DAY TWENTY THREE

1
DAY TWENTY THREE

• 2Day Chapter 10 . . . The whole nine yards
• Thursday Chapter 11
• Next Tuesday Finish Chapter 11
• Exam III April 17th

2
Wall Street Report

• 1. Humanoids 5,973
• 2. A F 5,727
• 3. Tommy Boy 5,548
• 4. IGT 5,359
• 5. CheeseCake 5,290

3
Wall Street Report

• 6. Nokia 5,277
• 7. Fried Spanish Rice 5,195
• 8. Otter Meat 5,188
• 9. Hilton Ho Tels 5,158
• 10. Muck 5,116
• 11. Goldman Sux 5,039

4
Interesting Factoids Price College of Bizness
Majors

• Accounting 403
• Economics 63
• Energy Management 123
• Finance 509
• International Bizness 249
• Legal Studies 38
• Management 475
• MIS 794
• Marketing 613

5
CHAPTER 10

• Accounting for Long-Term Investments and
  International Operations

6
Information for the common stock of The Boeing
Company is

• The 52 week high and low prices are 114.50 and
  74.125, respectively
• The annual cash dividend is 1.12 per share
• During the previous day 10,598 x 100 shares of
  Boeing common stock were traded
• The daily high and low were 109.875 and 108.75,
  respectively
• The days closing price of 109.125 was 0.50
  lower than the closing price of the preceding day

52 Weeks High Low Stock
Dividend Sales 100s High Low
Close Net Change 114 1/2 74 1/8
Boeing 1.12 10598 109
7/8 108 3/4 109 1/8 - 1/2
7
STOCK INVESTMENTSA Review

• The person or company that owns stock in a
  corporation is the INVESTOR
• The corporation that issued the stock is the
  INVESTEE

8
STOCK INVESTMENTSA Review

• SHORT-TERM INVESTMENTS (marketable securities)
  are current assets
• These investments must be liquid (readily
  convertible to cash)
• The investor must intend either to convert the
  investments to cash within one year or to use
  them to pay a current liability

9
STOCK INVESTMENTSA Review

• LONG-TERM INVESTMENTS include
• Stocks and bonds that
• The investor expects to hold longer than one year
• Are not readily marketable
• The next slide shows the position of short-term
  and long-term investments on the balance sheet

10
Reporting Investments on the Balance Sheet
Current Assets X Cash X
Short-term investments X Accounts
receivable X Inventories X
Prepaid expenses X Total current
assets X Long-term investments (Investments)
X Property, plant, and equipment
X Intangible assets X Other assets
X
11
STOCK INVESTMENTSA Review

• TRADING SECURITIES are
• Stock investments (of less than 20) that will be
  sold in the near future for short-term profit
• Classified as current assets
• AVAILABLE-FOR-SALE SECURITIES are
• All stock investments (of less than 20) other
  than trading securities
• Classified as long-term unless they are expected
  to be sold within one year

12
ACCOUNTING FOR EQUITY-METHOD INVESTMENTS

• An investor with a stock holding of between 20
  and 50 of the investees voting stock may
  SIGNIFICANTLY INFLUENCE how the investee operates
  the business
• Dividend policy
• Product lines
• Sources of supply, etc.

13
ACCOUNTING FOR EQUITY-METHOD INVESTMENTS

• The EQUITY METHOD is used to account for
  investments in which the investor owns 20 - 50
  of the investees stock
• These investee companies are referred to as
  AFFILIATES
• Investments accounted for by the equity method
  are recorded initially at COST

14
ACCOUNTING FOR EQUITY-METHOD INVESTMENTS
Phillips Petroleum Company pays 400,000 for 30
of the common stock of White Rock Corporation.
Phillipss entry to record the purchase of this
investment follows
Jan. 6 Long-term Investment 400,000
Cash 400,000 To purchase equity-method
investment
15
ACCOUNTING FOR EQUITY-METHOD INVESTMENTS
The Investors Percentage of Investee Income
Under the equity method, the investor applies its
percentage of ownership in recording its share of
the investees net income and dividends. If
White Rock reports net income of 250,000 for the
year, Phillips records 30 of this amount as
follows
Dec. 31 Long-Term Investment (250,000 x .30)
75,000 Equity-Method Investment Revenue
75,000 To record
investment revenue
As the investees owners equity increases, so
does the Investment account on the investors
books
16
ACCOUNTING FOR EQUITY-METHOD INVESTMENTS
After the preceding entries are posted,
Phillipss Investment account reflects its equity
in the net asset of White Rock
Long-Term Investment
Jan. 6 Purchases 400,000 Dec. 31 Net
income 75,000 Dec. 31 Balance
445,000
Dec. 31 Dividends 30,000
17
ACCOUNTING FOR CONSOLIDATED SUBSIDIARIES

• A CONTROLLING (majority) interest is the
  ownership of more than 50 of the investees
  voting stock
• The investor is called the PARENT COMPANY
• The investee is called the SUBSIDIARY

18
For example, because Saturn Corporation is a
subsidiary of General Motors, the parent, the
stockholders of GM control Saturn, as diagrammed
below
Many individuals and institutional investors (The
stockholders)
owns
General Motors Corporation (Parent)
which owns
Saturn Corporation (Subsidiary)
19
ACCOUNTING FOR CONSOLIDATED SUBSIDIARIES

• Consolidation accounting
• Is a method of combining the financial statements
  of two or more companies that are controlled by
  the same stockholders
• Reports a single set of financial statements for
  the consolidated entity, which carries the name
  of the parent company

20
Accounting Methods for Stock Investment by
Percentage of Ownership
21
ACCOUNTING FOR CONSOLIDATED SUBSIDIARIES

• The assets, liabilities, revenues, and expenses
  of each subsidiary are added to the parents
  accounts

22
ACCOUNTING FOR CONSOLIDATED SUBSIDIARIES

• Consolidated balance sheet
• Suppose that Parent Corporation has
• Purchased all (100) of the outstanding common
  stock of Subsidiary Corporation at its book value
  of 150,000 and
• Loaned Subsidiary Corporation 80,000
• The consolidated statements cannot show both the
  investment amount plus the amounts for the
  subsidiarys assets and liabilities
• This would count the same resources twice

23
ACCOUNTING FOR CONSOLIDATED SUBSIDIARIES
The following exhibit shows the work sheet for
consolidating the balance sheet

• Entry (a)
• Credits the parents Investment account to
  eliminate its debit balance and
• Debits the subsidiary stockholders equity
  accounts to eliminate their credit balances

24
Eliminations
Parent Corporation
Subsidiary Corporation
Consolidated Amounts
Debit
Credit
Assets
(b) 80,000 (a)150,000
30,000 195,000 356,000 581,000
Cash Notes receivable from Subsidiary Inventory In
vestment in Subsidiary Other assets Total
12,000 80,000 104,000 150,000 218,000 564,00
0
18,000 91,000 138,000 247,000
Itsy Bitsy!! Knappsy
Liabilities and Stockholders Equity
17,000 80,000 100,000 50,000 247,000
60,000 190,000 176,000 155,000 581,000
Accounts payable Notes payable Common
stock Retained earnings Total
43,000 190,000 176,000 155,000 564,000
(b) 80,000 (a)100,000 (a) 50,000 230,000
230,000
25
ACCOUNTING FOR CONSOLIDATED SUBSIDIARIES

• GOODWILL
• Arises when a parent company pays more to acquire
  a subsidiary company than the market value of the
  subsidiarys net assets
• Is the INTANGIBLE ASSET that represents the
  parent companys excess payment to acquire the
  subsidiary

26
ACCOUNTING FOR CONSOLIDATED SUBSIDIARIES

• Minority interest
• Arises when a parent company purchases less than
  100 of the stock of a subsidiary company
• Is reported among the liabilities on the balance
  sheet of the parent company
• The income of a consolidated entity is the net
  income of the parent plus the parents proportion
  of all subsidiaries net income

27
LONG-TERM INVESTMENTS IN BONDS AND NOTES

• Held-to-maturity investments are long-term
  investments in bonds and notes that the investor
  intends to hold until the bonds mature
• Bond investments are recorded at cost

28
Accounting Method to Use for Each Type of
Long-Term Investment


Accounting Type of Long-Term Investment

Method

• Investor owns less than 20 of investee stock
  (Available-for-sale investment classified as
  noncurrent asset)
• Investor owns between 20 and 50 of
  investee/affiliate stock
• Investor owns more than 50 of investee stock
• Long-term investment in bonds (Held-to-maturity
  investment)

Market value Equity Consolidation Amortized cost
29

• Accounting for Long-Term Investments and
  International Operations

30
ACCOUNTING FOR INTERNATIONAL OPERATONS
The exhibit below shows the percentages of
international sales for three large U. S.
companies
Company of International Sales Coca-Cola
62 IBM 57 Intel 56
31
ACCOUNTING FOR INTERNATIONAL OPERATONS

• Accounting for business activities across
  national boundaries makes up the field of
  international accounting

32
FOREIGN CURRENCIES AND EXCHANGE RATES

• The measure of one currency against another is
  called the foreign-currency exchange rate
• Using an exchange rate to convert the cost of an
  item given in one currency to its cost in a
  second currency is called a translation

33
Foreign-Currency Exchange Rates at One Point in
Time
Monetary Unit
Dollar Value
Country
Canada European Common Market France Germany Great
Britain Italy Japan Mexico
Dollar Euro Franc Mark Pound Lira Yen Peso
0.66 1.06 0.16 0.54 1.59 0.0005
0.0086 0.107
34
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 0.107. On August 28,
when the peso is worth only 0.104, Shipp
receives 1 million pesos from Artes, but the
dollar value of Shipps cash receipt is 3,000
less than expected. The following journal
entries show how Shipp would account for these
transactions
July 28 Accounts Receivable - Artes (1,000,000
pesos x 0.107) 107,000 Sales
Revenue 107,000 Sale on
account
Aug. 28 Cash (1,000,000 pesos x 0.104) 104,000
Foreign Currency Transaction Loss
3,000 Accounts Receivable
- Artes 107,000 Collection
on account
35
FOREIGN CURRENCIES AND EXCHANGE RATES

• The company reports the net amount of foreign
  currency transaction gains and losses on the
  income statement as Other Revenues and Gains, or
  Other Expenses and Losses

Other
36
CONSOLIDATION OF FOREIGN SUBSIDIARIES

• The consolidation of a foreign subsidiary poses
  two special challenges
• Accountants must first bring the subsidiarys
  statements into conformity with American GAAP
• When the subsidiary statements are expressed in
  foreign currency, they must be translated into
  dollars

37
Differences in accounting principles exist among
countries around the world as shown below
Research and Development Costs
Country
Inventories
Goodwill
United States Germany Japan United Kingdom
Specific unit cost, FIFO, LIFO, weighted
average Similar to U.S. Similar to U.S. LIFO is
unacceptable for tax purposes and is not widely
used
Amortized over period not to exceed 40
years Amortized over 5 years Amortized over 5
years Amortized over useful life or not
amortized if life is indefinite
Expensed as incurred Expensed as incurred May
be capitalized and amortized over 5 years
Expense research cost Some development costs may
be capitalized
38
INTERNATIONAL ACCOUNTING STANDARDS

• A company that sells its stock through a foreign
  stock exchange must follow the accounting
  principles of the foreign country
• The globalization of business enterprises and
  capital markets is creating much interest in
  establishing common, worldwide accounting
  standards

39
INTERNATIONAL ACCOUNTING STANDARDS

• The primary organization working to achieve
  worldwide harmony of accounting standards is the
  International Accounting Standards Committee
  (IASC)

40
Chapter 10 Howork

• DQs 1,3,7,8,9,10,11

41
EXAM III FALL 2002