We are back, aren't we?
This is Lecture #209 then we have Lecture
210 and then we take the test, all right?
We'll talk a little bit about the test today
but the first thing I want to do is go through
the homework, all right?
So let's go through the homework.
I believe I assigned, was it Exercise 15-2,
15-3, 15-4; is that correct?
Also, don't forget your Chapter 13 Connect
assignment, always be aware of those due dates,
okay?
So you folks at home, look at the red calendar
on D2L.
So let's go ahead -- show the screen for -- we're
going to do Exercise 15-2, 15-3 and 15-4.
That was what I assigned, was it not?
Okay.
So all right, you can come off that.
Exercise 15-2 says Prepare journal entries
to record the following transactions involving
the short-term securities investments of Natura
Co., all of which occurred during year 2013.
Okay?
All right, we can do that.
On June 15, paid $1 million cash to purchase
Remedy's 90-day short-term debt securities.
One million dollar principal dated June 15th
that paid 10% interest.
And it says this is categorized as a held-to-maturity
security.
They always talk about the way that these
are categorized, so we're going to talk a
little bit about that but probably not until
next lecture, I don't want you to worry about
it now though.
Okay, that first journal entry, to purchase
the security would look like this.
Okay?
You debit short-term investments.
That HTM stands for held-to-maturity, you
don't need to put that.
In parenthesis sometimes they'll put who the
company that we're investing in is.
And then we credit cash for a million dollars,
okay?
Now one question that you might have is, in
the earlier lecture we talked about cash equivalence,
do you remember that?
There are certain investments that are, if
they are 90 days or closer to maturity, they
can be classified as cash equivalents.
So looking at this again, we debit short-term
investments, we don't debit cash equivalents.
Why is that?
Well, yes, one of the qualifications to be
a cash equivalent is 90 days or sooner maturity
but there are some other ones as well and
this did not qualify as a cash equivalent.
And they tell us very clearly this is a short-term
investment type of thing.
Okay?
All right, any questions on that?
Okay, let's look at Exercise 15-2B.
On September 16th, we received a check from
Remedy in payment of the principal and 90
days interest on the debt.
Okay?
Well, we don't just get a million dollars,
do we?
We don't just receive a million dollars cash.
We receive our million dollars cash back for
the principal but we also receive interest.
And how do we compute that interest?
Well, we take the principal amount of a million
dollars, times the annual interest rate, times
90 divided by 360 since it's a 90-day note.
Now you might have done 90 divided by 365
since there's 365 days in the year, that's
fine as well.
If it were a multiple choice test it might
be off by a dollar or something and then just
choose the answer that's closest to it.
Yeah, Jeremiah?
>>It didn't say it was an annual rate, I thought
it was just 10% for the entire thing so I
just put --
>>You just said times 10%?
>>Yes, I had 1.1 million.
>>Okay, that's a great question.
Very good question and let me state this:
The rate they give you is always the annual
rate.
>>Okay.
>>Okay?
I mean, and, you know, if you're ever like,
is it an annual rate or is it a quarterly
rate?
If it was a quarterly rate of 10% that would
be an annual rate of 40%, right?
That would be pretty doggone high, right?
So but it's -- that's a great question and
it's something good to point out.
The rate that they always give you is always
going to be an annual rate.
Very good question.
Okay?
So any questions on that?
If you did, if you did, like I said, 90 divided
by 365, did anybody do that here?
No?
Okay.
They usually use 360 just because it's a little
clear with even numbers.
All right?
Okay, cool.
Let's go to exercise 15-3.
Prepare journal entries to record the following
transactions involving the short-term security
investments of Crumb Company, all of which
occurred during year 2013.
Okay, on August 1st we paid $450,000 cash
to purchase Houtte's 9% debt securities for
the 450,000 principal dated July 30, 2013
and maturing January 30, 2014.
And they tell us that these are categorized
as, what do they tell us?
Available for sale securities?
Okay.
All right, well, let's take a look at that
answer.
All right.
On August 1st, we debit short-term investments.
The AFS stands for available for sale.
You don't have to put that.
They put the name of the company, Houtte,
in parenthesis and we credit cash for $450,000,
correct?
All right, then what happens?
On exercise 15-3 B, on October 30, we receive
a check from Houtte for 90 days interest on
the debt securities purchased in transaction
A. Now, is the debt maturing on that date?
No.
We just receive interest, right?
Okay, this is I believe a one-year note; is
that correct?
No, no, no.
This is a -- this is a 6-month note, but it's
still not maturing on October 30, is it?
We're just receiving interest.
How much interest do we receive?
Well, we take the principal of the 450,000
times 9% annual rate.
Again, we're receiving 90-days interest, so
it's 90 divided by 360.
We debit cash, credit interest revenue for
10,125.
And again, that 9% is an annual rate.
Cool?
All right.
That was easy enough.
If that was easy, then Exercise 15-4 is even
easier, right?
I didn't give you much homework tonight or
this time, did I?
Okay, well hopefully you use that to start
studying for the test, all right?
All right, Exercise 15-4, debt securities
reflect a creditor relationship.
Let me move that down a little bit.
Debt securities reflect a creditor relationship
such in investments and notes, bonds and certificates
of deposit, right?
We're not an owner, we are a creditor.
Okay?
And that's what we talked about last lecture
is debt securities.
Now what we're going to talk about this lecture
is equity securities, okay?
Equity securities reflect an owner relationship
such as shares of stock that we might purchase
that are issued by other companies, okay?
Short-term investments are securities that
management intends to convert to cash within
one year or the operating cycle, whichever
is longer and they're readily convertible
to cash.
I usually concentrate on the one-year because
usually the operating cycle is less than a
year.
Okay.
And then not surprisingly, the next one, long
term investments in securities are often,
or are defined as those securities that are
not readily convertible to cash or are not
intended to be converted into cash in the
short-term, usually one year.
All righty, any questions there, folks?
Not too difficult, is it?
Okay.
What I'd like to do now is let's talk, just
real briefly, about the test.
Did everybody get one of these -- I'll put
it on the screen first.
Did everybody get one of these study guides?
Like, did you get one?
>>No.
>>Okay.
>>Everybody else have one?
Okay.
Did you get one of those?
Yeah, hand that back to Blake if you could.
Does everybody have one now?
I have extras.
All right, this is a study guide, you folks
at home online, look in your packet of handouts
and it should be in there.
I'm not going to read each line to you, okay?
You can read, but this is kind of a study
guide on what to do, what to concentrate on
for the test.
Now I've said this a lot before -- you can
come off that -- what's the best way to study
for one of my tests?
>>Do the homework.
>>See if you can redo the homework with a
blank piece of paper, okay?
A lot of people just kind of get lazy and
they just look over the homework and they
go, oh, that makes sense.
Okay?
It's a lot different than being able to reproduce
the answer on a blank piece of paper, okay?
A lot of times my test questions are simply
homework questions we've had and I've changed
the company name and the numbers, okay?
So if you're real good at doing your homework
with a blank piece of paper, you'll probably
even recognize that, okay?
As a rule of thumb, not just for my class
but for any instructor you ever have.
I've given you a lot of handouts in this class,
haven't I?
Whenever the instructor goes through the trouble
of making a handout and printing out a handout,
something that we work on in class, that's
definitely something you want to study and
definitely something you want to focus on,
okay?
I do have a study test or a practice test
out there.
It's on the website, for you folks at home.
Has anybody here seen it?
Okay, it's out there.
It's out there under practice tests.
And I have the practice test answers out there.
Now again, I encourage you to see if you can
do the problem, not just look over the question
and then look at the answers, all right?
But those are the best ways.
You guys know, you guys are Accounting 2 students,
you've had Accounting 1.
You know that you can't obsess over problems,
right?
I'll have some people that they'll get to
a problem on a test or even a multiple choice
that's worth 4 points or 2 points and they
can't get the answer and they will just sit
there and spin for 20 minutes trying to get
a 3-point multiple choice question.
That's not good test taking skills, is it?
Okay.
You always have to be aware, okay, of how
much time that you have.
There's too many instructors anymore that
are just letting people have as long a time
as they want to do their test.
And if they don't get it done in the class
period, they let them sit out in the hall
and finish it and stuff.
We're not supposed to do that and I can't
do that because I have classes after this.
So you constantly need to be looking and going,
okay, how am I doing here?
I know when I was a student taking a test,
the first thing I did was go through -- the
first thing I did was actually take the test,
thumb through it real quick, look what's there.
Does anybody else do that?
Just so in your brain, you kind of know what
you're dealing with.
You go, okay look, there's 20 multiple choice
and there's 4 problems, okay.
Then I would go through and I would do the
ones that I had no trouble with, okay?
But if I came to one that I was a little bit
fuzzy on or one that didn't compute, all I
did was write a question mark on there and
go on.
Okay?
Because it's better to do the stuff that you
feel good about that you could do somewhat
quickly and efficiently and then come back
to the ones.
Okay?
I've had people sit and stew on one multiple
choice and then they handed in their test
and it was half blank.
It's like, you probably wouldn't even got
that one right anyway.
You need to move on.
You can always write on your exams.
People always go, can I write on the exam?
Yes, write on the exam, okay?
On the Scantron, you need to be adept at filling
out accurate Scantrons, okay?
I recommend not filling out the Scantron as
you move through the test.
I recommend just putting the Scantron aside,
writing all of the test, changing, oh, this
multiple choice isn't an A, it's D and all
that.
And then when you're finally good with everything
that's on your test, one of the very last
things before you hand in the test is transfer
your answers, okay?
So that if you change a multiple choice you're
not trying to erase that Scantron and getting
it all boogered up.
If you get it all boogered up you need to
come get a new Scantron.
Okay?
You guys know how to take tests, right?
The policy is you can use your own calculator,
this is for the folks at home too.
You can use your own calculator if it's not
graphing.
Okay, you cannot even think about using your
phone as a calculator, okay?
And I think that's about it.
Are there any other questions about the test?
Anybody here?
Okay.
You online students, I will e-mail you some
more information about the test.
You take yours in the Testing Center, obviously.
Be aware of the hours.
Go to the website and take a look at the JCCC
Testing Center hours.
Make sure you're always aware.
Be very nice to those people in the Testing
Center, they do great work.
But be sure not to have your phone on you,
even if it's off, even if it's on vibrate,
you cannot have your phone on you while you
take that test, okay?
All right, questions on anything?
All right.
What we're going to talk about now is we talked
about debt securities last lecture, correct?
What we're going to talk about now is equity
securities.
Let's take a look.
Equity securities, equity securities reflect
an owner relationship, right?
Now remember Chapter 13 we talked about issuing
stock to raise capital, that was Chapter 13?
Well, we can also purchase other company's
stock as investments, okay?
And then there is that owner relationship.
We record equity at securities at cost when
acquired, but a lot of times we have a brokerage
fee that we have to deal with.
As we receive dividends we debit cash and
credit debit in revenue.
And then when we sell the securities, we compare
the sale proceeds with what our cost was and
we record any gain or loss, okay, that may
be need to be recorded.
Come off that for a second, if you would.
One thing you got to be really careful with
is this, on this test will be Chapter 13,
right, where one of the components of that
chapter was issuing stock and your debit cash,
your credit common stock and additional paid-in
capital or contributed capital and excess
of par or whatever they're calling it, right?
Now we're going to talk about purchasing stock.
Now you need to make sure, and it's not our
own stock, this is not treasury stock, it's
another company stock.
You have to make sure you're shifted into
the right gear.
Is this Chapter 13, we're issuing stock in
our own company?
Or is this Chapter 15, we're purchasing another
company's stock?
Okay?
You'll see on the test that I actually put
the Chapter 15 multiple choice questions all
together.
I'll say Chapter 15 multiple choice and they'll
be lifted.
That'll kind of help you shift into the right
gear, you with me?
But on the problems and such, you know, make
sure is it Chapter 13 or is it Chapter 15,
all right.
The best way to learn this that we just write
on the screen is actually to do some examples.
So take a look, on May 6, 2013, Matrix Inc.,
that is us, we purchased 10,000 shares of
Apple Inc.
Common stock for 250,000 in the open market.
They were also charged a total brokerage fee
of $500 for this transaction, okay?
Now I want you to note that we debit long
term investment and then we might put Apple
in parenthesis.
We debit it for 250,500 and we credit cash
for 250,500 because of this $500 brokerage
fee, okay?
Now note that we do not have a brokerage fee
expense account that we debit for 500.
No, this becomes part of the asset.
You with me?
And that's consistent with the way we did
inventory and fixed assets in Accounting 1,
okay?
Now, we purchased 10,000 shares of common
stock for 250,500, so what is the true per
share cost of this stock?
Do you see that it's 25.05?
It's just that 250, 500 divided by the 10,000.
Correct?
Now I always like to have that 25.05 per share
cost somewhat handy, you know, write it somewhere
or something like that because we'll need
it.
Now on June 30, Apple pays a quarterly dividend.
Are we Apple?
We are not Apple, we are Matrix.
So we're actually receiving a dividend from
Apple.
We are Matrix.
Matrix, that's us, receives a dividend check
of 20,000 because they paid $2 per share and
we have 10,000 shares.
So we debit cash.
We credit dividend revenue, right?
Okay.
Now on December 18, Matrix Inc., that's us.
We sell 1,000 shares of Apple in the open
market for $30 per share.
That's the market price, that's determined
by supply and demand, isn't it?
Now we also paid a $175 brokerage fee.
Okay, so how do we do this?
Well let me build the journal entry.
I'm going to put these in the order that I
would record them.
The first thing I would say is how much cash
did we receive when we sold those shares?
Well, we sold 1,000 shares, correct?
And what did the, what did the market say
that the price was per share?
$30.
Now that's not it though, is it?
1,000 times 30 is $30,000, but out of that
$30,000 we had to pay a $175 brokerage fee.
So the actual amount of cash that we received
and we debit cash for it is 29,825.
You follow me?
So that's the first thing I do is how much
cash came in.
The second thing I do is, okay, well, we're
selling some of these long term investments.
What do I credit long term investments for?
What do I reduce long term investments for?
Well, this is where that 25.05 comes in handy.
How many shares did we sell?
1,000.
So we take 1,000 times 25.05 per share cost
which certainly includes that initial transaction
fee and that gives us 25,050, that's the second
thing I do.
Then the last thing I do is ask myself, does
that journal entry balance?
It does not balance, does it?
So we consider this kind of the accounting
plug.
And if it needs help on the credit side as
it does in this example, we credit a gain
on sale of investment.
If it needed help on the debit side, we would
debit loss on sale of investment.
Of course you can think through it, this makes
sense that this is a gain because we sold
it at a higher price than what our cost was,
and the flip side if it was a loss.
Okay, now come off that for a second.
This is called a realized gain, okay?
There are also what is called realized losses.
That means we've actually realized it, It's
been confirmed by an actual sale.
A realized gain or a realized loss has actually
happened.
It's actually been confirmed by the sale and
you'll see why I'm emphasizing that in the
next lecture.
You don't have to say -- going back to the
slide -- you don't have to credit realized
gain but know that it is a realized gain.
Remember what gains are?
Gains are like revenue accounts, kind of.
They have a credit balance account.
They're temporary accounts.
They are on the income statement and gains
are added in arriving at net income.
Remember that from Accounting 1?
Losses are kind of like expenses.
They are temporary accounts, debit balance.
They go on the income statement.
And losses are deducted in arriving at net
income.
Cool?
Okay, actually that's where we're going to
stop.
What we are going to do now is we're going
to work on some stuff in class.
What I want you to do now in class is do Quick
Study 15-1 and Quick Study 15-3, okay?
Now don't do the exercises.
Here I'll put these up on the screen.
What I want you to do is Quick Study 15-1
and Quick Study 15-3, okay?
Let's play that music and we will come back
in a little bit and we'll go over the answers.
So do Quick Study 15-1, 15-3.
(Music) okay, if you folks at home aren't
done, just pause this and start us up when
you are.
All right, let's do Quick Study 15-1.
On April 18, Riley Company made a short-term
investment in 300 common shares of XLT co.
So we're Riley.
Purchase price is $42 per share and the brokerage
fee is $250.
The intent is to actively manage these shares
for profit.
Okay, well let's record that journal entry,
first of all.
Okay.
Is this what you got?
Debit short-term investments, credit cash
for 12,850 which is 300 shares at $42.
Plus we had to pay the $250 fee, correct?
Does that make sense?
Okay.
Then it goes on to say, on May 30th, Riley
Company, that's us, receives a dollar per
share from XLT in dividends.
Well, all we do is -- how many shares do we
have?
300?
So we've received 300 times 1 equals $300
cash.
We debit cash, we credit dividend revenue.
Okay?
Cool?
All right.
That's not too tough, is it?
Let's do Quick Study 15-3.
Prepare Hertog Company’s journal entries
to reflect the following transactions for
the current year.
Okay, on May 7, we purchased 200 shares of
Kraft stock as a short-term investment in
available for sale securities at a cost of
$50 per share plus $300 in brokerage fees.
Okay?
So the journal entry is...what do we debit
short-term investments for?
>>10,300.
>>10,300, you are correct.
10,300.
And we credit cash for 10,300.
We purchased 200 shares at $50 plus we paid
a $300 fee.
Now one thing that you can see that I did
up here, because I know we're going to need
it, is I figured out what our true cost was
per share.
And the true cost was $51.50 per share which
was the 10,300 total amount of dollars that
we paid divided by the 200 shares that we
acquired.
Okay?
Because it goes on to say, in Quick Study
15-3, that we sell 200 shares of its investment
in Kraft stock per share.
The broker's commission on this sale is 150.
Okay.
Well let's build the journal entry.
The first thing that I would do is debit cash
for the amount of cash that came in.
Did you get 11,050?
Okay, which equals 200 times 56 minus 150,
right?
Okay.
Now the next thing that I would do is I would
have credited short-term investments for 200
times the cost, which is 51.50, which equals
10,300, right?
Now we sold all of them so you you could have
just said, okay, well what's in the balance
because we're obviously taking this down to
zero now, right?
This I should be pointing at, not this.
But we're taking our short-term investments
to 10,300.
We purchased 200 shares, now we're selling
200 shares so we credit short-term investments
for 10,300.
But you could've also obtained that number
by simply taking 200 times the cost of 51.50.
And then this is a realized gain that is the
accounting plug to make the journal entry
balance.
We know it's a gain because it's being made
on the credit side but we also know it's a
gain because we sold it more for what our
cost was, cool?
Is there any questions on Quick Study 15-1
or 15-3?
We're going to do another one in class now,
okay?
So what I want you to do now is, and we'll
go over it as well when you all are done.
We're going to do -- 
let's do Exercise 15-1.
Exercise, not Quick Study, but Exercise 15-1.
So let's go ahead and take a few minutes to
work on that one and then we will go over
it as well.
(Music) All right.
Okay, let's go over this one and then I'll
assign you homework and you could be on your
way, all right?
Exercise 15-1; prepare journal entries to
record the following transactions involving
the short-term security investments of Duke
Company, all of which occurred during 2013.
On March 22, we purchased 1,000 shares of
RIP Company stock at $10 per share plus an
$80 brokerage fee.
The shares are categorized as trading securities.
So what we do here, same rationale as we've
been doing, purchased 1,000 shares of stock
for 1,000 times 10 plus $80 brokerage fee.
So our total amount of expenditure is 10,080.
The total amount of cash we paid for those,
1,000 shares.
So you can see where I calculated the true
cost per share which is 10,080 divided by
the 1,000 shares, $10.08 cost per share.
All right?
It goes on to say on September 1 we receive
a dollar per share cash dividend on the RIP
Company stock purchased earlier.
Well we have 1,000 shares paid a dollar dividend
per share.
So we debit cash, we credit, debit in revenue
for $1,000, correct?
C, we sold $500 shares of RIP Company stock
for $15 per share less a $50 brokerage fee.
First thing I always do is how much cash came
in?
Did you get cash coming in at $74.50?
Okay.
Okay, $74.50 which is the market value of
the shares times how many we sold minus the
brokerage fee we had to pay, correct?
Now, the rest of the journal entry is thus,
let me tell you how I would've -- I would've
next computed -- well, let me just show you.
This is the next number I would've computed
is what do we credit or reduce short-term
investments for?
Okay?
Two schools of thought: The school of thought
that I always use, because you can use it
consistently, is how many shares did we sell?
>>500.
>>500.
What was the true cost per share?
5,000 times $10.08, that equals 5,040, right?
The other school of thought is, well, we purchased
1,000 shares; we just sold 500 so we could
just take one half of that.
But again, I like my methodology better because
you can always use it.
It's not always a nice fractional situation
like that.
What was the true cost per share?
How many did we sell?
And that's what you reduce the short-term
investments for, because we don't have it
anymore.
And then, of course, the accounting plug is
to credit gain on sale of short-term investments
for 2,410 which makes the journal entry balanced.
That is a realized gain, correct?
All right, questions?
Okay, so what I want you all to do for homework
is study for the test.
Make sure you're getting your Connects done.
But I want you to do; I want you to do the
Clemon Company handout, okay?
You should all have that.
You folks at home have this in your packets.
Do that entire page.
Do the Oatman Company entire page.
And also do Exercise 15-8.
So Oatman Company, Clemon Company, Exercise
15-8.
Hey, I'll see you guys later, I'll let you
guys go a little early today, what a treat,
all right?
See you.
