Investments and International Operations

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Investments andInternational Operations

• Chapter 16

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Stock Prices
Stock Price Information for McDonalds
Corporation 52 weeks High Low Stock
Symbol Dividend Volume 100s Close 4956
2981 MCD .20 2067670
2988
The financial community quotes stock prices in
dollars and cents.
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Trading and Available-For-Sale Investments
Trading investments are investments to be sold in
the very near future with the intent of
generating profits on price changes.
Available-for-sale investments are
investments other than trading securities in
which the investor cannot exercise significant
influence over the investee.
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Objective 1

• Account for trading investments.

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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?

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Accounting forTrading Investments Example
October 23 Short-Term Investment 30,000 Cash
30,000 Purchased investment
Bowie pays a cash dividend of 1.40 per share on
November 14.
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Accounting forTrading Investments Example
What is Des Moines entry to receive this cash
dividend?
November 14 Cash 840 Dividend
Revenue 840 Received cash dividend
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Reporting Trading Investments

• Trading investments are reported on the balance
  sheet at current market value.
• Assume that Bowies stock has decreased in
  value.
• On December 31, Des Moines' investment in Bowie
  is worth 25,000 (5,000 less than the purchase
  price).

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Reporting Trading Investments
What is the adjusting entry that Des Moines would
make at year end?
December 31 Loss on Trading Investment 5,000 Sh
ort-term Investment 5,000 Adjusted trading
investment to market value
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Reporting Trading Investments
Balance Sheet (partial) ASSETS Current
assets Short-term investments, at market
value 25,000
Income Statement (partial) Other gains and
losses Gain (loss) on trading investment
(5,000)
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Reporting Trading Investments

• 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?

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Reporting Trading Investments
January 10 Cash 23,000 Loss on Sale of
Investment 2,000 Short-Term
Investment 25,000 Sold investment
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Objective 2

• Account for available-for-sale
• investments.

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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 Bowies
  investment in Gomezs common stock is 37,400 on
  December 31, 2002.
• Bowie paid 36,000 for the stock on May 1.

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Reporting Available-for-SaleInvestments
What is the adjusting entry?
December 31, 2002 Allowance to Adjust
Investment to Market 1,400 Unrealized
Gain on Available-for-Sale Investment 1
,400 Adjusted investment to market value
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Reporting Available-for-SaleInvestments
ASSETS Long-term available-for-sale inve
stmentsat market value 37,400
STOCKHOLDERS EQUITY Common stock Retained
earnings Unrealized gain on available-for-sale
investment 1,400
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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.

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Selling an Available-for-SaleInvestment
January 15, 2003 Cash 38,000 Gain on
Sale of Investment 2,000 Long-Term
Available-for-Sale Investment (cost) 36,00
0 Sold investment
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Objective 3

• Use the equity method
• for investments.

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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
  investees success and failure should be included
  in accounting for the investment.

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Equity Method
Des Moines, Inc., purchases 30 of the voting
stock of Bowie Corp. for 500,000 on January 10.
January 10 Long-Term Equity-Method Investment
500,000 Cash 500,000 Purchased
equity-method investment
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Equity Method

• The initial investment is recorded at cost.
• Adjustments are made to the investment account
  for the investors prorata share of income or
  loss.
• Suppose Bowie Corp. reported a 200,000 net loss
  for year two.

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Equity Method
What journal entry would Des Moines make?
December 31, Year 2 Equity-Method Investment
Loss 60,000 Long-Term Equity-Method
Investment 60,000 Recorded investment loss
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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 investees owners equity
  and so it also reduces the investors investment.

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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

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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

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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.

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Objective 4

• Understand consolidated
• financial statements.

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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
  companys accounts.

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Goodwill
Goodwill is an intangible asset that arises when
the purchase price to acquire a subsidiary
company is greater than the sum of the market
value of the subsidiarys assets minus
liabilities.
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Minority Interest...

• is the portion (less than 50) of a subsidiarys
  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.

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Accounting Methods forStock Investment
The percentage of ownership determines the
accounting method to be used.
2050 Equity Method
Less than 20 Market-Value Method
50 or more Consolidation Method
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Objective 5

• Account for long-term
• investments in bonds.

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Long-Term Investmentsin Bonds Example

• Suppose that Bryan Insurance purchases 10,000 of
  College Stations 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.

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Long-Term Investmentsin Bonds Example
What are the journal entries for April 1 and
October 1, 2002?
April 1 Long-Term Investment in
Bonds 9,520 Cash 9,520 Purchased bond
investment
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Long-Term Investmentsin Bonds Example
October 1 Cash (10,000 .06
6/12) 300 Interest Revenue 300 Received
semiannual interest
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Long-Term Investmentsin Bonds Example
What is the straight-line amortization on October
1?
October 1 Long-Term Investment in Bonds (10,000
9,520) 48 6 60 Interest
Revenue 60 Amortized discount on bond
investment
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Long-Term Investmentsin Bonds and Notes

• The amortization entry has two effects
• It increases the Long-Term Investment account.
• It records the related interest revenue that
  Bryan has earned as a result of the increase in
  the carrying amount of the investment.

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Objective 6

• Account for transactions
• stated in a foreign currency.

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Accounting forInternational Operations
Company Percent of International
Sales McDonalds 62 Toys ?
Us 27 Procter Gamble 49
Accounting for business activities across
national boundaries makes up the field of
international accounting.
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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.

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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.

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Foreign-CurrencyExchange Rates Example
Bryan records the purchase in U.S. dollars at the
exchange rate on the date of purchase.
April 1 Equipment 165,000 Accounts
Payable 165,000 Recorded purchase of car at
1.65 rate
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Foreign-CurrencyExchange Rates Example
When payment is due on April 30, the price of a
pound is 1.68.
April 30 Accounts Payable
165,000 Foreign-Currency Transaction
Loss 3,000 Cash 168,000 Payment of
account
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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.

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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 subsidiarys
  financial statements into dollars usually creates
  a foreign-currency translation adjustment.

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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.

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Reporting Comprehensive Income

• What are the elements of comprehensive income?

Net income, plus other comprehensive
income Unrealized gains and losses
on available-for-sale investments
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End of Chapter 16