2008 pearson prentice hall. all rights reserved. 10-1 long-term investments and international...

©2008 Pearson Prentice Hall. All rights reserved.

10-1

Long-Term Investments and International Operations

Chapter 10

©2008 Pearson Prentice Hall. All rights reserved.10-2

Stock Investments

• Investor – entity that owns stock of a corporation

• Investee – corporation that issued the stockABC Company purchases 1000 shares of XYZ Corporation:

ABC is the investor XYZ is the investee


Reporting Investments on the Balance Sheet

• Assets to the investor• Short-term investments

Also called marketable securities and often classified as trading securities

Must be liquid Intended to be converted to cash within one

year• Long-term investments

Expected to be held longer than one year


Accounting Methods for Long-Term Investments

Percent owned by investor Accounting method

Up to 20% Available-for-Sale

20 - 50% Equity Method

More than 50% Consolidation


Learning Objective 1

Account for available-for-sale investments


Available-for-Sale Investments

• Can be classified as current or long-term Based on how long management intends to hold the

investment• Initially recorded at cost• Cash dividends received are recorded as

revenue Stock dividends indicated by memorandum

• Reported at market value on the balance sheet Considered more relevant for decision making


Valuing Investments at Year-End

Increase in market value Decrease in market value

Unrealized Gain Unrealized Loss

Allowance to Adjust Investment to Market is a companion account to Long-Term Investments

Debit balance = Market > Cost

Credit balance = Market < Cost


Unrealized Gain or Loss

• Reported in two places on the financial statements

• Income Statement Other comprehensive income – separate

section below net income• Balance Sheet

Accumulated other comprehensive income – separate section of stockholders’ equity

Unrealized gains or losses on available-for-sale investments do not impact net income


Selling Available-for-Sale Investments

• Results in a realized gain or loss reported on the income statement

• Difference between cost and selling price


E10-13

Date Accounts Debit Credit

(a) Long-term Investment (400 x $32) $12,800

Cash $12,800

(b) Cash $400

Dividend revenue $400


E10-13

Market value at year end 15,200

(400 shares x $38)Balance in LT Investment 12,800 Unrealized gain 2,400

Date Accounts Debit Credit(c) Allowance to Adjust Investment to Market $2,400 Unrealized Gain on Investment $2,400


E10-13

• The investment is sold when the market value is $23

• This results in a loss Cost minus selling price

Date Accounts Debit Credit(d) Cash ($23 x $400) $9,200 Loss on sale of investments _______

Long-term Investment (cost from letter

a) $12,600

What amount will balance the entry?



Use the equity method to account for investments


The Equity Method

• Investor owns 20 – 50% of investee’s voting stock

• Investor has significant influence over the investee

• Investment recorded at cost• Investment is increased by investee

earnings• Investment is decreased by investee

dividends


Long-Term Investment

Original Cost Share of Dividends

Ending Balance

Share of Net Income


E10-14


(a) Long-term Investments $1,000,000

Cash $1,000,000

(b) Long-term Investments __________

Equity method investment revenue __________

Multiply the percent the investor owns by the investee net income


E10-14


(c) Cash $105,000

Long-term investments $105,000

Long-Term Investments

(a) _________

(b) 160,000

(c)__________

1,055,000

Enter the amounts from

entry (a) and (c)

©2008 Pearson Prentice Hall. All rights reserved.10-185-18


Understand consolidated financial statements


Consolidated Subsidiaries

• Investor owns more than 50% of voting stock of investee

• Investor controls investee• Investor is called the parent company• Investee is called a subsidiary (sub)• Financial statements of a parent and its

subsidiaries are combined Consolidated as if one company


Consolidated Worksheet

• Tool to combine parent and subsidiary financial statements at year-end

• Parent and subsidiary accounts are placed side-by-side in columns

• Worksheet entries are made to eliminate reciprocal accounts Parent’s investment and Sub’s equity Receivables and payables between parent

and sub


Parent Corp Sub CorpCash 12,000 18,000 Investment in sub 150,000 Other assets 322,000 229,000 Total 484,000 247,000 Accounts payable 153,000 97,000 Common stock 176,000 100,000 Retained Earnings 155,000 50,000 Total 484,000 247,000

Parent Sub Corp Corp Debit Credit

Cash 12,000 18,000 Note Rec - sub 40,000 b 40,000 Investment in sub 150,000 a 150,000 Other assets 282,000 229,000 Total 484,000 247,000 Accounts payable 153,000 57,000 Note pay - parent 40,000 b 40,000 Common stock 176,000 100,000 a 100,000 Retained Earnings 155,000 50,000 a 50,000 Total 484,000 247,000 190,000 190,000

Eliminations

Parent Sub Cons.Corp Corp Debit Credit

Cons. Balances

Cash 12,000 18,000 30,000 Note Rec - sub 40,000 b 40,000 Investment in sub 150,000 a 150,000 - Other assets 282,000 229,000 511,000 Total 484,000 247,000 541,000 Accounts payable 153,000 57,000 210,000 Note pay - parent 40,000 b 40,000 Common stock 176,000 100,000 a 100,000 176,000 Retained Earnings 155,000 50,000 a 50,000 155,000 Total 484,000 247,000 190,000 190,000 541,000

Eliminations


Goodwill and Minority Interest

• Goodwill Recorded in consolidation process as an

intangible asset Occurs when parent purchases sub for more

than the fair value of its net assets• Minority Interest

Recorded in consolidation process and can be included in liabilities

Occurs when parent owns less than 100% of sub



Account for long-term investments in bonds


Long-Term Bond Investments

• Major investors Financial institutions Insurance companies

• Called held-to-maturity investments• Reported at amortized cost

Bonds carrying amount is amortized to face value at maturity value


BondsIssuing

CorporationInvestor

(Bondholder)

Investment in bonds Bonds payable

Interest revenue Interest expense


E10-19• Skoda should use the amortized cost method to

account for the bond investment• The investment is recorded at cost

$20,000 x .97

Date Accounts Debit Credit30-Sep Long-term investment in bonds $19,400

Cash $19,400


E10-19• On December 31, interest earned on the bond investments is

accrued ___________________________

• Amortization is recorded $20,000 – 19,400 = $600 $600/60 months = $10 per month $10 per month x 3 months = $30

Date Accounts Debit Credit31-Dec Interest Receivable $325

Interest Revenue $325

31-Dec Long-term Investment in Bonds $30 Interest Revenue $30

Face value x interest rate x months/12



Account for international operations

©2008 Pearson Prentice Hall. All rights reserved.

10-29

International Accounting

• Most corporations operate in multiple countries Most use their own

currency Several European

countries use the euro


Foreign Currency TermsPrice of one currency stated in terms

of another currency

Translation Converting the cost of an item statedin one currency into another currency

Import/Export Ratio Relationship of a country’s imports to exports

Strong Currency Exchange rate of currency is risingrelative to other nations

Exchange rate

Weak Currency Exchange rate of currency is fallingrelative to other nations


Accounting for Foreign Currency Transactions

• Export Sales in which payments will be made in a

foreign currency• Import

Purchases that will be paid in a foreign currency

• Changes in exchange rates between sale or purchase and payment will result in a foreign currency gain or loss


Export Entries• A U.S. company sells goods to a Mexican

company for one million pesos when the exchange rate is $0.086

• When payment is received the exchange rate is $0.083

Date Accounts Debit CreditAccounts Receivable (1 million x .086) $86,000 Sales $86,000

Cash (1 million x .083) $83,000 Foreign Currency Transaction Loss $3,000

Accounts Receivable $86,000


Import Entries• A U.S. company buys inventory from a supplier

in Switzerland for 20,000 Swiss francs when the exchange rate is $0.80

• They make payment when the exchange rate is $0.78

Date Accounts Debit CreditInventory (20,000 x .80) $16,000 Accounts Payable $16,000

Accounts Payable $16,000 Foreign Currency Transaction Gain $400

Cash (20,000 x .78) $15,600


Consolidation of Foreign Subsidiaries

• Two challenges:• (1) Foreign accounting practices differ

from American GAAP• (2) Subsidiary statements may be in

foreign currency and need translation Results in a foreign currency translation

adjustment


Translation Adjustment

• Assets and liabilities are translated into dollars at current exchange rate on financial statement date

• Stockholders’ equity is translated into dollars at older, historical exchange rates

• Differing rates creates out-of-balance condition

• Foreign currency translation adjustment is the balancing amount


International Standards

• Most accounting methods are consistent throughout the world

• Differences do exist for: Inventory – LIFO method of inventory not

used in the U.K. Goodwill – In Germany and Japan, the

account is amortized; not in the U.S. Research & Development costs – Capitalized

in Japan; expensed in the U.S.



Report investing transactions on the statement of cash flows


Investing Activities on the Cash Flow Statement

• Purchases and sales of long-term investments are investing activities

• Investing inflow Proceeds from sales of long-term investments

(available-for-sale, equity method and held-to-maturity)

• Investing outflow Purchases of all categories of long-term

investments


End of Chapter 10

2008 pearson prentice hall. all rights reserved. 10-1 long-term investments and international...

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