Accounting for a simulated investment portfolio: active learning pedagogy in intermediate accounting.

Carter, Fonda L. ; Jones, Rita C.

INTRODUCTION

Accounting for Investments is the focus of Chapter 17 in the 12th and 13th editions of the Kieso, Weygandt, and Warfield "Intermediate Accounting" textbook. In order to enhance student learning and to assess students understanding of the material, a three-month project was developed to assign to students in an Intermediate Accounting Class of a southeastern, regional university. The focus of the project is the accounting for investments in equity and debt securities issued by other companies. As part of the project assignment, each student is allocated a fictional amount of $450,000. The students are instructed to investigate the stocks of companies of their choosing and then to simulate purchases of three to four stocks of different companies in each stock portfolio utilizing approximately $150,000 of the fictional funds for each stock fund. The portfolios of the students must include both stock purchases and stock sales for investments classified as available-for-sale securities and trading securities. The remaining fictional funds of $150,000 are to be used to simulate an investment in bonds of one company. The students are required to document the accounting treatment for the purchase transactions, the sales transactions, and the adjustment to fair value for each portfolio at the end of each month during the period of the project. It is up to the individual student to develop their own system of documentation.

The purposes of the project are to enhance the students' understanding of the subject of investments and to give them hands-on experience in actually identifying and collecting documentation on stock and bond prices. An additional purpose is to provide an opportunity for the students to prepare work-papers to document the accounting treatment of the simulated transactions. The students are also instructed to incorporate the use of spreadsheets to document their transactions and to summarize their portfolios. The preparation of the work-papers and subsequent instructor comments provide the students with feedback they can utilize both in other school projects and in the work place. The reward for students participating in this active learning project is a grade of up to 35 points, which represents approximately 5% of their total course grade.

Through a review of the literature, this paper will discuss active learning in general, compare active learning for in-class assignments versus out-of-class assignments, and draw conclusions about which may be preferable for intermediate accounting courses. Following the Literature Review section, there is a section devoted to the detailed discussion of the project as well as the results section.

LITERATURE REVIEW

Active Learning

Active learning is defined as any strategy "that involves students in doing things and thinking about the things they are doing" (Bonwell and Eison, 1991, p. 2). It has attracted considerable attention in higher education in response to concerns about how and what students are learning (Bennis and O'Toole, 2005; Lyman, 1997). Among other things, Active Learning is also referred to as "Applied Learning," "Group Learning," "Collaborative Learning," or "Cooperative Learning". Each of these involves small groups of students working together to solve exercises and problems during a class period (Hermanson, 1994; Holt, 1995; Atkinson and Jones, 1997).

Active Learning In The Classroom

The evolvement of students in active learning has become increasingly important to schools and colleges of business as they respond to criticisms about the lack of relevancy of time spent in the classroom (Bennis and O'Toole, 2005; Porter and McKibben ,1988; Lyman, 1997). Fortunately, educators have begun to find evidence that their peers are responding to the criticisms. Research published since 2000 shows that business and economics educators are more frequently using active learning techniques in the classroom than in years past (Zygmont, 2006; and Dallimore, Hertenstein and Platt, 2006) and although there are many different forms of active learning, most of them are classroom-based (Auster and Wylie, 2006).

Auster and Wylie, (2006) concerned with criticisms of classroom relevancy, presented their version of in-classroom learning assignments, and in doing so, validated the value to their students. Bonwell & Eison, 1991, argue that active learning can have a high impact on what students are able to learn. They propose a systematic approach to creating active learning in the classroom. Schee (2007) agrees with this philosophy and proffers that it may not be necessary to leave the classroom to have an excellent Active Learning experience. He suggests an in-class, interactive activity for Principles of Marketing classes as a possible solution. The activity is called The Exchange Game. He implements the game in his classes on the first day of class, and involves the entire class. The outcomes from his active learning experiment were: 1) increased class participation, 2) engagement with the instructor and other students, 3) enthusiasm for the course, and 4) increased knowledge of principles of marketing.

Auster and Wylie (2005) point out that active learning emphasizes the application of theory and concepts by involving students in the learning process. A variety of methods exemplifies active learning, such as, but not limited to, "problem-solving exercises, informal small groups, simulations, case studies, role-playing, and other activities" (Meyers & Jones 1993, p. xi). Tushman, et. al. (2007) find that their executive education students who are involved in "action-learning" programs out-perform the students in their traditional executive education program. It is for reasons such as these that this project is presented.

Active Learning Projects Away From Class

Recently, Martin Ince (2007) published an article about Professor Michael Eraut of the UK's University of Sussex who headed a teaching and learning research project called LINEA (Learning in Nursing, Engineering and Accountancy). Eraut and his colleague, Judith Furner, found that accountants just may be in the profession that is getting early learning right. Among other things, they found that learning something and using it almost simultaneously was one of the most stimulating aspects of becoming an accountant. They set forth in their findings that accountants are involved in a basic activity of asking questions to collect information, and then immediately applying that information to do their jobs. Eraut and Furner use the field of auditing as an example of this and find that question-asking skills are the key to a job well-done. They also find that question-asking skills are of two sorts: 1) those where new auditors continually ask questions of their colleagues about how to construct and carry out an audit, and 2) those questions asked of the client about their business in order to process the client's information to complete the audit. The art of question-asking for auditors takes place on the job which, of course, is an Active Learning environment.

Authors of the current research believe that the assignment of a project to be completed outside of the classroom, but which is also supported by in-class reinforcement, accomplishes learning at its highest level as noted in Blooms' Taxonomy. This approach to learning is also supported by the Cone of Experience, (Table 1) developed by Edgar Dale in 1960, which holds that students generally remember about 90% of what they say as they do a thing. This is the ultimate way for students to learn and retain information. Fortunately, projects of this type are especially well-suited to accounting classes. Based on Table 1, in-class lectures, compared with active learning projects, result in decreased retention of the material covered, and thus, Active Learning projects such as the one involved in this research are important.

THE PROJECT

Pilot Project

The initial pilot project was assigned to students enrolled in an Intermediate Accounting class in the spring semester of 2007. The students were instructed to simulate an investment of $300,000 in "Available for Sale" and "Trading Securities" stock portfolios. The assigned project included instructions for dividing the simulated investment between the two portfolios with stocks purchased from three to four different companies for each portfolio over a three-month period. During the period of the project, each student was also required to sell one company's stock in each portfolio and purchase a different company's stock. It was the student's responsibility to determine their stock selection as well as the exact dates of the purchases and sales transactions. Students were required to document and record all transactions of purchases and sales, along with the adjusting entries to fair value at the end of each of the first two months. The project was completed by 33 students. The average grade on the project was 29.76 out of a possible 35 points, and twelve students scored a perfect grade on the project.

The Revised Project

Based on feedback from the initial project assignment, the project instructions were revised to provide better clarification to the students and to include a step related to the simulated purchase of approximately $150,000 in bonds classified as trading securities. A grading rubric was also developed to aid in the consistent grading of the projects. An analysis of the results is important in the continuous improvement of the instructor's delivery of the material in the classroom. It provides additional information on the areas where the students struggle with mastering certain learning objectives.

The project is designed to assign to students after they study the topic investments as typically taught during an intermediate accounting class. The Kieso, Weygandt, and Warfield Intermediate Accounting textbook covers the material on investments in Chapter 17. The material covered encompasses the accounting for the investments in debt securities (primarily corporate bonds) and the accounting for the investment in equity securities (primarily corporate stocks). The accounting for investments in equity securities is further divided into holdings of less than 20% of a company's stock, holdings between 20% and 50% of a company's stock , and holdings more than 50% of a company's stock. While the accounting for holdings between 20% and 50% is covered (the equity method), most of the focus of the textbook and the classroom discussion is concentrated on the holdings of less than 20% of a company's stock (fair value method). The accounting for holdings of a company's stock of more than 50% is not covered as it is the focus of more advanced accounting classes.

As noted, the material covered in the textbook and subsequently in class primarily focuses on the coverage of the "Fair Value" method of accounting for holdings of less than 20% of a purchased company's stock. Individual companies further divide stock purchases either into an "Available for Sale" portfolio or a "Trading" portfolio. In reality, a company classifies stocks in one of the two categories based on how long they intend to hold the stocks. If they intend to hold them for a short period of time (frequent buying and selling), they classify them in the trading securities portfolio. If the company does not intend to sell the securities in the short-term, they are classified as available for sale. The difference between the two categories is the resulting accounting treatment for the adjustment to fair value at the end of an accounting period. While the adjustment for trading securities to fair value is made to income, the adjustment for available for sale securities to the market value is made directly to equity. A general ledger account entitled "Unrealized holding Gain or Loss--Equity" is used to record the difference between cost and market value and is reported directly in stockholder's equity in the balance sheet. With stocks classified as available for sale, an adjustment to income is only made for this category of securities once the actual stock is sold and a realized gain or loss results.

The course material on investments also includes coverage of investments in debt securities. While there are three separate categories of investments in debt securities for accounting and reporting purposes, the project only includes the accounting for "Available for Sale" debt securities. The other two options for accounting for debt securities are "Held to Maturity" and "Trading" and are not covered in the project due to the fact it is more difficult to locate bond pricing. As with stocks, the investment in bonds is classified into one of the categories based on how long the company intends to hold the investment.

Due to the nature of the information utilized in the assignments in this chapter, it was determined the material lends itself to coverage in an active learning project. Textbook exercises and problems include information on stock purchase price; number of shares purchased, and related market values. Students are required in the textbook problems to prepare journal entries from the information given. Because stock and bond prices are readily available for publicly traded companies, the project was developed to have students apply the concepts and accounting principles related to investments to their own stock purchases. Utilizing the information they have developed from real companies' stock and bond prices should enhance the students' understanding and comprehension of the investment material.

Project Assignment

At the completion of the lecture on equity and debt investments, students are given instructions on how to divide up a simulated investment portfolio and then are instructed briefly on what is required for each (Appendix A) part of the assignment. It is intentional on the instructor's part not to provide detailed instructions as part of the purpose of the project is for the student to develop their own formats for documentation. However, the students are instructed that the project is to be prepared utilizing a spreadsheet program and should be well organized. A portion of the grade is based on appropriate documentation and professional presentation.

The project covers a three-month period. The purpose is to allow the students to make journal entries to the fair value for the equity securities at the end of month one and month two. The second month of the journal entry is more difficult because in the calculation of the adjustment amount, consideration has to be given to the previous balance in the "Securities Fair Value Adjustment" general ledger account. The three-month time period also gives the students the opportunity to follow the market prices of the stocks purchased. While the students are not graded on stock performance, it is interesting to them to follow how well their portfolios perform and provides lively classroom discussion.

THE RESULTS

In the fall semester of 2007, forty-three projects were completed from forty-five students. The two students who did not turn in the assignment earned a grade of zero for that 35-point portion of their total grade for the semester. The average on all the projects was 30.4 points. The highest grade was a 35 and 17 was the lowest grade. Nine students earned a grade of 35. In the fall semester of 2008, all thirty five students that were assigned the project completed it. Six students earned a 35 on the project and the average of all students was 30.74. The lowest grade was a 25.

A grading rubric was developed to grade the projects. The rubric was broken down into ten categories. The first nine were directly related to the steps in the project and the last category directly related to project presentation. The ten categories were then subdivided into poor, fair and good with possible points assigned for each.

The first category in the project related to the students following the directions for the simulated purchase of three to four trading securities. The students could select as many shares of stock of any companies they chose as long as they allocated approximately $150,000 of their total investment amount to the purchase of the stocks in this portfolio. The students were instructed to prepare journal entries to record the purchase, to show the calculation of the total purchase price (i.e. number of shares purchased x market price on the date of purchase), and to provide documentation of the purchase price. In all of the steps in the project, it was left up to the student to develop their own format for the calculations, the subsequent journal entries, and the documentation of the market prices of the stocks. The total possible points on this area were 3.0 and the average for all students was 2.8 for both semesters. The most common reason for point deduction in this area was the students did not show the calculation of number of shares purchased at the applicable price. The students primarily documented the purchase with a printout of the stock prices from an online source such as Yahoo Finance or AOL Finance. Time was spent in class showing the students sources to locate stock prices online. It was up to the students to pick the actual companies and the dates of the sale and purchase transactions.

The second category was very similar to the first category but was related to the students' simulated purchase and the resulting documentation for three to four stocks in the category of available for sale securities. The students were instructed to allocate approximately $150,000 for this portfolio. It was up the students which stocks to classify as trading securities and which stocks to classify as available for sale securities. The instructions to the students were the same as for the trading securities. The grading was also the same and the resulting average in this category was also a 2.8 average (both semesters) out of a possible of 3 points.

Accounting for the purchase and related documentation of approximately $150,000 in bonds, including the accrued interest, was the third category in the project. Discussion was spent in class on how to find bond prices since they are harder to locate than stock prices. Students primarily used the website http://investinginbonds.com/corporatebonds. The total possible points in this category was also 3.0 points. Students were graded on the preparation of the correct journal entry for the purchase price and the documentation. The average student grade in this area was 2.7 for fall semester 2007 and 2.9 for fall semester 2009. The average was lower in the fall of 2007 because two students did not attempt this step in the project. The other reason for students losing points in this category was primarily due to the students not properly including the accrued interest on the bonds in the purchase price and the resulting journal entry.

The fourth category in the project instructed the students to document the adjustment of the trading securities portfolio to the market price at the end of the first month of the project. The students were graded on the documentation of the calculation of the amount for the adjustment, including cost and market value, as well as the documentation of the market price used in the adjustment amount. The average was 2.4 out of a possible 3.0 points for both semesters. Students primarily lost points in this category for not properly showing the calculation of the adjustment amount. Several students also lost points for preparing an adjustment entry for each company in each portfolio instead of one single adjustment amount for the entire portfolio.

The fifth category requirements were similar to the fourth category but related to the adjustments to fair value for the available for sale portfolio. Similar results were obtained for this category, as compared to the fourth category, as the only difference in the journal entry is the actual general ledger account titles utilized in the adjustment process. The calculations and documentation requirements were the same as for the fourth category. The average points achieved were 2.4 out of 3.0 (both semesters) and the results were similar as those obtained in the fourth category. Students lost points for primarily the same reasons.

The next step in the project was for the students to select one of the stocks in the trading security portfolio and one in the available for sale portfolio for a simulated sale. The date of the sale was also selected by the students in order to record a journal entry for the simulated sale. To receive all 3.0 possible points in this area, the students had to properly record the journal entry for the sale, including the documentation of the calculation of the gain or loss on the sale. Documentation was also required for the sales price. The average on this was a 2.4 in fall of 2007 and 2.8 in the fall of 2008. Students primarily lost points in this category for failing to properly compute the realized accounting gain or loss on the sale or for not providing documentation on the calculation.

The students were then instructed to provide documentation on the purchase of a replacement stock for the stock sold in the previous step. The possible points in this category were a 2.0 and all the students turning in projects for both semesters earned a 2.0 on this step.

The next two categories relate to the adjustment of the trading securities and available for sale portfolios to their relative fair value at the end of month two of the project period. The average on these areas dropped to the lowest of all the categories with a 2.2 average for the fall of 2007 and a 2.3 average for the fall of 2008 out of a possible 3 points. This step was more difficult because in the adjustment to the market value at the end of month two, the student has to consider the balance in the "Securities Fair Value Adjustment--Trading Securities or Available for Sale Securities" account from the previous month. Students lost points if they ignored the previous adjustment or the balance in this account in their calculations. Again, the results of the project provide valuable information to the instructor on the comprehension of the course material on investments.

The final nine points of the project related to overall presentation. The students were given very little instruction on this step other than it should be well organized and documented. This was intentional as part of the focus of the project was for the student to determine their own format and flow of the documentation. For example, some students prepared one journal entry for the purchase of the entire trading security portfolio but provided a backup spread sheet detailing the number of shares and stock price for the related securities in the portfolio. Other students prepared a journal entry for each purchase of a company's stock and documented the calculation on the face of the journal entry worksheet. Both were acceptable as long as the documentation was organized and easy to follow. The students earned an average of 8.3 in the fall of 2007 and 8.0 in the fall of 2008 out of the 9.0 possible points. Points were primarily lost due to mistakes in the typing, confusion in the flow of the information provided, or if the project appeared to be hastily thrown together. Overall, the students demonstrated their ability to develop professional projects that were well documented.

Comparative Results

In addition to analyzing the results as noted above, the students' exam grades on the related material were compared to a control group of students in another class that did not complete the learning project. The control group consisted of students taking the same intermediate accounting class at the same university in the fall of 2009. The instructors were different but the control group instructor covered the same material with the exception of the learning project. In order to make the comparison, the multiple choice exam questions (from each instructor's individual exam on the investments material) were categorized based on the first three learning objectives of the chapter related to Investments. The percentage correct were averaged based on the learning objective and the number of questions asked. The results are shown below in Table 2.

Although there are not enough observations to perform statistical analysis, the results do provide anecdotal evidence the learning project provides a valuable learning experience for the student. The results of the first three categories in Table Two indicate the group that completed the learning project scored higher on questions on the exam (related to the items included in the learning project) as opposed to the control group. In order to strengthen the argument that the learning project contributed to the students' understanding of the material, the results from the remaining questions on the exam (those that were not related to the learning project) were compared and were noted to be similar, as shown also in Table Two. Additionally, to determine whether the differences in the two groups were due to the learning project or the fact the students from the learning project group were just better students, the GPAs were compared as noted in the table above. The results of the GPA comparison indicate the two groups are similar in terms of their learning output as well.

While the value of the learning project is noted in exam results, an additional aspect of the project is that it provides the students with an opportunity for developing professional work papers. In accounting, it is essential to create an "audit trail" for accounting transactions, journal entries, etc ... This project both enhances student learning based on exam results and enhances their professional technical communication skills.

COSTS OF USING ACTIVE LEARNING PROJECTS

The use of active learning projects is not without costs. To the instructor one such cost is the significant amount of time and effort in developing the assignment and presenting it to the class. Additional time is spent in class on follow-up Q & A sessions and outside the class in grading the work submitted and subsequently providing the students with feedback. The extra time it takes for each of these activities is sizeable and must be a consideration for the instructor. While the rubric assists in the grading process, it also presents a time consideration in its development. The time spent discussing the projects in class also takes some time away from in classroom instruction and learning. Questions are welcomed from the class throughout the assignment period in order to clarify any points that are misunderstood in the assignment.

Obvious costs to the students are the time and energy expended determining the stocks and bonds to purchase, locating the stock and bond prices, and then preparing the required documentation. Although the material is covered in class, the student also has to spend time reviewing the textbook related to the proper journal entries to make for each step in the project. However, it is the conclusion of the instructor that the costs of the project are outweighed by the benefits received by the students.

SUMMARY AND CONCLUSIONS

In conclusion, the overall feedback from the students was positive. The project allowed the students to select their own stocks and to develop their own format for documenting the simulated investment transactions. While the students were not graded on the performance of their portfolios, it did provide real-world data for the simulated purchase of the stocks and bonds and the related subsequent accounting journal entries. In-class and homework assignments from the textbook provide the information to the student. In this project, the student is required to determine the information to utilize for making the initial journal entries and the subsequent adjusting entries. The project is an out of class assignment but is reinforced by classroom discussion. Overall, the project is designed to aid in the students' comprehensive understanding and retention of the course material as it relates to investments.

While students were not graded on stock performance, students enjoyed the competition that naturally resulted from sharing in class how their portfolios were "performing". Open discussions on the project increased students' interest in the subject matter and in turn provided them with a more engaging learning experience. The project meets the criteria for active learning as defined by Bondwell & Eison, 1991, as anything that "involves students in doing things and thinking about what they are doing". It allows the students to learn while they simultaneously use the information in a practical application.

In addition, the project provides feedback to the instructor as to the extent of the students' understanding of the subject matter. Analysis of the results of the project allows the instructor to continuously improve the project as well as the classroom presentation of the material to enhance the students' learning. An additional consideration is the results from the project can be utilized for documentation of the assessment of the learning objectives for the material the project covers as well as the use of technology in the assignment. The use of a grading rubric assists both in feedback to the instructor and the documentation of the assessment of learning.

APPENDIX A

INTERMEDIATE ACCOUNTING INVESTMENT PROJECT

In this project you are allocated $450,000 (fictional money of course) to invest in stocks and bonds of your choice. You can find market values on companies' stock prices from several different sources including www.yahoo.finance, http://money.aol.com, and http://moneycentral.msn.com/detail/stock_quote. You are to follow the instructions below in allocating and accounting for your investments. You are to use spreadsheet software for the documentation of calculations and journal entries.

In the first month, purchase 3-4 stocks that you will classify as trading securities. Prepare journal entries to record the stock purchases. Provide documentation to support the amounts in the journal entries and the stock prices. Also, purchase 3-4 stocks that you will classify as available for sale securities and follow the same instructions.

Purchase approximately $150,000 in bonds to be classified as available for sale. Prepare the appropriate journal entry to record the purchase price along with any accrued interest. You will find information on bond prices at www.investinginbonds.com.

At the end of month one, prepare the adjusting journal entries to adjust both the trading securities portfolio and the available for sale securities portfolio to their fair market value. Provide documentation for your adjustments including calculations, cost, fair market value and the resulting journal entry.

During month two, sell at least one of the trading securities and one of the available for sale securities. Prepare journal entries to record the sale. Document the calculation of the gain or loss on the sales and the price of the stock on the date of sale.

Purchase at least one stock in each portfolio to replace the stock sold in #4. Record the appropriate journal entries and provide documentation on the purchase prices.

At the end of month two and three, prepare the adjusting journal entries to adjust the trading securities portfolio and the available for sale securities portfolio to fair market value. Provide documentation for your adjustment.

REFERENCES

Atkinson, Keith E. and Jones, R. C. (1997). The Impact of Group Learning on Student Performance in Accounting Principles I and II. Proceedings of the 1997 Southeast Regional American Accounting Association meeting.

Auster, Ellen , Grant, T. and Wylie, K. (2005). Excellence in business teaching: A quick start guide. Toronto, Canada: McGraw-Hill Ryerson.

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Bonwell, C., & Eison, J. (1991). Active learning: Creating excitement in the classroom. ASHE-ERIC Higher Education Report No. 1. Washington, DC: George Washington University.

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Dallimore, Elise J., Hertenstein, Julie H. And Platt, Marjorie B. (2006). Non-voluntary Class Participation in Graduate Discussion Courses: Effects of Grading and Cold Calling. Journal of Management Education. 30(2), 354-377.

Hermanson, Dana R. (1994). The Effect of Self-Generated Elaboration on Students' Recall of Tax and Accounting Material: Further Evidence. Issues in Accounting Education. Vol. 9, No. 2, Fall: 301-318.

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Ince, Martin (2007). Getting it Right. Accountancy. June: 60-61.

Kieso, Donald, Weygandt, Jerry J., Warfield, Terry D. (2007). Intermediate Accounting, 12th Edition, Wiley publishing.

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Fonda L. Carter, Columbus State University

Rita C. Jones, Columbus State University

TABLE 1
RETENTION OF INFORMATION STUDIED
Based on Dale's CONE OF EXPERIENCE

10%     of what they read
20%     of what they hear
30%     of what they see
50%     of what they see and hear
70%     of what they say as they talk
90%     of what they say as they do a thing
Edgar Dale, 1960, via Cooper and Krinsky, 1991

Table Two
Comparative Results of Exam Questions Grouped by Learning Objective

Learning Objectives as outlined         Learning        Control Group
in Intermediate Accounting,           Project Group      Percentage
Kieso, Weygandt, and Warfield,         Percentage          Correct
12th Edition.                            Correct

Identify the three categories of          84.2%             67.6%
debt securities and describe the
accounting and reporting
treatment for each.

Understand the procedures for            87.25%             76.4%
discount and premium amortization
of debt securities.

Identify the categories of equity         74.5%             70.0%
securities and describe the
accounting and reporting
treatment for each category.

Additional questions on exam not          69.7%             69.9%
related to the learning project

Number of students completing the          38                17
exams

Average GPAs of student                   3.06              3.01
completing the exam