16 - 1 ©2002 prentice hall, inc. business publishing accounting, 5/e horngren/harrison/bamber...

16 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

Investments andInternational Operations

Chapter 16


Stock Price Information for McDonald’s Corporation:52 weeksHigh Low Stock Symbol Dividend Volume 100s Close4956 2981 MCD .20 2067670 2988

The financial community quotesstock prices in dollars and cents.

Stock Prices


Trading investments are investmentsto be sold in the very near future with the

intent of generating profits on price changes.

Available-for-sale investments are investmentsother than trading securities in which the investor

cannot exercise significant influence over the investee.

Trading and Available-For-Sale Investments


Objective 1

Account for trading investments.


Accounting forTrading Investments Example

Assume that on October 23, Des Moines, Inc., had purchased 600 shares of Bowie Corp. stock for $30,000.

Des Moines' management team hopes to sell this stock within three months.

What is the entry?



Bowie pays a cash dividend of$1.40 per share on November 14.

Bowie pays a cash dividend of$1.40 per share on November 14.

October 23Short-Term Investment 30,000

Cash 30,000Purchased investment

October 23Short-Term Investment 30,000

Cash 30,000Purchased investment



November 14Cash 840

Dividend Revenue 840Received cash dividend

November 14Cash 840

Dividend Revenue 840Received cash dividend

What is Des Moines’ entryto receive this cash dividend?

What is Des Moines’ entryto receive this cash dividend?


Reporting Trading Investments

Trading investments are reported on the balance sheet at current market value.

Assume that Bowie’s stock has decreased in value.

On December 31, Des Moines' investment in Bowie is worth $25,000 ($5,000 less than the purchase price).



December 31Loss on Trading Investment 5,000

Short-term Investment 5,000Adjusted trading investment to market value

December 31Loss on Trading Investment 5,000

Short-term Investment 5,000Adjusted trading investment to market value

What is the adjusting entry thatDes Moines would make at year end?

What is the adjusting entry thatDes Moines would make at year end?



Balance Sheet (partial):ASSETSCurrent assets:Short-term investments, at market value $25,000

Balance Sheet (partial):ASSETSCurrent assets:Short-term investments, at market value $25,000

Income Statement (partial):Other gains and losses:Gain (loss) on trading investment $(5,000)

Income Statement (partial):Other gains and losses:Gain (loss) on trading investment $(5,000)



When a company sells a trading investment, the gain or loss on the sale is the difference between the sale proceeds and the last carrying amount of the investment.

Suppose Des Moines sells the Bowie stock for $23,000 on January 10.

How would Des Moines record the sale?



January 10Cash 23,000Loss on Sale of Investment 2,000

Short-Term Investment 25,000Sold investment

January 10Cash 23,000Loss on Sale of Investment 2,000

Short-Term Investment 25,000Sold investment


Objective 2

Account for available-for-sale

investments.


Available-for-Sale Investments...

– are stock investments other than trading securities.

The market value method is used to account for these investments.

Assume that the market value of Bowie’s investment in Gomez’s common stock is $37,400 on December 31, 2002.

Bowie paid $36,000 for the stock on May 1.


December 31, 2002Allowance to Adjust Investmentto Market 1,400

Unrealized Gain on Available-for-SaleInvestment 1,400

Adjusted investment to market value

December 31, 2002Allowance to Adjust Investmentto Market 1,400

Unrealized Gain on Available-for-SaleInvestment 1,400

Adjusted investment to market value

What is the adjusting entry?What is the adjusting entry?

Reporting Available-for-SaleInvestments


ASSETSLong-term available-for-saleinvestments–at market value $37,400

ASSETSLong-term available-for-saleinvestments–at market value $37,400

STOCKHOLDERS’ EQUITYCommon stock………Retained earnings……Unrealized gain onavailable-for-sale investment $ 1,400

STOCKHOLDERS’ EQUITYCommon stock………Retained earnings……Unrealized gain onavailable-for-sale investment $ 1,400

Reporting Available-for-SaleInvestments


Selling an Available-for-SaleInvestment

Selling the investment can result in a realized gain or loss.

Realized gains and losses measure the difference between the amount received from the sale and the cost of the investment.

Suppose that Bowie sells its investment for $38,000 on January 15.


Selling an Available-for-SaleInvestment

January 15, 2003Cash 38,000

Gain on Sale of Investment 2,000Long-Term Available-for-SaleInvestment (cost) 36,000

Sold investment

January 15, 2003Cash 38,000

Gain on Sale of Investment 2,000Long-Term Available-for-SaleInvestment (cost) 36,000

Sold investment


Objective 3

Use the equity method

for investments.


Equity Method

Where the investor can exert significant influence over the investee, the equity method of accounting is used.

Accountants believe that some measure of the investee’s success and failure should be included in accounting for the investment.


Equity Method

January 10Long-Term Equity-MethodInvestment 500,000

Cash 500,000Purchased equity-method investment

January 10Long-Term Equity-MethodInvestment 500,000

Cash 500,000Purchased equity-method investment

Des Moines, Inc., purchases 30%of the voting stock of Bowie Corp.

for $500,000 on January 10.

Des Moines, Inc., purchases 30%of the voting stock of Bowie Corp.

for $500,000 on January 10.


Equity Method

The initial investment is recorded at cost. Adjustments are made to the investment

account for the investor’s prorata share of income or loss.

Suppose Bowie Corp. reported a $200,000 net loss for year two.


Equity Method

December 31, Year 2Equity-Method Investment Loss 60,000

Long-Term Equity-Method Investment 60,000Recorded investment loss

December 31, Year 2Equity-Method Investment Loss 60,000

Long-Term Equity-Method Investment 60,000Recorded investment loss

What journal entry would Des Moines make?What journal entry would Des Moines make?


Equity Method

If Bowie Corp. pays a $100,000 dividend on January 15 of year three, Des Moines would debit Cash for $30,000 and credit the Long-Term Equity-Method Investment.

Dividends decrease the investee’s owners’ equity and so it also reduces the investor’s investment.


Recording the Sale of anEquity-Method Investment

Suppose that on February 8, Des Moines sells one-tenth of Bowie Corp. common stock for $33,000.

What is the carrying amount of the investment?

$500,000 – $60,000 – $30,000 = $410,000


Recording the Sale of anEquity-Method Investment

What is the gain or loss? $8,000 loss $410,000 ÷ 10 = $41,000 carrying amount

of the investment Cash received = $33,000


Joint Ventures...

– are defined as a separate entity or project owned and operated by a small group of businesses.

Investors account for their investment in a joint venture by the equity method even when the investor owns less than 20% of the venture.


Objective 4

Understand consolidated

financial statements.


Consolidation Accounting...

– is a method of combining the financial statements of two or more companies that are controlled by the same owners.

The assets, liabilities, revenues, and expenses of each subsidiary are added to the parent company’s accounts.


Goodwill

Goodwill is an intangible asset that ariseswhen the purchase price to acquire asubsidiary company is greater thanthe sum of the market value of the

subsidiary’s assets minus liabilities.


Minority Interest...

– is the portion (less than 50%) of a subsidiary’s stock that is owned by stockholders other than the parent company.

The parent company reports on its consolidated balance sheet an account titled Minority Interest.

Most companies list Minority Interest among their liabilities.


Accounting Methods forStock Investment

50% or moreConsolidation Method

20%–50%EquityMethod

Less than 20%Market-Value Method

The percentage of ownership determinesthe accounting method to be used.


Objective 5

Account for long-term

investments in bonds.


Long-Term Investmentsin Bonds Example

Suppose that Bryan Insurance purchases $10,000 of College Station’s 6% bonds at a price of $9,520 on April 1, 2002.

Interest dates are April 1 and October 1. Bryan intends to hold the bonds as long-

term investments until their maturity date of April 1, 2006.



April 1Long-Term Investment in Bonds 9,520

Cash 9,520Purchased bond investment

April 1Long-Term Investment in Bonds 9,520

Cash 9,520Purchased bond investment

What are the journal entriesfor April 1 and October 1, 2002?

What are the journal entriesfor April 1 and October 1, 2002?



October 1Cash ($10,000 × .06 × 6/12) 300

Interest Revenue 300Received semiannual interest

October 1Cash ($10,000 × .06 × 6/12) 300

Interest Revenue 300Received semiannual interest



October 1Long-Term Investment in Bonds($10,000 – $9,520) ÷ 48 × 6 60

Interest Revenue 60Amortized discount on bond investment

October 1Long-Term Investment in Bonds($10,000 – $9,520) ÷ 48 × 6 60

Interest Revenue 60Amortized discount on bond investment

What is the straight-lineamortization on October 1?

What is the straight-lineamortization on October 1?


Long-Term Investmentsin Bonds and Notes

The amortization entry has two effects:1 It increases the Long-Term Investment

account.2 It records the related interest revenue that

Bryan has earned as a result of the increase in the carrying amount of the investment.


Objective 6

Account for transactionsstated in a foreign

currency.


Company Percent of International SalesMcDonald’s 62%Toys “Я” Us 27%Procter & Gamble 49%

Company Percent of International SalesMcDonald’s 62%Toys “Я” Us 27%Procter & Gamble 49%

Accounting for business activitiesacross national boundaries makes upthe field of international accounting.

Accounting for business activitiesacross national boundaries makes upthe field of international accounting.

Accounting forInternational Operations


Foreign-Currency Exchange Rates

Foreign-currency exchange rate is the measure of one currency against another.

Transactions stated (denominated) in a foreign currency must first be translated into dollars before recording.

Accounts stated in a foreign currency often give rise to foreign currency transaction gains or losses.


Foreign-CurrencyExchange Rates Example

Bryan Insurance buys a Rolls Royce for 100,000 British pounds on April 1, when the price of the pound is at U.S. $1.65.

Payment is due April 30.



April 1Equipment 165,000

Accounts Payable 165,000Recorded purchase of car at 1.65 rate

April 1Equipment 165,000

Accounts Payable 165,000Recorded purchase of car at 1.65 rate

Bryan records the purchase in U.S. dollarsat the exchange rate on the date of purchase.

Bryan records the purchase in U.S. dollarsat the exchange rate on the date of purchase.



When payment is due on April 30,the price of a pound is $1.68.

When payment is due on April 30,the price of a pound is $1.68.

April 30Accounts Payable 165,000Foreign-Currency Transaction Loss 3,000

Cash 168,000Payment of account

April 30Accounts Payable 165,000Foreign-Currency Transaction Loss 3,000

Cash 168,000Payment of account


International Transactions

Hedging means to protect oneself from losing money in one transaction by engaging in counterbalancing transactions.

Losses on the receipt of one currency may be approximately offset by gains of the payment on another currency.


Consolidation of Foreign Subsidiaries

The foreign subsidiary statements must be conformed to GAAP and translated into dollars before consolidation.

The process of translating a foreign subsidiary’s financial statements into dollars usually creates a foreign-currency translation adjustment.


International Accounting Standards

Most methods of accounting are consistent throughout the world.

Differences, however, do exist among countries.

A company that sells its stock through a foreign stock exchange must follow the accounting principles of the foreign country.


Reporting Comprehensive Income

What are the elements of comprehensive income?

Net income, plus other comprehensive income:Unrealized gains and losses onavailable-for-sale investments

Net income, plus other comprehensive income:Unrealized gains and losses onavailable-for-sale investments


End of Chapter 16

16 - 1 ©2002 prentice hall, inc. business publishing accounting, 5/e horngren/harrison/bamber...

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