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©2008 Pearson Prentice Hall. All rights reserved 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
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©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
©2008 Pearson Prentice Hall. All rights reserved.10-3
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
©2008 Pearson Prentice Hall. All rights reserved.10-4
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
©2008 Pearson Prentice Hall. All rights reserved.10-5
Learning Objective 1
Account for available-for-sale investments
©2008 Pearson Prentice Hall. All rights reserved.10-6
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
©2008 Pearson Prentice Hall. All rights reserved.10-7
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
©2008 Pearson Prentice Hall. All rights reserved.10-8
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
©2008 Pearson Prentice Hall. All rights reserved.10-9
Selling Available-for-Sale Investments
• Results in a realized gain or loss reported on the income statement
• Difference between cost and selling price
©2008 Pearson Prentice Hall. All rights reserved.10-10
E10-13
Date Accounts Debit Credit
(a) Long-term Investment (400 x $32) $12,800
Cash $12,800
(b) Cash $400
Dividend revenue $400
©2008 Pearson Prentice Hall. All rights reserved.10-11
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
©2008 Pearson Prentice Hall. All rights reserved.10-12
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?
©2008 Pearson Prentice Hall. All rights reserved.10-13
Learning Objective 2
Use the equity method to account for investments
©2008 Pearson Prentice Hall. All rights reserved.10-14
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
©2008 Pearson Prentice Hall. All rights reserved.10-15
Long-Term Investment
Original Cost Share of Dividends
Ending Balance
Share of Net Income
©2008 Pearson Prentice Hall. All rights reserved.10-16
E10-14
Date Accounts Debit Credit
(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
©2008 Pearson Prentice Hall. All rights reserved.10-17
E10-14
Date Accounts Debit Credit
(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
Learning Objective 3
Understand consolidated financial statements
©2008 Pearson Prentice Hall. All rights reserved.10-19
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
©2008 Pearson Prentice Hall. All rights reserved.10-20
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
©2008 Pearson Prentice Hall. All rights reserved.10-21
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
©2008 Pearson Prentice Hall. All rights reserved.10-22
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
©2008 Pearson Prentice Hall. All rights reserved.10-23
Learning Objective 4
Account for long-term investments in bonds
©2008 Pearson Prentice Hall. All rights reserved.10-24
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
©2008 Pearson Prentice Hall. All rights reserved.10-25
BondsIssuing
CorporationInvestor
(Bondholder)
Investment in bonds Bonds payable
Interest revenue Interest expense
©2008 Pearson Prentice Hall. All rights reserved.10-26
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
©2008 Pearson Prentice Hall. All rights reserved.10-27
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
©2008 Pearson Prentice Hall. All rights reserved.10-28
Learning Objective 5
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
©2008 Pearson Prentice Hall. All rights reserved.10-30
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
©2008 Pearson Prentice Hall. All rights reserved.10-31
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
©2008 Pearson Prentice Hall. All rights reserved.10-32
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
©2008 Pearson Prentice Hall. All rights reserved.10-33
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
©2008 Pearson Prentice Hall. All rights reserved.10-34
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
©2008 Pearson Prentice Hall. All rights reserved.10-35
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
©2008 Pearson Prentice Hall. All rights reserved.10-36
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.
©2008 Pearson Prentice Hall. All rights reserved.10-37
Learning Objective 6
Report investing transactions on the statement of cash flows
©2008 Pearson Prentice Hall. All rights reserved.10-38
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
©2008 Pearson Prentice Hall. All rights reserved.10-39
End of Chapter 10