chapter 10 powerpoints on long-term investments & international operations

8/8/2019 Chapter 10 PowerPoints on Long-term Investments & International Operations

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Chapter 10

10-1


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Account for Available-for-Sale Investments

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Investor entity that owns stockof a

corporation

Investee corporation that issued the stock

ABC Company purchases 1000 shares of

XYZ Corporation: ABC is the investor

XYZ is the investee

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Assets to the investor

Short-term investments Alsocalled marketable securities and often

classified as trading securities

Must be liquid

Intended to be converted tocash withinone year

Long-term investments Expected to be held longer thanone year

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10-5

Percent owned by investor Accounting method

Up to 20% Available-for-Sale20 - 50% Equity Method

More than 50% Consolidation


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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

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Increase in market value Decrease in market value

Unrealized Gain Unrealized Loss

Allowance to Adjust Investment to Market

is a companion account toLong-Term Investments

Debit balance =Market > Cost

Credit balance =Market < Cost

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JOURNAL

Date Accounts and explanation Debit Credit

Allowance to adjust investment to market

Unrealized gainon investment

Adjusted investment to market

JOURNAL


Unrealized loss on investment

Allowance to adjust investment to market

Adjusted investment to market

If market value isgreater than

carryingvalue

If market value isless thancarrying

value

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Original cost of investment

Debit balance inAllowance toAdjust Investments to Market

OR

Credit balance inAllowance toAdjust Investments to Market

If fair value> cost

If fair value< cost

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Reported in two places on the financial statements

Income Statement

Other comprehensive income separate section belownet income

Balance Sheet

Accumulated other comprehensive income separatesectionof stockholders equity

Unrealized gains or losses on available-for-saleinvestments do not impact net income

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Results in a realizedgainor loss reported on

the income statement

Difference betweencost and selling price

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10-12

Journalize transactions long-term available-for-sale investment transactions

a. Purchased 470 shares of Potter foods

common stock at $31 per share with intentto hold

b. Received cash dividend of $1.70 on Potter

c. At year-end, adjusted investment to fairmarket value of $36 per shared. Sold Potter stock for market price of $22 per

share


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10-14

Date Accounts Debit Credit

(c) Allowance toAdjust Investment to Market[470 ($31 - $36)] $2,350

Unrealized Gainon Investment $2,350


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Investment is sold when market value is $22

This results in a loss

Cost minus selling price

10-15

Date Accounts Debit Credit(d) Cash ($22 470) $10,340

Loss on sale of investments $4,230

Long-term Investment (cost from letter a) $14,570


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Use the Equity Method toAccount for

Investments

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Investor owns 20 50% of investees votingstock

Investor has significant influence over theinvestee

Investment recorded at cost

Investment is increased by investee earnings

Investment is decreased by investee dividends

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10-18

Long-Term Investment

Original Cost Share of Dividends

EndingBalance

Share ofNet Income


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10-19

Nelson Corp owns equity-methodinvestments. Nelson paid $1,500,000

to acquire a 25% investment inPayton. Payton reported net incomeof $670,000 for 1st year and declared

& paid cash dividends of $400,000.


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10-20


(a) Long-term Investments $1,500,000

Cash $1,500,000

(b) Long-term Investments ($670,000 .25) $167,500

Equity method investment revenue $167,500


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(c) Cash ($400,000 0.25) $100,000

Long-term investments $100,000

10-21

Long-Term Investments

(a) 1,500,000

(b) 1 7,500

(c) 100,000

1,5 7,500


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Understand Consolidated Financial

Statements

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Investor owns more than 50% ofvoting stockofinvestee

Investor controls investee

Investor is called parent company

Investee is called subsidiary (sub)

Financial statements of a parent and itssubsidiaries are combined Consolidated as ifone company

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Tool tocombine parent and subsidiaryfinancial statements at year-end

Parent and subsidiary accounts are placedside-by-side incolumns

Worksheet entries are made to eliminatereciprocal accounts Parents investment and Subs equity

Receivables and payables between parent and sub

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10-25

1 2

3


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Goodwill Recorded inconsolidation process as an

intangible asset Occurs when parent purchases sub for more than

the fair value of its net assets Minority Interest

Recorded inconsolidation process and can beincluded in liabilities

Occurs when parent owns less than 100% of sub

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10-28

Example of preparing a consolidatedworksheet.see your textbook (Page 635) andyou can fill in the blanks.


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ELIMINATION CONSOLIDATED

ASSETS XYZ, Inc. Cressida Corp DEBIT CREDIT BALANCESHEET

Cash 51,000 18,000

Accounts receivable, net 85,000 58,000

Note receivable from XYZ 40,000

Inventory 57,000 81,000

Investment in Cressida 103,000

Plant assets, net 291,000 96,000

Other assets 22,000 9,000

Total 609,000 302,000

LIABILITIES AND

STOCKHOLDERSEQUITY

Accounts payable 46,000 29,000

Notes payable 147,000 35,000

Other liabilities 79,000 135,000

Common stock 113,000 81,000

Retained earnings 224,000 22,000

Total 609,000 302,000 10-29


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ELIMINATION CONSOLIDATED

ASSETS XYZ, Inc. Cressida Corp DEBIT CREDIT BALANCESHEET

Cash 51,000 18,000 69,000

Accounts receivable, net 85,000 58,000 143,000

Note receivable from XYZ 40,000 (b) 40,000

Inventory 57,000 81,000 138,000

Investment in Cressida 103,000 (a) 103,000

Plant assets, net 291,000 96,000 387,000

Other assets 22,000 9,000 31,000

Total 609,000 302,000 768,000

LIABILITIES AND

STOCKHOLDERSEQUITY

Accounts payable 46,000 29,000 75,000

Notes payable 147,000 35,000 (b) 40,000 142,000

Other liabilities 79,000 135,000 214,000

Common stock 113,000 81,000 (a) 81,000 113,000

Retained earnings 224,000 22,000 (a) 22,000 _______ 224,000

Total 609,000 302,000 143,000 143,000 768,000 10-30


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Stockholders equity ofconsolidated entity =

$337,000 ($113,000 + $224,000).

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The stockholders equity of the consolidated

entity is $304,000 ($111,000 + $193,000).

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Account for Long-term Investments inBonds

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Major investors

Financial institutions

Insurance companies

Called held-to-maturity investments

Reported at amortized cost

Bonds carrying amount is amortized to face valueat maturity value

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10-35

IssuingCorporation

Investor(Bondholder)

Investment in bonds Bonds payable

Interest revenue Interest expense


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Suppose a company purchases $10,000 of 6% CBSbonds at a price of 95.2 on April 1, 2010. The investorintends to hold the bonds as a long-term investment

until their maturity. Interest dates are April 1 andOctober 1. Because these bonds mature on April 1,2014, they will be outstanding for 4 years (48months). In this case the investor paid a discount

price for the bonds (95.2% of face value). Thecompany must amortize the bonds carrying amountfrom cost of $9,520 up to $10,000 over their term tomaturity. Assume amortization of the bonds by the

straight-line method. 10-36


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JOURNAL


4-1 Long-term investment in bonds 9,520

Cash 9,520

Purchased bond investments

10-1 Cash 300

Interest revenue 300

Received semi-annual interest10-1 Long-term investment in bonds 60

Interest revenue 60

To amortize bond investment

$10,000 x 6% x 1/2

[($10,000 9,520)/48x]x 6

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Increases Long-

Term Investmentaccount as it

reaches maturity Records interestrevenue earned

from carryingamount increase

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Type of Long-Term Investment Accounting Method

Investor owns less than 20% of investee stock Available-for-sale

Investor owns between 20 50% of investee stock Equity

Investor owns more than 50% of investee stock Consolidation

Investor owns a long-term investment in bonds Amortized cost

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10-40

HK buys $1,100,000 of Tyconix bonds at a priceof 104. Tyconix bonds pay cash interest atannual rate of 6% and mature at end of 5 years.1. How much did HK pay?2. How much cash interest with HK receive every

year from Tyconix?3. Will HKs annual interest revenue be more or

less than amount of cash interest each year?4. Compute HKs annual interest revenue on this

bond. S-L method.


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1. Paid $1,144,000($1,100,000 1.04) Will collect$1,100,000at maturity

2. Annual cash interest = $66,000($1,100,000 .06)

3. Annual interest revenue will be less than the amount of

cash interest received each year because the investor

bought the bonds at a premium.But the investor will

collect only the face amount of the bonds at maturity. Thedifference between the purchase price paid and the face

amount collected is a reduction in interest revenue over

the life of the bonds.

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4. Cash interest received each year $66,000

Amortization$1,144,000 $1,100,000

= (8,800)

5 years

= Annual interest revenue $57,200

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10-43

Continuing S10-7. Journal entries:a. Purchase of bond investment on June 30.

Expect to hold to maturity.b. Receipt of semiannual cash interest on Dec 31,

2010.c. Amortization of bonds on Dec 31, 2010. (SL)d. Collection of investments face value at

maturity on June 30, 2015. (Assume interestand amortization have already been recorded.)


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DATE

ACCOUNT TITLES AND

EXPLANATION DEBIT CREDIT

2010

a.June 30

Long-Term Investment inBonds ($1,100,000 1.04) 1,144,000

Cash 1,144,000

To purchase bond investment.

b. Dec. 31 Cash ($1,100,000 .06 6/12) 33,000

Interest Revenue 33,000

To receive semiannual interest.

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c. Dec. 31 Interest Revenue 4,400

Long-Term Investment in

Bonds [($1,144,000

$1,100,000) / 5 6/12].

4,400

To amortize bond investment.

2015

d. Jan. 2 Cash 1,100,000Long-Term Investment in

Bonds1,100,000

To receive face value at maturity.

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10-46

On Sept 30, 2010, Newtex paid 98 for 8% bonds ofTeague Corp as a long-term held-to-maturityinvestment. Maturity value of bonds will be

$30,000 on Sept 30, 2015. Bonds pay interestMarch 31 & Sept 30.1. What method use Newtex use for Teague

investment?

2. Using straight-line amortization, journalize all 2010transactions.

3. Show how Newtex would report everything onbond investment on bal sheet 12/31/10.


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Newtex should use the amortized cost

method to account for the bond investment

The investment is recorded at cost $30,000 .98

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Date Accounts Debit Credit30-Sep Long-term investment in bonds $29,400

Cash $29,400


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On December 31, interest earned on the bond investments isaccrued

$30,000 8% x 3/12 = $600

Amortization is recorded

$30,000 29,400 = $600 $600/60 months = $10 per month

$10 per month 3 months = $30

10-48

Date Accounts Debit Credit31-Dec InterestReceivable $600

Interest Revenue $600

31-Dec Long-term Investment inBonds

$30

Interest Revenue $30


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Account for InternationalOperations

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Most corporationsoperate in multiplecountries

Most use their owncurrency

Several Europeancountries use the euro

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10-51

Price of one currency stated in termsof another currency

TranslationConverting the cost of an item stated

in one currency into another currency

Import/ExportRatioRelationship of a countrys importsto exports

Strong CurrencyExchange rate of currency is rising

relative to other nations

Exchange rate

Weak CurrencyExchange rate of currency is falling

relative to other nations


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Ratioof imports toexports

If exports exceedimports, increase indemand drives upprice ofcurrency

If imports ex

ceedexports, supplyincreases andcurrency price falls

Rate of returnoncapital markets

If high, increasesinternationalinvestments anddemand for currency

Currencies aredescribed as strongor weak

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Export Sales inwhich payments will be made in a foreign

currency

Import Purchases that will be paid in a foreigncurrency

Changes in exchange rates between sale orpurchase and payment will result in a foreigncurrency gainor loss

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A U.S.company sells goods to a Mexicancompanyfor one million pesos when the exchange rate is$0.086

When payment is received the exchange rate is$0.083


AccountsReceivable (1 million x. 086) $86,000

Sales $86,000

Cash (1 million x .083) $83,000

Foreign Currency TransactionLoss $3,000

AccountsReceivable $86,00010-54


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Gains and losses are netted and reported in

the Other category on the Income

Statement

Losses can be avoided by:

Only acceptingor paying in dollars

Hedging

Purchasing futures contracts

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Twochallenges:

1. Foreign accounting practices differ from U.S.

GAAP

2. Subsidiary statements may be in foreigncurrency and need translation

Results in a foreigncurrency translation adjustment

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Assets and liabilities are translated into dollarsat current exchange rate on financial statementdate

Stockholders equity is translated into dollars atolder, historical exchange rates

Differing rates creates out-of-balance condition

Foreigncurrency translation adjustment is thebalancing amount

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Most accounting methods are consistentthroughout the world

Differences do exist for: Inventory LIFOmethod of inventory not used in

the U.K.

Goodwill In Germany andJapan, the account isamortized; not in the U.S.

Research & Development costs Capitalized inJapan; expensed in the U.S.

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10-60

Pepson sells syrup to a Russian companyon Sept 12. Pepson agrees to accept500,000 Russian rubles. On date of sale,ruble is quoted at $0.36. Pepson collectshalf of receivable on Oct 18 when ruble isworth $0.33. On Nov 15, when foreign-

exchange rate is $0.39, Pepson collectsfinal amount.

Write journal entries.


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DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Sept. 12 AccountsReceivable

(500,000 rubles $0.36) 180,000

SalesRevenue 180,000

Sale on account.

Oct. 18 Cash (250,000 rubles $0.33) 82,500

Foreign-Currency TransactionLoss 7,500

AccountsReceivable ($180,000 ) 90,000

Collectionon account.

Nov. 15 Cash (250,000 rubles $0.39) 97,500

AccountsReceivable ($180,000 ) 90,000

Foreign-Currency Transaction Gain 7,500

Collectionon account. 10-61


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10-62

Ocean Belting sells goods for 1,100,000Mexican pesos. Foreign-exchange rate is$0.086 on date of sale. Ocean then collects

cash on April 24, when exchange rate for apeso is $0.089. Record cash collection.

Ocean buys inventory for 28,000 Swiss francs.

A Swiss franc costs $0.82 on purchase date.Record Oceans payment of cash on Oct 25,when exchange rate for a Swiss franc is $0.87.


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DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Apr. 24 Cash (1,100,000 pesos $0.089) 97,900

AccountsReceivable

(1,100,000 pesos (0.086)) 94,600Foreign-Currency Transaction Gain 3,300

Collectionon account.

Oct. 25 AccountsPayable

(28,000 Swiss francs $0.82) 22,960

Foreign-Currency TransactionLoss 1,400

Cash (28,000 Swiss francs $0.87) 24,360

Payment on account.10-63


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Currency Strengthened Weakened

Dollar X

Peso X

Dollar X

Swiss franc X

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Report Investing Transactions on the

Statement of Cash Flows

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Purchases and sales of long-term investmentsare investing activities

Investing inflow Proceeds from sales of long-term investments

(available-for-sale, equity method and held-to-maturity)

Investingoutflow Purchases of all categories of long-term investments

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10-67

During 2010, Sugar Land Donuts reported netloss of $129.6 mill. Sugar Land received $1.7mill from sale of other businesses. Sugar Land

made capital expenditures of $10.0 mill andsold PP&E for $6.9. Sugar Land purchasedlong-term investments at a cost of $11.5 milland sold other long-term investments for $2.6

mill.


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SugarLand Donuts

Statement of Cash Flows (partial)

Fiscal Year 2010

Millions

Cash flows from investing activities:

Capital expenditures $(10.0)

Sale of property, plant, and equipment 6.9

Sale ofother businesses 1.7

Purchase of long-term investments (11.5)

Sale of investments 2.6

Net cash (used) in investing activities $(10.3)

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Based on Sugar Lands investing activities, it appears that the company isgrowing. Acquisitions of long-term assets and investments are greater than

the sales of long-term assets and other businesses.


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chapter 10 powerpoints on long-term investments & international operations

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