16 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Investments andInternational Operations
Chapter 16
16 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Stock Price Information for McDonald’s Corporation:52 weeksHigh Low Stock Symbol Dividend Volume 100s Close4956 2981 MCD .20 2067670 2988
The financial community quotesstock prices in dollars and cents.
Stock Prices
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Trading investments are investmentsto be sold in the very near future with the
intent of generating profits on price changes.
Available-for-sale investments are investmentsother than trading securities in which the investor
cannot exercise significant influence over the investee.
Trading and Available-For-Sale Investments
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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
Bowie pays a cash dividend of$1.40 per share on November 14.
Bowie pays a cash dividend of$1.40 per share on November 14.
October 23Short-Term Investment 30,000
Cash 30,000Purchased investment
October 23Short-Term Investment 30,000
Cash 30,000Purchased investment
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Accounting forTrading Investments Example
November 14Cash 840
Dividend Revenue 840Received cash dividend
November 14Cash 840
Dividend Revenue 840Received cash dividend
What is Des Moines’ entryto receive this cash dividend?
What is Des Moines’ entryto receive this cash dividend?
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Reporting Trading Investments
Trading investments are reported on the balance sheet at current market value.
Assume that Bowie’s 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
December 31Loss on Trading Investment 5,000
Short-term Investment 5,000Adjusted trading investment to market value
December 31Loss on Trading Investment 5,000
Short-term Investment 5,000Adjusted trading investment to market value
What is the adjusting entry thatDes Moines would make at year end?
What is the adjusting entry thatDes Moines would make at year end?
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Reporting Trading Investments
Balance Sheet (partial):ASSETSCurrent assets:Short-term investments, at market value $25,000
Balance Sheet (partial):ASSETSCurrent assets:Short-term investments, at market value $25,000
Income Statement (partial):Other gains and losses:Gain (loss) on trading investment $(5,000)
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 10Cash 23,000Loss on Sale of Investment 2,000
Short-Term Investment 25,000Sold investment
January 10Cash 23,000Loss on Sale of Investment 2,000
Short-Term Investment 25,000Sold 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 Bowie’s investment in Gomez’s common stock is $37,400 on December 31, 2002.
Bowie paid $36,000 for the stock on May 1.
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December 31, 2002Allowance to Adjust Investmentto Market 1,400
Unrealized Gain on Available-for-SaleInvestment 1,400
Adjusted investment to market value
December 31, 2002Allowance to Adjust Investmentto Market 1,400
Unrealized Gain on Available-for-SaleInvestment 1,400
Adjusted investment to market value
What is the adjusting entry?What is the adjusting entry?
Reporting Available-for-SaleInvestments
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ASSETSLong-term available-for-saleinvestments–at market value $37,400
ASSETSLong-term available-for-saleinvestments–at market value $37,400
STOCKHOLDERS’ EQUITYCommon stock………Retained earnings……Unrealized gain onavailable-for-sale investment $ 1,400
STOCKHOLDERS’ EQUITYCommon stock………Retained earnings……Unrealized gain onavailable-for-sale investment $ 1,400
Reporting Available-for-SaleInvestments
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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, 2003Cash 38,000
Gain on Sale of Investment 2,000Long-Term Available-for-SaleInvestment (cost) 36,000
Sold investment
January 15, 2003Cash 38,000
Gain on Sale of Investment 2,000Long-Term Available-for-SaleInvestment (cost) 36,000
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 investee’s success and failure should be included in accounting for the investment.
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Equity Method
January 10Long-Term Equity-MethodInvestment 500,000
Cash 500,000Purchased equity-method investment
January 10Long-Term Equity-MethodInvestment 500,000
Cash 500,000Purchased equity-method investment
Des Moines, Inc., purchases 30%of the voting stock of Bowie Corp.
for $500,000 on January 10.
Des Moines, Inc., purchases 30%of the voting stock of Bowie Corp.
for $500,000 on January 10.
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Equity Method
The initial investment is recorded at cost. Adjustments are made to the investment
account for the investor’s prorata share of income or loss.
Suppose Bowie Corp. reported a $200,000 net loss for year two.
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Equity Method
December 31, Year 2Equity-Method Investment Loss 60,000
Long-Term Equity-Method Investment 60,000Recorded investment loss
December 31, Year 2Equity-Method Investment Loss 60,000
Long-Term Equity-Method Investment 60,000Recorded investment loss
What journal entry would Des Moines make?What journal entry would Des Moines make?
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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 investee’s owners’ equity and so it also reduces the investor’s 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
16 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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.
16 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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 company’s accounts.
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Goodwill
Goodwill is an intangible asset that ariseswhen the purchase price to acquire asubsidiary company is greater thanthe sum of the market value of the
subsidiary’s assets minus liabilities.
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Minority Interest...
– is the portion (less than 50%) of a subsidiary’s 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
50% or moreConsolidation Method
20%–50%EquityMethod
Less than 20%Market-Value Method
The percentage of ownership determinesthe accounting method to be used.
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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 Station’s 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
April 1Long-Term Investment in Bonds 9,520
Cash 9,520Purchased bond investment
April 1Long-Term Investment in Bonds 9,520
Cash 9,520Purchased bond investment
What are the journal entriesfor April 1 and October 1, 2002?
What are the journal entriesfor April 1 and October 1, 2002?
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Long-Term Investmentsin Bonds Example
October 1Cash ($10,000 × .06 × 6/12) 300
Interest Revenue 300Received semiannual interest
October 1Cash ($10,000 × .06 × 6/12) 300
Interest Revenue 300Received semiannual interest
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Long-Term Investmentsin Bonds Example
October 1Long-Term Investment in Bonds($10,000 – $9,520) ÷ 48 × 6 60
Interest Revenue 60Amortized discount on bond investment
October 1Long-Term Investment in Bonds($10,000 – $9,520) ÷ 48 × 6 60
Interest Revenue 60Amortized discount on bond investment
What is the straight-lineamortization on October 1?
What is the straight-lineamortization on October 1?
16 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Long-Term Investmentsin Bonds and Notes
The amortization entry has two effects:1 It increases the Long-Term Investment
account.2 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 transactionsstated in a foreign
currency.
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Company Percent of International SalesMcDonald’s 62%Toys “Я” Us 27%Procter & Gamble 49%
Company Percent of International SalesMcDonald’s 62%Toys “Я” Us 27%Procter & Gamble 49%
Accounting for business activitiesacross national boundaries makes upthe field of international accounting.
Accounting for business activitiesacross national boundaries makes upthe field of international accounting.
Accounting forInternational Operations
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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
April 1Equipment 165,000
Accounts Payable 165,000Recorded purchase of car at 1.65 rate
April 1Equipment 165,000
Accounts Payable 165,000Recorded purchase of car at 1.65 rate
Bryan records the purchase in U.S. dollarsat the exchange rate on the date of purchase.
Bryan records the purchase in U.S. dollarsat the exchange rate on the date of purchase.
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Foreign-CurrencyExchange Rates Example
When payment is due on April 30,the price of a pound is $1.68.
When payment is due on April 30,the price of a pound is $1.68.
April 30Accounts Payable 165,000Foreign-Currency Transaction Loss 3,000
Cash 168,000Payment of account
April 30Accounts Payable 165,000Foreign-Currency Transaction Loss 3,000
Cash 168,000Payment 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 subsidiary’s 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 onavailable-for-sale investments
Net income, plus other comprehensive income:Unrealized gains and losses onavailable-for-sale investments
16 - 49©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
End of Chapter 16
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