1 Long-Term Investments and International Operations Chapter 10

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Long-Term Investments and Long-Term Investments and International OperationsInternational Operations

Chapter 10Chapter 10

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

• Trading - expected to be sold in the near future with the intent of generating profits on the sale

• Available-for-sale - stock investments other than trading securities, which would be sold if need for cash arose– Short term– Long term

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Learning Objective 1Learning Objective 1

Account for available-for-sale investments

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Available-for-Sale InvestmentsAvailable-for-Sale Investments

Market value method

• Record initial investment at cost

• Report securities on the balance sheet at current market value

Accounting forAccounting forAvailable-for-Sale InvestmentsAvailable-for-Sale Investments

On February 23, GE purchases 1,000 shares of Hewlett-Packard common stock for $35,750. GE intends to hold this stock for longer than one year.

General Journal

Date Accounts and Explanations PR Debit Credit

Feb 23 Long-term Investment(1,000 x $35.75) 35,750

Cash 35,750Purchased investment

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Accounting forAccounting forAvailable-for-Sale InvestmentsAvailable-for-Sale Investments

GE receives a $0.20 per share cash dividend on this investment.

General Journal


Jul 14 Cash (1,000 x $.22) 200

Dividend Revenue 200Received cash dividend


What Value of an InvestmentWhat Value of an InvestmentIs Most Relevant?Is Most Relevant?

The market value of GE’s investment in Hewlett-Packard is $36,400 on December 31.

General Journal


Dec 31 Allowance to Adjust Investment To Market ($36,400-$35,750 [cost]) 650

Unrealized Gain on Investment 650Adjusted investment to market


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Long-Term InvestmentAllowance to AdjustInvestment to Market

35,750 650

Investment carrying amount = Market value of $36,400

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• Unrealized Gain or Loss - reported in two places in financial statements:– Other comprehensive income, reported on

income statement following net income– Accumulated other comprehensive income, a

separate section of stockholders’ equity following retained earnings


Income statement:Revenues $10,000Expenses, including income tax 6,000Net income $ 4,000Other comprehensive income: Unrealized gain on investment $ 650 Less: Income tax (40%) ( 260) 390Comprehensive income $ 4,390



Balance sheet:Assets: Total current assets $ XXX Long-term investments – at market value 36,400Property, plant, and equipment, net XXXStockholders’ equity: Common stock $ 1,000 Retained earnings 2,000 Accumulated other comprehensive income: Unrealized gain on investments $ 390Total stockholders’ equity $ 3,390


Selling an Available-Selling an Available-for-Sale Investmentfor-Sale Investment

GE sells its investment in Hewlett-Packard stock for $34,000 during 20x9.

General Journal


May 19 Cash 34,000Loss on Sale of Investment 1,750

Long-Term Investment (cost) 35,750Sold investment


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Use the equity method for investments.

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Equity Method InvestmentsEquity Method Investments

• Used to account for investments in which investor has significant influence, defined as owning 20% to 50% of investee’s stock

• Record initial investment at cost

Equity Method InvestmentsEquity Method Investments

Phillips Petroleum Company pays $400 million for 30% of the common stock of White Rock Natural Gas Corporation.

General Journal


Jan 6 Long-Term Investment 400Cash 400

To purchase equity-methodinvestment


Investor’s PercentageInvestor’s Percentageof Investee Incomeof Investee Income

White Rock Natural Gas Corporation reports net income of $250 million for the year.

General Journal


Dec 31 Long-Term Investment 75Equity-Method InvestmentRevenue 75

To record investment revenue($250 x 0.30)


Receiving DividendsReceiving DividendsUnder the Equity MethodUnder the Equity Method

White Rock declares and pays a cash dividend of $100 million.

General Journal


Dec 31 Cash ($100 x 0.30) 30Long-Term Investment 30

To record cash dividend receivedon equity-method investment


Investment AccountInvestment Account

Long-Term Investment

Jan. 6 Purchases 400Dec. 31 Net income 75Dec. 31 Balance 445

Dec. 31 Dividends 30


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Financial StatementsFinancial Statements

Balance sheet (partial): millionsAssets Total current assets $XXX Long-term investments, at equity 445 Property, plant, and equipment, net XXX

Income statement (partial): millionsIncome from operations $XXXOther revenue: Equity-method investment revenue 75Net income $XXX

2020


Understanding consolidated financial statements.

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Consolidated SubsidiariesConsolidated Subsidiaries

Parent Company

Subsidiary A

100%ownership

Subsidiary B

85%ownership

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Consolidated SubsidiariesConsolidated Subsidiaries

SubsidiaryFinancial

Statements _____ __________ __________ _____

SubsidiaryFinancial

Statements _____ __________ __________ _____

ConsolidatedFinancial

Statements_____ __________ __________ _____

ConsolidatedFinancial

Statements_____ __________ __________ _____

ParentFinancial

Statements_____ __________ __________ __________ _____

ParentFinancial

Statements_____ __________ __________ __________ _____

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Consolidation AccountingConsolidation Accounting

• Method of combining financial statements of a parent company and those subsidiary companies that are controlled by the parent company: a substance and form issue

• Control is presumed by 50% or more ownership• Assets, liabilities, revenues, and expenses of

each subsidiary are added to parent company’s accounts, with elimination of intercompany receivables and payables, etc.

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Goodwill and Minority InterestGoodwill and Minority Interest

• Goodwill - intangible asset - represents parent company’s excess payment over net fair value to acquire subsidiary

• Minority interest - arises when parent company purchases less than 100% of the stock of a subsidiary company

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Account for long-term investments in bonds.

Long-Term InvestmentsLong-Term Investmentsin Bonds and Notesin Bonds and Notes

Investor (Bondholder)Investment in bonds

Interest revenue

Held-to-maturity investments are long-terminvestments in bonds and notes only.

Issuing CorporationBonds payable

Interest expense



An investor purchases $10,000 of 6% CBS bonds at a price of 95.2 on April 1, 20X5. The investor intends to hold the bonds as a long-term investment until their maturity in four years. Interest dates are April 1 and October 1.

General Journal


Apr 1 Long-Term Investment in Bonds 9,520Cash 9,520

Purchased bond investment($10,000 x 0.925)


Long-Term Investments in Long-Term Investments in Bonds Bonds

General Journal


Oct 1 Cash 300Interest Revenue 300

Received semiannual interest

($10,000 x .06 x 6/12 )

Oct 1 Long-Term Investment in Bonds 60Interest Revenue 60

To amortize bond investment[($10,000 - $9,520) / 48] x 6 months


The discount is amortized by the straight-line method.


General Journal


Dec 31 Interest Receivable 150Interest Revenue 150

To accrue interest revenue

($10,000 x .06 x 3/12 )

Dec 31 Long-Term Investment in Bonds 30Interest Revenue 30

To amortize bond investment[($10,000 - $9,520) / 48] x 3 months


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Long-Term Investment in Bonds

4/1 9,52010/1 6012/31 30

9,610

Long-Term Investment in BondsLong-Term Investment in Bonds

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Account for international operations.

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Foreign CurrenciesForeign Currenciesand Exchange Ratesand Exchange Rates

• Foreign currencies exchange rate - Measure of one currency against another

• Translation - Using an exchange rate to convert the cost of an item given in one currency to its cost in a second currency

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Foreign CurrenciesForeign Currenciesand Exchange Ratesand Exchange Rates

Two main factors determine the supply and demand for a particular currency:

1. Ratio of a country’s imports to its exports2. Rate of return available in the country’s

capital market3. It’s all about supply and demand of the

currencies

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Import/Export ConsiderationsImport/Export Considerations

• A net importer nation (like the U.S.) must buy foreign currencies by selling its native currency

• This increases demand for the foreign currency, driving its value up relative to the dollar

• This increases supply of the dollar, driving his value down relative to the foreign currency

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Capital Market ConsiderationsCapital Market Considerations

• U.S. securities markets are widely viewed as being the fairest and most stable in the world

• Foreign investors must pay in dollars:– This increases demand for the dollar, driving

its value up relative to the foreign currency– This increases the supply of foreign currency,

driving its value down relative to the dollar

Managing Cash inManaging Cash inInternational TransactionsInternational Transactions

D. E. Shipp Belting sells goods to Artes de Mexico for a price of 1 million pesos on July 28. On that date, a peso was worth $0.086.

General Journal


Jul 28 Accounts Receivable – Artes 86,000Sales Revenue 86,000

Sale on account (1,000,000 pesos x $0.086)



On August 28, the peso is worth $0.083. Shipp receives 1 million pesos from Artes.

General Journal


Aug 28 Cash (1,000,000 pesos x $0.083) 83,000Foreign Currency Transaction Loss 3,000

Accounts Receivable – Artes 86,000Collection on account



Shipp Belting buys inventory from Gesellschaft Ltd., a Swiss company. They decide on a price of 20,000 Swiss francs. On September 15, Shipp receives the goods. The Swiss franc is quoted at $0.80.

General Journal


Sep 15 Inventory 16,000 Accounts Payable-Gesellschaft 16,000Purchase on account(20,000 Swiss francs x $0.80)



When Shipp pays on September 29, the Swiss franc has decreased in value to $0.78

General Journal


Sep 29 Accounts Payable-Gessellschaft 16,000Cash 15,600

Foreign-Currency TransactionGain 400

Payment on account(20,000 Swiss francs x $0.78)


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• Report the net amount of foreign currency transaction gains and losses on the income statement as “Other Revenues and Gains” or “Other Expenses and Losses”

Foreign-currency transaction loss $3,000Foreign-currency transaction gain ( 400)Foreign-currency transaction loss, net $2,600

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

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

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Consolidation of Foreign Consolidation of Foreign SubsidiariesSubsidiaries

• Subsidiary’s statements must be brought into conformity with American GAAP

• Subsidiary statements, expressed in foreign currency, must be translated into dollars.

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Consolidation of Foreign Consolidation of Foreign SubsidiariesSubsidiaries

• Foreign-currency translation adjustment - balancing amount that brings the dollar amount of the total liabilities and stockholders’ equity of a foreign subsidiary into agreement with the dollar amount of its total assets.

• A detailed example: text pages 488-489

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International Accounting International Accounting StandardsStandards

International Accounting Standards Committee (IASC) - primary organization working to achieve worldwide harmony of accounting standards

Supported by United States, most of British Commonwealth, Japan, France, Germany, Netherlands, and Mexico

However, IASB has no authority to require compliance

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Report investing transactions on the statement of cash flows.

Using the Statement of Cash Using the Statement of Cash FlowsFlows

Cash flows from investing activities:Addition to property and equipment $(15)Disposition of PP&E 7Loans to others (14)Payments for other companies (12)All other investing activities (6)Cash used for investing activities $(40)

General Electric Statement of Cash FlowsYear Ended December 31, 2001

(In Millions)


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1 Long-Term Investments and International Operations Chapter 10