Click to edit Master title style Investments in Stocks 14

Click to edit Master title style Accounting for Investments in Stocks Like individuals, businesses have a variety of reasons for investing in stocks, called equity securities. A business may purchase stocks as a means of earning a return on excess cash that it does not need for its normal operations.

Click to edit Master title style Trading securities are securities that management intends to actively trade for profit Available-for-sale securities are securities that management expects to sell in the future, but which are not actively traded for profit.

Click to edit Master title style When a business invests in available-for-sale securities, such investments are classified as temporary investments or marketable securities.

Click to edit Master title style Marketable securities must meet two conditions: 1.The securities must be readily marketable, and can be sold for cash at any time. 2.Management must intend to sell the securities when the business needs cash for operations.

Click to edit Master title style On June 1, Crabtree Company purchased 2,000 shares of Inis Corporation common stock at $89.75 per share plus a brokerage fee of $500. The firm paid $180,000 [($89.75 x 2,000 shares) + $500]. June 1Marketable Securities Purchased 2,000 shares of Inis Corporation common stock. Cash

Click to edit Master title style Nov 30Cash Received dividends on Inis Corporation common stock (2,000 shares x $0.90). Dividend Revenue On October 1, Inis declared a $0.90 per share dividend payable on November 30.

Click to edit Master title style On the balance sheet, temporary investments are reported at their fair market value. Any difference between the fair market value and their cost is an unrealized holding gain or loss Unrealized Holdings Gain or Loss

Click to edit Master title style Unrealized Common Stock Cost Market Gain (Loss) Edwards Inc.$150,000$190,000$40,000 SWS Corp.200,000200,000— Inis Corporation180,000210,00030,000 Bass Co. 160, ,000(10,000) Total$690,000$750,000$60,000 The Crabtree Co.’s portfolio of temporary investments was purchased during 2008 and has the following fair market values and unrealized gains and losses on December 31,

Click to edit Master title style Temporary Investments on the Balance Sheet 66

Click to edit Master title style 11 Long-term investments are not intended as a source of cash in the normal operations of the business. Rather, such investments are often held for their income, long-term gain potential, or influence over another business entity Long-Term Investments in Stocks

Click to edit Master title style 12 Account for the investment by using the equity method 14-5 Accounting for Long-Term Stock Investments Is there a significant influence over the investee? NoYes Account for the investment as an available-for-sale security 70

Click to edit Master title style Jan. 2Investment in Brock Corp. Stock Purchased 40% of Brock Corp. common stock. Cash On January 2, Hally Inc. pays cash of $350,000 for 40% of the common stock and net assets of Brock Corporation.

Click to edit Master title style Dec. 31Investment in Brock Corp. Stock Recorded 40% share of Brock Corp. net income of $105,000. Income of Brock Corp For the year ending December 31, Brock Corporation reports net income of $105,000.

Click to edit Master title style Dec. 31Cash Recorded 40% share of Brock Corp. dividends. Investment in Brock Corp.Stock On December 31, Brock Corporation pays $45,000 in dividends.

Click to edit Master title style Investments and Dividends

Click to edit Master title style Mar. 1Cash Investment in Drey Inc. Stock Gain on Sale of Investments Sale of Investments in Stocks On March 1, an investment in Drey Inc. stock that had a carrying amount of $15,700 is sold for $17,500.

Click to edit Master title style 18 Example Exercise Phillips Company purchased 30% of the outstanding stock of Singh Company on January 1, Singh reported net income of $90,000 and declared dividends of $15,000 during How much would Phillips adjust their investment in Singh Company under the equity method? 76