2014 Nguyn Cng Phng 1

Financial Accounting 2
Nguyn Cng Phng 2013
Chapiter 1
Investements in securities: Investor
Accounting
Required text: Chapiter 11-Investment in Debts and Equity securities
(Thomas Beechy, Joan E. Conrod, 2012)
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Contents
Classification of investments in
secirities
Acounting principles for investments
in securities: The cost methode of
accounting
Accounting for investments in stocks
Accounting for investments in bonds
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Classification of investments in
securities
It depends on intent and circumstances
Equity investments
An investment in common shares may be:
Available for sale,
Held to maturity,
or a trading investment,
or if strategic, a control investment, a significant influence
investment, or a joint venture.
Debt investments
An investment in a debt instrument of another entity
can be classified as:
available for sale,
held to maturity,
or a trading investment.
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Classification
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Levels of influence
Percent ownership of voting shares
Ownership of an investor of the voting shares of a
company is :
(a) more than 50 %: Control. Investor: parent company, investee:
subsidiary
(b) From 20% to less than 50 %: Significant influence
(c) Less than 20 %: No influence
An investor can control a corporation while holding less
than a majority of the corporations voting shares through
any of several methods
Percent share
ownership
=
Amount of shares of investor
Amount of common shares
of an investee
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Accounting principle for investments
in securities: the cost method
The original investment is recorded at its
investment cost
The cost of an investment includes acquisition charges such as
acquisition cost, transactions costs (brokerage, fees and
duties)
Interest, dividends in connection with an
investment are generally regarded as investment
income
However, in some circumstances, accrued unpaid interest before the
acquisition of an interest-bearing investment represents a recovery of
cost and do not form part of income.; it is deducted from cost
If the investment is a long-term investment in debt
securities, any premium or discount is amortized to income
over the life of the investment. This will change book value.
Book value will be move toward maturity value, and be
equal to maturity value on the maturity date
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The cost method
Disposal of investments: the difference between
the carrying amount and the disposal proceeds is
recorded as a gain or loss on sale
If an investment is acquired in exchange, or part
exchange, for another asset, the acquisition cost
of the investment is determined by reference to
the fair value of the asset given up.
Difference between the fair value and book value of
the asset given up is recorded as a extraordinary gain
or loss
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1- Investment in stocks:
Accounts
Accounts
TK 221-Investment in subsiadary
TK 223-Investment in associates
TK 228- Other long term investment
TK 121-Short term securities investment
Journal entries of three categories of
transaction
Acquisition
Interest and dividends received from investment
Disposal
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Journal Entries at the acquisition
date
Investment costs:
Debit accounts 22X, 121: acquisition cost, transaction
cost
Credit accounts: 11X,211,152...
Purchase of stocks that result in a change in
percentage ownership, using a new account that
corresponds to the degree of influence to record
the initial and new acquisition
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Journal entries at the acquisition
date
Stocks purchased directly from investee, in
exchange, or part exchange, for another asset,
the acquisition cost of the investment is
determined by reference to the fair value of the
asset given up.
Debit Acc. 22X, 121: Fair value of the asset given up
Credit Acc. 15X,21X: Book value of the asset given up
Debit acc. 811 or credit acc. 711: difference between
the fair value and book value
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Journal entries at the acquisition
date
Purchase outstanding common stocks from its
shareholders, in exchange, or part exchange, for
another asset, the acquisition cost of the
investment is determined by reference to the fair
value (sale price) of the asset given up
For stocks purchased: Debit Acc. 22X, 121/Credit
acc. 131: selling value of asset give up
For asset give up: the investor records assets sold
Debit acc. 632, 811/Credit acc. 15X, 21X: book value
Debit acc. 131/Credit acc. 511,711: seling price
Debit acc. 11X, 131 d or Credit acc. 11X, 331: difference
between book value and selling price of asset give up
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Journal entries at the acquisition date
The investor purchases the outstanding
common stocks from its shareholders and funds
the purchase price by a issuance of shares (and
a cash)
Debit acc. 22X,121: purchase price
Credit acc. 4111: face value
Credit acc. 4112: additional paid-in capital
Credit 11X: Difference between purchase price and
sale price of share issued
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Journal entries at the acquisition date
The investor purchases the outstanding
common stocks from its shareholders and funds
the purchase price by a issuance of bonds (and
a cash)
Debit acc. 22X,121: purchase price
Credit acc. 3431: face value
Debit acc. 3432: discount or Credit acc. 3433: Premium
Credit 11X: Difference between purchase price of stocks
and issuance price of bonds
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Calculation of dividend and dividend
income
Dividends declared
Dividends = dividend payout ratio * Face value
Dividend income
The investor only reports dividend income
commencing with the date in which it purchase the
shares; the earned dividend before the date of
purchase (accrued dividend) is treated as a return of
investment.
For example, if the investor purchase the common
stocks on March 1, it can only recognize a dividend
income from dividend that it earns subsequent to
March 1. The earned dividend before March 1 is treated
as a return of investment and the equity investment
accounts (22X, 121) are reduced accordingly
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Journal entries at the received or
declared dividend date
Dividend paid by cash or receivable
Debit acc. 11X,138: cash or receivable
Credit acc. 515: Income from financing activities
Credit acc. 22X, 121: Return of investment
If the dividend paid by issued shares
Debit acc. 22X,121
Credit acc. 515
Credit acc. 22X, 121: Return of investment
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tip
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Sale of common stock: Journal
entries at the sale date
The difference between the carrying amount
and the disposal proceeds is recorded as a gain
loss on sale :
Record
Proceed and carrying amount
Debit acc. 11X, 131: proceeds
Credit ac. 22X,121: carrying value (Book value)
Debit acc. 635 or credit acc. 515: Difference between
the carrying amount and proceed
Transaction charges: Debit acc. 635
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Journal entries at the sale date
The investor sells a portion of an equity
investment that reduces its interest, a new
account that corresponds to the degree of
influence is used to record the remain
investment
For example:
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Example
1. 1/5, company A purchased 2.000.000 shares B, the unit
purchase price was 20.000, paid by bank transfer. The
percent share ownership of A is 22%.
2. 10/8, company B declared dividend yield 0f 15% for the
first half of year.
3. 12/9, company A sold 1/4 shares B, the unit selling
price was 22.000, paid in cash in bank. The percent
share ownership of A in B is 16%.
4. 22/12, company A sold total shares B, the unit selling
price was 18.000, paid in cash in bank.
Requirement: Prepare the journal entries for the
transactions
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2. Investment in bonds
Just as corporations may invest in the
stock of other corporations, they may also
invest in the bonds of other corporations
The bonds may be purchased directly
from the issuing corporation or through
an organized bond exchange
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Investment in bonds: Definitions
The purchase price, the face value,
The purchase price of a bonds is more than the face
value: premium
The purchase price of a bonds is less than the face
value: Discount
Carrying value: This is based on the face value of the bond
less amortization of the premium or discount
Interest purchased: When a security is purchased between
interest payment dates, a portion of the purchase price is
to cover the interest earned by the seller as of the sale
date. This is called accrued interest (receivable)
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Investment in bonds: Definitions
Coupon rate: The yield paid by a bond. A bond's
coupon rate is simply just the annual coupon payments
paid by the issuer relative to the bond's face or par
value.
Effective interest rate is the rate that exactly discount
the cash flows associated with an instrument to the net
carrying mount at initial recognition.
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Purchase of bonds
The cost of a bond investment includes all
costs related to the purchase (for example,
brokers commission)
When bonds are purchased between interest
dates, the buyer normally pays the seller the
interest accrued (earned) up to that date; the
buyer then receives the entire interest
payment at the next interest payment date
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Journal entries at the purchase
date
Debit acc. 121 (short term),228/Credit acc. 11X
Purchase of fixed income securities with prepaid
interest
Debit acc. 121,228: purchase price
Credit 3387: prepaid interest
Credit 11X: purchase price less prepaid interest
When bonds are purchased between interest dates
Debit acc. 121,228: purchase price-interest purchased
Debit 138: interest purchased
Credit: 11X: Purchase price
For example: see example on page 620
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Interest
interest payment constant each period, consistent with
the terms of bond, equal the coupon rate X face value.
Effective interest is a constant percentage of bond
carrying amount
Effective interest = carrying value X effective rate
Interest revenue is measured using the effective interest,
consistent with the accounting period
Difference between interest payment and interest
income is the premium or discount amortization
Investment value changes by the amortization of the
premium or discount, and the investment book value
moves toward face value at maturity
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Effective rate
interest payment is constant each period:
CF: Cash flows
PV: Present value of an investment
i: effective rate
j= 1->n: interest periods
Prepaid interest or postpaid interest
FV: Future value
Effective rate based on Excel: rate function
(nper;pmt;pv;fv;type;guess)

j
i
n
j
PV
j
CF


1 1
tip

n
i PV FV 1
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Example 2
On 01/10/N, company A purchased 5.000
bonds of company M, the face value 100.000
VND/bond, coupon rate 12%/year, the bonds
matured on 30 September N+5. The purchase
price was 120.000VND/bond, total amount
was paid by bank transfer. The interest was
paid annually on 30 September. The cost
transaction was 180.000 VND, paid by bank
transfer. Company A takes adjusting entries at
the 31/12
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Example 2
The effective rate is measured referring to the
function:
PV = 120.000*5000=600.000.000
CF
1
= CF
2
=CF
3
=CF
4
=60.000.000; CF
5
=560.000.000
The investor receive interest payments every 12 months
from the issuer.
At the bond's maturity date, the investor also receives the
face value of the bond in cash
=> i= 7,108 %
tip

j
j
n
j
i
CF
PV

1
1
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Example 2: Effective interest
tip
Period
Carrying value at
the beginning
Interest
revenue
Amortization
(carr. Value at the
beginning
i-1

amortization
i-1
)
(carr. value at
the beginnig
i
x
effective rate)
(received
interest
effective
interest)
1 600.000.000 42.648.000 17.352.000
2 582.648.000 41.414.620 18.585.380
3 564.062.620 40.093.571 19.906.429
4 544.156.191 38.678.622 21.321.378
5 522.834.813 37.165.187 22.834.813
total 200.000.000 100.000.000


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Journal entries
Interest period coincides accounting period
Debit acc. 111, 112
Credit 515- financial income
Interest period is different from accounting period
Record at the end of accounting period:
Debit acc. 138: accrued interest receivable
Credit acc. 515:
Record when interest is received:
Debit acc. 111, 112: annual payment
Credit acc. 138: accrued interest received
Credit acc. 515: annual payment less accrued interest
Credit or debit acc. 228: amortization of premium or
discount
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Example 2: General journal entries
Date Description
Ref.
Account

Amount
(1.000 vn)
Debit Credit
01/10/N Purchase 5.000 bonds of M
228 (2282)
112
600.000
600.000
01/10/N Transaction cost
228
(2282)
112
180
180
31/12/N Adjusting entry to record accrued
interest from 1/10/N to 31/12/N:
(42.648/12) x 3 = 10.662

138
515

10.662


10.662
01/10/N+1 Received annual interest: 60.000,
including:
- interest revenue fr. 1/10 to 31/12/N:
10662
- interest revenue fr. 1/1 to 1/10/N+1:
(42.648 - 10.662) = 31.986
- return on investment: 17.352
112
138

515


228 (2282)


60.000
10.662

31.986


17.352
31/12/N+1 Adjusting entry to record interest
revenue fr. 01/10/N+1 to 31/12/N+1:
(41.414,620 /12) x 3 =
10.353,655

138
515


10.353,655


10.353,655


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Total interests are prepaid at the
purchase date
Effective interest is measured referring to the
function on the slide 25, note:
PV: purchase price prepaid interest
FV: Face value at maturity
Effective interest
i
= effective rate * carrying value at
the beginning
i
Carrying value at the beginning
i
= carrying value at the
beginning
i-1
+ effective interest
i-1
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Example 3
On 01/10/N, company A purchased 5.000
bonds of company M, face value 100.000
VND/bond, coupon rate 9.8%/year, the bonds
matured on 30 September N+5. The purchase
price was 120.000 VND/bond, total amount
was paid by bank transfer. The total interest
was prepaid on 1/10/N. The cost transaction
was 180.000 VND, paid by bank transfer.
Company A takes adjusting entries at the
31/12
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Example 3
Prepaid interest:
100.000 VND/bond x 5.000 bonds x 9,8% x 5 years =
245.000.000 VND
Effective interest
PV = 355.000.000 VND (=120.000 VND/bond x 5.000
bonds - 245.000.000 VND)
FV = 500.000.000
=> i= 7,09%

n
i PV FV 1
tip
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Example 3: Effective interest

period
i
Carrying value at the
beginning
Effective interest
(carr.value at the beginning
i-1

+ efective interest
i-1
)
(carr. value
i
x 7,09%)
1 355.000.000 25.169.500
2 380.169.500 26.954.018
3 407.123.518 28.865.057
4 435.988.575 30.911.590
5 466.900.165 33.099.835
Total 145.000.000

tip
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Journal entries
The acc. 3387 is credited for total received
interests
The acc. 515 is credited for effective interest
according to accounting period (Dr acc. 3387/Cr
acc. 515)
Notes:
Total credits in acc. 3387: Total received interest
Total credits in acc. 515: Total effective interest
Difference between total received interest and total
effective interest = difference between purchase
price and face value
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example 3: General journal entries
Date Description Ref. account
Amount
(1.000 vn)
Dr. Cr.
01/10/N
Purchase 5.000 bonds of
company M, prepaid interest
228 (2282)
112
338 (3387)
600.000
355.000
245.000
01/10/N Transaction cost
228 (2282)
112
180
180
31/12/N Adjusting entry to record
interest revenu fr. 1/10/N to
31/12/N: (25.169,5/12) x 3 =
6.292,375

338 (3387)
515

6.292,375


6.292,375
31/12/N+1 Adjusting entry to record interest
revenue of N+1, including:
- effective interest fr. 1/1 to
1/10/N+1: 25.169,5 - 6.292,375
=
18.877,125
- eff. Interest fr. 1/10 to
31/12/N+1:
(26.954,018 /12) x 3 =
6.738,5045




338 (3387)
515




25.615,6295





25.615,6295

tip
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Total interests are paid at the
maturity
Total interests are paid at the maturity
Effective interest is determined referring to
the function at the slide 24, of which:
PV: Purchase price
FV: payment at the maturity (face value plus total
interests)
Effective interest
i
= effective rate * carrying value at
the beginning
i
Carrying value at the beginning
i
= carrying value at the
beginning
i-1
+ effective interest
i-1
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Example 4
On 01/10/N, company A purchased 5.000
bonds of company M, face value 100.000
VND/bond, coupon rate 13,83%/year, the
bonds matured on 30 September N+5. The
purchase price was 120.000 VND/bond, total
amount was paid by bank transfer. The total
interest was paid on 30/9/N+5. The cost
transaction was 180.000 VND, paid by bank
transfer. Company A takes adjusting entries at
the 31/12
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Example 4
Total interests are paid at the maturity:
100.000 vnd/bond x 5.000 bonds x 13,83 % x 5
periods = 345.750.000 vn
Effective rate
PV = 600.000.000
FV = 845.750.000 (=500.000.000 + 345.750.000)
=> i= 7,107%

n
i PV FV 1
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Example 4: effective interest
Period
Carrying value at the beginning Effective interest
(car. Value at the beginning
i-1
+
effective interest
i-1
)
(car. value
i
x 7,107%)
1 600.000.000 42.642.000
2 642.642.000 45.672.567
3 688.314.567 48.918.516
4 737.233.083 52.395.155
5 789.628.238 56.121.762
Total 245.750.000

tip
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Journal entries
Record annually interest revenue: Dr.
aac.138/Cr. Acc. 515
Recording interest payment at the maturity
Dr. acc. 11X: Total paid interests
Cr. Acc. 515: effective interest according to current
accounting period (at the maturity)
Cr. Acc. 138: Total interest revenues recorded for
before current accounting periods
Difference between received interest and total
effective interests is credited to acc. 515 or debited
to acc. 635
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Example 4: General journal entries
Date Description
Ref.
Account
Amount
( 1.000 vn)
Dr. Cr.
01/10/N
Purchase 5.000 bonds of
company M
228 (2282)
112
600.000
600.000
01/10/N Transaction cost
228 (2282)
112
180
180
31/12/N Adjusting entry to record
interest revenu fr. 1/10/N to
31/12/N:
(42.642/12) x 3 = 10.660,5

138
515

10.660,5


10.660,5
31/12/N+1 Adjusting entry to record
interest revenu of N+1,
including:
- interest revenu fr. 1/1 to
1/10/N+1:
42.642 - 10.660,5 = 31.981,5
- interest revenu fr. 1/10 to
31/12/N+1:
(45.672,567/12) x 3 =
11.418,14175

138
515


43.336,64175


43.336,64175

tip
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Disposal of bonds investment
At the maturity
Investor receive face value at the maturity
Difference between face value and carrying value is recorded as gain
(cr. Acc. 515) or as loss (dr. acc. 635
Long-term investments in bonds may be sold before their
maturity date
When this occurs, the seller receives the sales price (less
commissions and other selling costs) plus any accrued interest since
the last interest payment date
Any gain or loss on the sale is recorded when the cash
proceeds are recorded ?
Gain or loss on the sale is equal to difference between selling price
and carrying value
such gains or losses are reported in the financing Income section of
the income statement
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Journal entries
Record the face value (or selling value), the carrying value and
gain or loss on the maturity date or on the sale:
Dr. 111, 112: face value (or selling value)
Dr. 635: carrying value less face value (or selling value)
Cr. 121, 228: Carrying value
Cr. 515: face value (or selling value) less carrying value
Transaction costs are recorded as the financial expenses:
Dr. 635 Financial expense
Cr. 111, 112
Convertible bonds is converted to common stocks:
Dr. 221, 223, 228(2281): purchase price (investment cost)
Dr. 635: carrying value of bonds purchase price of stocks
Cr. 121, 2282: Carrying value
Cr. 515: purchase price of stocks - carrying value of bonds
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Example 5
a) S dng tnh hung v d 2: Ngy 01/10/N+5,
Doanh nghip A nhn tin thanh ton 5.000 tri
phiu Cng ty M o hn, bao gm mnh gi ca
5.000 tri phiu (500.000.000 ng) v tri tc ca
nm cui (60.000.000 ng).
b) S dng tnh hung ca v d 3: Ngy 01/10/N+5,
Doanh nghip A nhn tin thanh ton 5.000 tri
phiu Cng ty M o hn ng bng mnh gi
(500.000.000 ng).
c) s dng tnh hung ca v d 4: Ngy 01/10/N+5,
Doanh nghip A nhn tin thanh ton 5.000 tri
phiu Cng ty M o hn, bao gm mnh gi ca
5.000 tri phiu (500.000.000 ng) v tng s li
nhn sau (345.750.000 ng).
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Provision for investment in securities
When the value of an investment falls below
its acquisition cost, assets may be overstated.
Conservatism might dictate loss recognition.
At each year-end, (and mid year-end for listed
companies) every investment must be
reviewed to see if value is permanently
impaired.
If such an impairment exists, the investment
must be written down
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Impairment and provision
Measure impairment
Provision (or return on provision) is measured as
the difference between impairment and balance
of provision for impairment of investments is
recorded as:
expense: Dr. 635/Cr. 129,229
Reduction of expense (return on provision): Dr.
129,29/Cr.635
Unit Carrying value
Unit market value
Impairment Amount of Stocks
in question
= X
tip
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Trnh by thng tin trong bo
co ti chnh
Trong bo co ti chnh phi trnh by:
Khon u t vo cng ty con
Danh sch cc cng ty lin kt km theo cc thng
tin v phn s hu v t l(%) quyn biu quyt,
nu t l ny khc vi phn s hu; v
Cc phng php c s dng k ton cc
khon u t vo cng ty lin kt.
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