investments and international operations appendix b copyright © 2007 prentice-hall. all rights...

Investments andInvestments andInternational OperationsInternational Operations

Investments andInvestments andInternational OperationsInternational Operations

Appendix B

Copyright © 2007 Prentice-Hall. All rights reserved

Stock InvestmentsStock InvestmentsStock InvestmentsStock Investments

• Short-term (marketable securities)– Current assets– Must be liquid– Management intends to sell within one year

• Long-term (all other investments)– Management intends to hold for more than

one year– Or securities that are not readily marketable

Copyright © 2007 Prentice-Hall. All rights reserved 2

Trading and Available-For-Sale Trading and Available-For-Sale InvestmentsInvestments

Trading and Available-For-Sale Trading and Available-For-Sale InvestmentsInvestments

• Trading investments – Short-term– To be sold in very near future– Intent is to generate profits on price changes

• Available-for-sale investments– Investments other than trading securities– Investor cannot exercise significant influence over

investee– Short-term if management intends to sell within a

year


Trading InvestmentsTrading InvestmentsTrading InvestmentsTrading Investments

• Market-value method

• Recorded at cost at acquisition

• Interest revenue recorded as accrued (debt securities)

• Dividends recorded as revenue (equity securities)


Trading InvestmentsTrading InvestmentsTrading InvestmentsTrading Investments

• Carrying amount is adjusted to market value each period– Recognize gain or loss

• When investment is sold– Recognize gain or loss = difference between

proceeds and last carrying amount on balance sheet



EB-1EB-1EB-1EB-1GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

2004

Dec 6 Short-term investment 52,250Cash 52,250

23 Cash 1,100Dividend Revenue 1,100

31 Loss on trading investment 2,250Short-term investment 2,250

($52,250 – $50,000)

Record at cost at acquisition

Interest revenue recorded as accrued (debt securities)Dividends recorded as revenue (equity securities)

Carrying amount is adjusted to Market Value each period

Long-term Available-for-Sale Long-term Available-for-Sale InvestmentsInvestments

Long-term Available-for-Sale Long-term Available-for-Sale InvestmentsInvestments

• Recorded at cost at acquisition

• Interest revenue recorded as accrued (debt securities)

• Dividends recorded as revenue when received (equity securities)


Available-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale Securities

• Carrying amount adjusted to Market Value each period– Unrealized – gain or loss that results

from change in market value, not from sale of investment

– Unrealized gain/losses – stockholders’ equity account

– Allowance account – companion account to investment account


Available-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale SecuritiesAvailable-for-Sale Securities

• Selling investment results in realized gain or loss – reported on income statement





2007

Jan 14 Long-term available-for-saleinvestment 13,200

Cash 13,200

Aug 22 Cash 180Dividend revenue 180

Dec 31 Unrealized loss on investment 1,200Allowance to adjust investment to market 1,200

($13,200 - $12,000)

Valuation account to “Available for Sale Investments” on Balance Sheet

Stockholders’ equity account on Balance

Sheet

Balance Sheet (partial)Balance Sheet (partial)Balance Sheet (partial)Balance Sheet (partial)Assets

Long-term assets:

Long-term available for sale investments, at market value $12,000

Stockholders’ Equity

Common stock $xxxx

Retained earnings xxxx

Unrealized loss on investments (1,200)

Total stockholders’ equity $xxxx





2008

Aug 4 Cash 13,500Gain on sale of available-for-sale investments 300Long-term available-for-saleinvestments 13,200

This gain on sale of investment is a realized gain. The loss recorded at December 31, 2007 was unrealized because it resulted from a change in the investment’s market value, not from the sale of the investment

Gains and LossesGains and LossesGains and LossesGains and Losses

• Notice: two kinds of gains and losses

• Realized: when the investment is actually sold – appears on income statement

• Unrealized: to adjust investment to market at end of fiscal period – in stockholders’ equity section if available-for-sale



Equity MethodEquity MethodEquity MethodEquity Method

• Use when investor can exert significant influence over investee (20-50% of outstanding voting stock)

• Original investment – recorded at cost

• Investment account is increased by a proportionate share of investee’s earnings

• Investment account is decreased by dividends received


Equity MethodEquity MethodEquity MethodEquity Method

• Investment account – reported on balance sheet

• Investor’s share of the investee’s earnings – reported on investor’s income statement as “Equity-Method Investment Revenue”


b. Long-term equity method investment 156,000

Equity method investment revenue 156,000

(780,000 x 20%)

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

2005 (in millions)

Jan 6 Long-term equity methodinvestments 500

Cash 500

Dec 31 Long-term equity methodinvestments ($60 x 40%) 24

Equity-method investmentrevenue 24

EB-4EB-4EB-4EB-4Net income increases investee’s owners’ equity and so it also increases investor’s investment

Net income increases investee’s owners’ equity and so it also increases investor’s investment


b. Long-term equity method investment 156,000

Equity method investment revenue 156,000

(780,000 x 20%)


2005 (in millions)

Dec 31 Cash ($50 x 40%) 20Long-term equity methodinvestments ($60 x 40%) 20

EB-4EB-4EB-4EB-4

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

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


EB-4EB-4EB-4EB-4

Long-term Equity Method Investments

Initial investment 500

Share of net inc. 24 20 Share of dividends

Balance 504


Consolidated SubsidiariesConsolidated SubsidiariesConsolidated SubsidiariesConsolidated Subsidiaries

Use when investor has controlling interest (more than 50% of outstanding voting stock)


Consolidation AccountingConsolidation AccountingConsolidation AccountingConsolidation Accounting

• Combines the financial statement of two or more companies that have the same owners

• Accounts of each subsidiary is added to the parent company’s accounts


Bond InvestmentsBond InvestmentsBond InvestmentsBond Investments

• Record at cost

• If management has intent to hold until maturity– Amortize any discount or premium to interest

revenue– Report at amortized cost on the balance sheet


EB-5EB-5EB-5EB-5

1. Purchase price ($1,000,000 x .98) = $980,000

Maturity value = $1,000,000

2. Cash interest per year ($1,000,000 x .08) = $80,000


EB-5EB-5EB-5EB-5

3. Annual interest revenue:

Bond discount amortization/year = $20,000/5 = $4,000

Amortization of discount increases interest revenue.

Cash interest per year $80,000

Discount amortization 20,000

Annual interest revenue $100,000



2004

Jan 2 Long-term investment in bonds 980,000Cash 980,000

Dec 31 Cash 80,000Interest revenue 80,000

31 Long-term investment in bonds 20,000Interest revenue 20,000

EB-6EB-6EB-6EB-6



2009

Jan 2 Cash 1,000,000

Long-term investment in bonds 1,000,000

EB-6EB-6EB-6EB-6


Accounting for International Accounting for International OperationsOperations

Accounting for International Accounting for International OperationsOperations

• Foreign currency exchange rate– Price of a foreign currency– Used to translate price of item stated in one

currency to its price in a second currency


Collecting and Paying Cash in a Collecting and Paying Cash in a Foreign CurrencyForeign Currency

Collecting and Paying Cash in a Collecting and Paying Cash in a Foreign CurrencyForeign Currency

• Translate into U.S. dollars when receivable or payable arises

• Recognize Foreign-Currency Gain or Loss when cash changes hand if the exchange rate has gone up or down

• Report net amount of gains and losses on the income statement under “Other Gains and Losses”




Mar 14 Accounts receivable(2,000,000 rubles x $.030) 60,000

Sales revenue 60,000

Apr 19 Cash (1,000,000 rubles x .038) 38,000Foreign-currency gain 8,000Accounts receivable 30,000

May 10 Cash (1,000,000 rubles x .036) 36,000Foreign-currency gain 6,000Accounts receivable 30,000

End of Appendix BEnd of Appendix BEnd of Appendix BEnd of Appendix B

investments and international operations appendix b copyright © 2007 prentice-hall. all rights...

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