1. Appendix D Investments McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.

2. LO1 Why Companies Invest in Other Companies oCompanies invest in other companies for a variety of reasons: oEquity securities oProvide dividend income and appreciation of stock. oGrowth companies reinvest their earnings. oDebt Securities oProvide interest revenue. D-2

3. Part A Equity Investments D-3

4. Accounting for Equity Investments Accounting for such investments depend on the degree of influence an investor has over the investee. D-4

5. LO2 Equity Investments with Insignificant Influence oOwnership of less than 20% of the voting stock. oFair Value method of accounting is used. oEquity Investments classified as: oTrading securities. oAvailable-for-sale securities. oBasic Investment transactions: oPurchase of an investment oReceipt of cash dividends oSale of the investment D-5

6. Adjust to Fair Value: Trading securities oEquity Investments adjusted to Fair Value at the end of every period. oAfter selling 20 shares, Nathan’s still owns 80 shares of Canadian Falcon, originally purchased for $30 per share. If Canadian Falcon’s stock at the end of 2012 has a current price of $32, then: D-6

7. Adjust to Fair Value: Available- for-sale securities oAvailable-for-sale securities are not acquired for the purpose of profiting from short-term price changes. oUnrealized gains and losses from changes in the fair value of available-for-sale securities are reported as other comprehensive income. oReferring to our previous example, if Nathan’s accounts for its investment in Canadian Falcon as available-for-sale securities, it will report the $2 increase in fair value as part of other comprehensive income. D-7

8. LO3 Equity Investments with Significant Influence oOwnership of between 20% and 50% of the voting stock. oEquity method of accounting is used. oInvestment is recorded as if the investee is a part of the company. oInvestment transactions discussed: oPurchase of an investment oRecognize Equity Income oReceive Cash Dividends D-8

9. LO4 Equity Investments with Controlling Influence oOwnership of more than 50% of the Voting stock. oThe investor is referred to as the Parent; the investee as the subsidiary. oConsolidation method of accounting is used oParent prepares consolidated financial statements. oConsolidated financial statements combine the parent’s and subsidiary’s operating activities as if they were a single reporting company. D-9

10. Part B DEBT INVESTMENTS D-10

11. LO5 Accounting for Debt Investments oOne party borrows by issuing a debt instrument, while another party lends by investing in the debt instrument. D-11

12. Adjust to Fair Value oDebt investments are classified as: oHeld-to-maturity securities oSecurities that the company expects to hold until they mature. oTrading securities oSecurities that the investor expects to sell (trade) in the near future. oThese are adjusted to fair value with the unrealized gain or loss included in net income. oAvailable-for-sale securities oThey are not expected to be sold in the near future nor expected to be held to maturity either. oThese are adjusted to fair value with the unrealized gain or loss included in comprehensive income. D-12

13. End of Appendix D D-13