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Long-Term Investments and International Transactions

16. Long-Term Investments and International Transactions. Exh. 16.3. Classes of Long-Term Investments. Held-To-Maturity. Available-For-Sale. Significant Influence. Controlling Influence. Equity Method. Cost Method. Market Value Method. Consolidation. Accounting Method. Accounting

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Long-Term Investments and International Transactions

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  1. 16 Long-Term Investments and International Transactions

  2. Exh. 16.3 Classes of Long-Term Investments Held-To-Maturity Available-For-Sale Significant Influence Controlling Influence Equity Method Cost Method Market Value Method Consolidation Accounting Method

  3. Accounting Recorded at cost at acquisition Interest revenue recorded as accrued Difference between cost and maturity value is amortized over the remaining life of the security Held-to-Maturity Securities Debt securities that a company intends to hold until maturity.

  4. Accounting Recorded at cost at acquisition Interest revenue recorded as accrued (debt securities) Dividends recorded as revenue (equity securities) Carrying amount is adjusted to Market Value each period. Available-for-Sale Securities Debt and equity securities that a company intends to sell in the future, before maturity.

  5. Available-for-Sale Securities Unrealized holding gains and losses from available-for-sale securities are reported in the equity section of the balance sheet.

  6. Foot, Inc. purchased 1,000 shares of General Boots at $5 per shares during 2001. At December 31, 2001, the shares had increased in value to $9.50 per share. Prepare the journal entries for Foot, Inc. to adjust the securities to fair value at Dec. 31, 2001. Available-for-Sale Securities Example

  7. Foot, Inc. purchased 1,000 shares of General Boots at $5 per shares during 2001. At December 31, 2001, the shares had increased in value to $9.50 per share. Available-for-Sale Securities Example The Unrealized Holding Gain is reported in the equity section of the Balance Sheet.

  8. Investor Ownership of Investee Shares Outstanding The Significance of the Size of the Investment Cost or Market Value Method Equity Method Consolidated Financial Statements { 0% 20% 50% 100% In some cases, influence or control may exist with less than 20% ownership.

  9. Investor Ownership of Investee Shares Outstanding The Significance of the Size of the Investment Cost or Market Value Method Equity Method Consolidated Financial Statements { 0% 20% 50% 100% Significant influence is generally assumed with 20% to 50% ownership.

  10. Original investment is recorded at cost. The investment account is increased by a proportionate share of investee’s earnings. The investment account is decreased by dividends received. Equity Method

  11. The investment account is reported on the balance sheet as a singleamount. The investor’s share of the investee’s earnings is reported as a single item on the investor’s income statement. The account is called “Earnings from Long-Term Investment” Equity Method

  12. Let’s do an equity method example.

  13. Equity Method Example On January 1, 2001, Big Corp. buys 20% of Small Inc. for $2,000,000 cash. Record Big’s journal entry.

  14. Equity Method Example On December 31, 2001, Small reports net income for the year of $300,000. Record Big’s journal entry.

  15. Equity Method Example Big owns 20% of Small and gets credit for 20% of Small’s income. 20% × $300,000 = $60,000 60,000 60,000

  16. Equity Method Example On December 31, 2001, Big received a $25,000 dividend check from Small. Record Big’s journal entry. 25,000 60,000 25,000

  17. Consolidation of Financial Statements • Required when investor’s ownership exceeds 50% of investee. • Control is presumed to exist. • Equity Method is used. • Consolidated Financial Statements show the financial position, results of operations, and cash flows of all entities under the parent’s control.

  18. (1) Accounting for sales and purchases listed in a foreign currency. (2) Preparing consolidated financial statements with international subsidiaries. Investments in International Operations Two major accounting challenges arise when companies have international operations:

  19. Each country uses its own currency for internal economic transactions. To make transactions in another country, units of that country’s currency must be acquired. The cost of those currencies is called the exchange rate. Exchange Rates Between Currencies

  20. Foreign Exchange Markets As the relative strength of a country’s economy changes . . . . . . the exchange rate of the local currency relative to other currencies also fluctuates. ¥ = $?

  21. When a transaction occurs on one date (for example a credit sale) . . . Foreign Exchange Markets ? . . . but the cash flow is at a later date . . . . . . fluctuating exchange rates can result in exchange rate gains or losses.

  22. On 12/1/01, BobCo sells inventory to Coventry Corp. on credit. Coventry will pay BobCo 10,000 British pounds in 90 days. The current exchange rate is $1 = .6093 £. Prepare BobCo’s journal entry. Foreign Exchange Transaction Example

  23. On 12/1/01, BobCo sells inventory to Coventry Corp. on credit. Coventry will pay BobCo 10,000 British pounds in 90 days. The current exchange rate is $1 = .6093 £. Prepare BobCo’s journal entry. Foreign Exchange Transaction Example

  24. Record the adjusting entry. Any resulting gain or loss should be reported on the income statement. Foreign Exchange Transaction Example On December 31, 2001, the foreign exchange rate was $1 = .6250 £. Accounting rules require that the foreign currency receivable be adjusted based on the exchange rate on the reporting date.

  25. Foreign Exchange Transaction Example On December 31, 2001, the foreign exchange rate was $1 = .6250 £. Accounting rules require that the foreign currency receivable be adjusted based on the exchange rate on the reporting date.

  26. Foreign Exchange Transaction Example On 3/1/02, Coventry Corp. pays BobCo the 10,000 £ for the 12/1/01 sale. The exchange rate on 3/1/02, was $1 = .6115 £. Record BobCo’s receipt of Coventry’s payment.

  27. Foreign Exchange Transaction Example On 3/1/02, Coventry Corp. pays BobCo the 10,000 £ for the 12/1/01 sale. The exchange rate on 3/1/02, was $1 = .6115 £. Record BobCo’s receipt of Coventry’s payment.

  28. Comprehensive Income GAAP excludes some unrealized items from income, such as the change in market value of available-for-sale debt and equity investments.

  29. Comprehensive Income

  30. End of Chapter 16 Let’s close this chapter!

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