Investments andInternational Operations pptx

Available-for-sale investments are investments other than trading securities in which the investor Trading and Available-For-Sale Investments... Accounting for Trading Investments Examp

Investments and International Operations

Chapter 16

Stock Price Information for McDonald’s Corporation:

Trading investments are investments

to be sold in the very near future with theintent of generating profits on price changes

Available-for-sale investments are investments

other than trading securities in which the investor

Trading and Available-For-Sale

Investments

Objective 1

Account for Trading

Investments.

Accounting for Trading 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?

Accounting for Trading Investments Example

Bowie pays a cash dividend of

$1.40 per share on November 14

October 23

Short-Term Investment 30,000

Purchased investment

Accounting for Trading Investments Example

November 14

What is Des Moines’ entry

to receive this cash dividend?

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)

Reporting Trading Investments

December 31

Loss on Trading Investment 5,000

Adjusted trading investment to market value

What is the adjusting entry that Des Moines would make at year end?

Reporting Trading Investments

Balance Sheet (partial):

ASSETS

Current assets:

Short-term investments, at market value $25,000

Income Statement (partial):

Other gains and losses:

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

Reporting Trading Investments

Objective 2

Account for

Available-for-sale Investments.

• Assume that the market value of Bowie’s

investment in Gomez’s common stock is $37,400

on December 31, 2005.

• Bowie paid $36,000 for the stock on May 1.

Adjusted investment to market value

What is the adjusting entry?

Reporting Available-for-Sale

Investments

ASSETSLong-term available-for-sale

STOCKHOLDERS’ EQUITYCommon stock………

Selling an Available-for-Sale

Investment

• 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

Objective 3

Use the Equity

Method for Investments.

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

Des Moines, Inc., purchases 30%

of the voting stock of Bowie Corp.

for $500,000 on January 10.

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

Equity Method

December 31, Year 2

Equity-Method Investment Loss 60,000

Long-Term Equity-Method Investment 60,000 Recorded investment loss

What journal entry would Des Moines make?

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

Recording the Sale of an Equity-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

Recording the Sale of an Equity-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

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

Objective 4

Understand Consolidated Financial Statements.

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

Goodwill is an intangible asset that ariseswhen the purchase price to acquire asubsidiary company is greater thanthe sum of the market value of thesubsidiary’s assets minus liabilities

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

Accounting Methods for

Stock Investment

50% or more Consolidation Method

The percentage of ownership determines

the accounting method to be used

Objective 5

Account for

Long-term Investments in Bonds.

Long-Term Investments

in 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

Purchased bond investment

What are the journal entries for April 1 and October 1, 2002?

Long-Term Investments

in Bonds and Notes

• The amortization entry has two effects:

1 It increases the Long-Term Investment

Objective 6

Account for Transactions

Stated in a Foreign

Currency.

Company Percent of International Sales

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

Accounting for International Operations

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

Foreign-Currency Exchange 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

Foreign-Currency Exchange Rates Example

April 1

Recorded purchase of car at 1.65 rate

Bryan records the purchase in U.S dollars

at the exchange rate on the date of purchase.

Foreign-Currency Exchange Rates Example

When payment is due on April 30, the price of a pound is $1.68.

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

• A company that sells its stock through a

foreign stock exchange must follow the

accounting principles of the foreign

country

End of Chapter 16