity and available for sale securities. Cash flows from purchases and sales of available for sale
and held to maturity securities are investing cash flows. The transfer of a security between categories
of investments is accounted for at fair value. At the date of the transfer, if the security is transferred:
Practice 5- Investment

Problem 1 (Debt Investment)

Purpose the student is required to prepare journal entries and adjusting entries covering a three-year
period for debt investments first classified as held-for-collection and then classified as trading. Bond
premium amortization is also involved

Presented below is an amortization schedule related to Spangler Company’s 5-year, $100,000 bond with
a 7% interest rate and a 5% yield, purchased on December 31, 2010, for $108,660.
Date Cash Interest Bond Premium Carrying Amount
Received Revenue Amortization of Bonds
12/31/2010 $108,659
12/31/2011 $7,000 $5,433 $1,567 $107,092
12/31/2012 $7,000 $5,355 $1,645 $105,446
12/31/2013 $7,000 $5,272 $1,728 $103,719
12/31/2014 $7,000 $5,186 $1,814 $101,905
12/31/2015 $7,000 $5,095 $1,905 $100,000
The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.
12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015
Amortized cos $107,092 $105,446 $103,719 $101,905 $100,000
Fair value $106,500 $107,500 $105,650 $103,000 $100,000
Instructions: ($592) $2,054 $1,931 $1,095 $0
$2,645 ($122) ($836) ($1,095)
(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2010, assuming the
(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2011.
(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2014.
(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as
available-for-sale.
(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2011.
(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2013.
Answer:
Account Titles Debit Credit
(a) December 31, 2010
Debt Investments $108,659
Cash $108,659
(b) December 31, 2011
Cash $7,000
Debt Investments $1,567
Interest Revenue $5,433
(c) December 31, 2013
Cash $7,000
Debt Investments $1,728
Interest Revenue $5,272
(d) December 31, 2010
Debt Investments $108,659
Cash $108,659
(e) December 31, 2011
Cash $7,000
Debt Investments $1,567
Interest Revenue $5,433
Unrealized Holding Gain or Loss – Equity $592
Fair Value Adjustment $592
(f) December 31, 2013
Cash $7,000
Debt Investments $1,728
Interest Revenue $5,272
Unrealized Holding Gain or Loss – Income $122
Fair Value Adjustment $122
(g) Prepare the journal entry if the bonds were sold on Dec.31, 2013.
(h) Prepare the journal entries for held to maturity bonds from the purchases of bonds
on Dec. 31, 2010 until the bonds were redeemed on Dec.31, 2015
(g) If the bonds were sold on Dec.31, 2013 the following entries will be recorded
Cash $105,650
Debt Investment $103,719
Gain on sale of debt investment $1,931
(h) If the bonds were held to maturity
Account Titles Debit Credit
December 31, 2010
Debt Investments $108,659
Cash $108,659
December 31, 2011
Cash $7,000
Debt Investments $1,567
Interest Revenue $5,433
December 31, 2012
Cash $7,000
Debt Investments $1,645
Interest Revenue $5,355
December 31, 2013
Cash $7,000
Debt Investments $1,728
 Interest Revenue $5,272
December 31, 2014
Cash $7,000
Debt Investments $1,814
Interest Revenue $5,186
December 31, 2015
Cash $7,000
Debt Investments $1,905
Interest Revenue $5,095
Cash $100,000
Debt Investment $100,000
Problem 2- (Equity Investments—Available-for-Sale)
Purpose to provide the student with an understanding of the reporting problems associated with
available for sale equity investments. Description and amounts that should be reported on a company’s
comparative financial statements are then required.

Castleman Holdings, Inc. had the following available for-sale investment portfolio at January 1, 2012.
Evers Company 1,000 shares @ $15 each $15,000
Rogers Company 900 shares @ $20 each $18,000
Chance Company 500 shares @ $9 each $4,500
Equity investments (available-for-sale) @ cost $37,500
Fair value adjustment (available-for-sale) -$7,500
Equity investments (available-for-sale) @ fair value $30,000
During 2012, the following transactions took place:
1. On March 1, Rogers Company paid a $2 per share dividend.
2. On April 30, Castleman Holdings, Inc. sold 300 shares of Chance Company for $11 per share.
3. On May 15, Castleman Holdings, Inc. purchased 100 more shares of Evers Co. stock at $16 per share.
4. At December 31, 2012, the stocks had the following price per share values: Evers $17, Rogers $19,
and Chance $8.
During 2013, the following transactions took place.
5. On February 1, Castleman Holdings, Inc. sold the remaining Chance shares for $8 per share.
6. On March 1, Rogers Company paid a $2 per share dividend.
7. On December 21, Evers Company declared a cash dividend of $3 per share to be paid in the next month.
8. At December 31, 2013, the stocks had the following price per shares values: Evers $19 and Rogers $21.
Instructions
(a) Prepare journal entries for each of the above transactions.
(b) Prepare a partial balance sheet showing the investment-related amounts to be reported
at December 31, 2012 and 2013.
(a)
Account Titles Debit Credit
1. March 1, 2012
Cash 1800
Dividend Revenue 1800
2. April 30, 2012
Cash 3300
Equity Investment 2700
Gain on Sale on Investment 600
3. May 15, 2012
Equity Investment 1600
Cash 1600
4. December 31, 2012
Equity Investment $8,500
Unreal. Holding Gain/Loss-Equity $8,500
5. February 1, 2013
Cash 1600
Loss on Slae on Investment 200
 Equity Investment 1800
6. March 1, 2013
Cash 1800
Dividend Revenue 1800
7. December 21, 2013
Dividend Receivable 3300
Dividend Revenue 3300
8. December 31, 2013
Equity Investment $4,200
Unreal. Holding Gain/Loss-Equity $4,200
(a) (Continued)
SCHEDULE
Computation of Fair Value Adjustment for
Available for Sale Securities
Fair Unrealized
Securities Cost Value Gain (Loss)

December 31, 2012:

Evers (1000@$15 + 100@$16) $16,600 $18,700 $2,100
Rogers $18,000 $17,100 -$900
Chance (500-300)@ $9 $1,800 $1,600 -$200
Total Portfolio $36,400 $37,400 $1,000
Previous adjustment -$7,500
Adjustment to FV -$8,500

Cost Fair Unrealized

December 31, 2013: Value Gain (Loss)
Evers $16,600 20900 $4,300
Rogers $18,000 18900 $900
Total Portfolio $34,600 39800 $5,200
Previous adjustment $1,000
Adjustment to FV $4,200
(b)
Castleman Holdings, Inc.
Balance Sheet (Partial)
December 31,
Partial Statement of Financial Position as of 2012 2013
Investment
Equity Investment at Fair Value $37,400 39800
Current Assets
Dividend Receivable 0 3300
Problem 3 (Equity Long term Investment)
Purpose the student is required to prepare journal entries for long term investment in stocks.
Three situtations of non-trading equity investments using cost method (situation 1) and equity method
(situation 2) and changes from cot to equity method ( situation 3) will be analyzed and recorded.

Situation 1
Hatcher Cosmetics acquired 10% of the 200,000 shares of common stock of Ramirez Fashion at
a total cost of $14 per share on March 18, 2012. On June 30, Ramirez declared and paid a $75,000 cash
dividend. On December 31, Ramirez reported net income of $122,000 for the year. At December 31, the
market price of Ramirez Fashion was $15 per share. The securities are classified as available-for-sale.
Situation 2
Holmes, Inc. obtained significant influence over Nadal Corporation by buying 25% of Nadal’s
30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2012. On June 15,
Nadal declared and paid a cash dividend of $36,000. On December 31, Nadal reported a net income of
$85,000 for the year.
Situation 3
On January 1, 2012, Meredith Corporation purchased 15% of the common shares of Pirates Company for
$200,000. During the year, Pirates earned net income of $80,000 and paid dividends of $20,000.
On Dec. 31 2012 Meredith purchased another 10% of Pirates common shares for $150,000
Instructions:
a Prepare all necessary journal entries in 2012 for all situations.
b Complete the following table of Equity Investment on Dec. 31 2012 for:
ownership interest Equity Investment
Hatcher 10% $300,000
Holmes 25% $79,750
Maredith 25% $359,000
(a)
Date Account Titles in Debit Credit
Situation 1: Journal entries by Hatcher Cosmetics:
3/18/12 Equity Investment $280,000
Cash $280,000
6/30/12 Cash $7,500
Dividend Revenue ($75,000 X 10%) $7,500
12/31/12 Fair Value Adjustment (15-14)*20000 $20,000
Unrealized Holding Gain or Loss—Income $20,000

Situation 2: Journal entries by Holmes, Inc.:

1/1/12 Equity Investment $67,500
Cash $67,500
6/15/12 Cash $9,000
Equity Investment 25%*36000 $9,000
12/31/12 Equity Investment $21,250
Income from Nadal (25%*85000) $21,250

Situation 3: Journal entries by Meredith Corp., Inc.:

1/1/12 Equity Investment $200,000
Cash $200,000
12/31/12 Cash $3,000
Dividend Revenue 15%*20000 $3,000
12/31/12 Equity Investment $150,000
Cash $150,000
Equity Investment $9,000
Income from Pirates Co. 15%*(80000-20000) $9,000
Problem 4
Purpose the student is required to prepare the amortization table and calculate the amotization cost
as well as the fair value (estimated market price) of the bonds using date and price formula. The student
also must calculate the the gain/loss from the investment in bonds
On Jan. 3, 2015 ABC Corp. issued 10000 bonds par $100, i=10% n=5 when the market rate is 8%.
Albert bought 100 bonds and sold 40 bonds on May 3, 2017 at market rate 7.5%. The remaining
60 bonds was sold on October 3, 2017 at market rate 8.5%.
Instructions:
a. Calculate the bond price on Jan. 3, 2015 107.985420074
b. Prepare the schedule of amortization
Bond discount amortization table Par value 1000000

Interest Premium Unamortized

expense Interest paid Amortization Premium Bond value
8% 10%
2-Jan-15 79854 1079854.20074
2-Jan-16 86388 100000 -13612 66243 $1,066,242.54
2-Jan-17 92110918590 0 92110918590 92110984832 ###
2-Jan-18 ### 0 ### ### ###
2-Jan-19 ### 0 ### ### ###
2-Jan-20 ### 0 ### ### ###

c. Calculate the amount of Albert investment in Bond on Jan. 3, 2015 $10,798.54

d. Caclulate the market price of ABC bond on May 3, 2017 $105.76
5/3/2017 10/3/2017
e. Calculate the value of Bonds when Albert sold 40 bonds $4,230.43
f. Calculate the market price of ABC bond on Oct. 3, 2017 $102.87
g. Calculate the value of Bonds when Albert sold 60 bonds $6,172.28
h. Calculate the total gain/loss Albert received from his investment in ABC Bonds
Cash received From the sale of 40 Bonds $4,230.43
From the sale of 60 Bonds $6,172.28
From Interest revenues $2,583.33
Total $12,986.04
Cash paid for investment in 100 ABC bonds $10,798.54
Gain/Loss $2,187.50