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Long-Term Investments and International Operations

Long-Term Investments and International Operations. Chapter 10. Trading and Available-For-Sale Investments. Trading - to be sold in the very near future with the intent of generating profits on the sale Available-for-sale - stock investments other than trading securities Short term Long term.

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Long-Term Investments and International Operations

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  1. Long-Term Investments and International Operations Chapter 10

  2. Trading and Available-For-Sale Investments • Trading - to be sold in the very near future with the intent of generating profits on the sale • Available-for-sale - stock investments other than trading securities • Short term • Long term

  3. Learning Objective 1 Account for available-for-sale investments

  4. Available-for-Sale Investments Market value method • Record initial investment at cost • Report on the balance sheet at their current market value

  5. Accounting forAvailable-for-Sale Investments On February 23, GE purchases 1,000 shares of Hewlett-Packard common stock for $35,750. GE intends to hold this stock for longer than one year. Feb 23Long-term Investment (1,000 x $35.75) 35,750 Cash 35,750 Purchased investment ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  6. Accounting forAvailable-for-Sale Investments GE receives a $0.20 per share cash dividend on this investment. Jul 14Cash (1,000 x $.22) 200 Dividend Revenue 200 Received cash dividend ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  7. What Value of an InvestmentIs Most Relevant? The market value of GE’s investment in Hewlett-Packard is $36,400 on December 31. Dec 31 Allowance to Adjust Investment To Market ($36,400-$35,750) 650 Unrealized Gain on Investment 650 Adjusted investment to market ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  8. Investment carrying amount = Market value of $36,400 What Value of an InvestmentIs Most Relevant? Long-Term Investment Allowance to Adjust Investment to Market 35,750 650

  9. What Value of an InvestmentIs Most Relevant? • Unrealized Gain or Loss - reported in two places in financial statements: • Other comprehensive income • Accumulated other comprehensive income

  10. What Value of an InvestmentIs Most Relevant? Income statement: Revenues $10,000 Expenses, including income tax 6,000 Net income $ 4,000 Other comprehensive income: Unrealized gain on investment $ 650 Less: Income tax (40%) ( 260) 390 Comprehensive income $ 4,390 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  11. What Value of an InvestmentIs Most Relevant? Balance sheet: Assets: Total current assets $ XXX Long-term investments – at market value 36,400 Property, plant, and equipment, net XXX Stockholders’ equity: Common stock $ 1,000 Retained earnings 2,000 Accumulated other comprehensive income: Unrealized gain on investments $ 390 Total stockholders’ equity $ 3,390 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  12. Selling an Available-for-Sale Investment GE sells its investment in Hewlett-Packard stock for $34,000 during 20x9. May 19 Cash 34,000 Loss on Sale of Investment 1,750 Long-Term Investment (cost) 35,750 Sold investment ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  13. Learning Objective 2 Use the equity method for investments.

  14. Equity Method Investments • Used to account for investments in which investor owns 20 to 50% of investee’s stock • Record initial investment at cost

  15. Equity Method Investments Phillips Petroleum Company pays $400 million for 30% of the common stock of White Rock Natural Gas Corporation. Jan 6 Long-Term Investment 400 Cash 400 To purchase equity-method investment ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  16. Investor’s Percentageof Investee Income White Rock Natural Gas Corporation reports net income of $250 million for the year. Dec 31 Long-Term Investment 75 Equity-Method Investment Revenue 75 To record investment revenue ($250 x 0.30) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  17. Receiving DividendsUnder the Equity Method White Rock declares and pays a cash dividend of $100 million. Dec 31 Cash ($100 x 0.30) 30 Long-Term Investment 30 To record cash dividend received on equity-method investment ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  18. Long-Term Investment Jan. 6 Purchases 400 Dec. 31 Net income 75 Dec. 31 Balance 445 Dec. 31 Dividends 30 Investment Account ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  19. Financial Statements Balance sheet (partial): millions Assets Total current assets $XXX Long-term investments, at equity 445 Property, plant, and equipment, net XXX Income statement (partial): millions Income from operations $XXX Other revenue: Equity-method investment revenue 75 Net income $XXX

  20. Learning Objective 3 Understand consolidated financial statements.

  21. 100% ownership 85% ownership Subsidiary A Subsidiary B Consolidated Subsidiaries Parent Company

  22. Consolidated Subsidiaries Parent Financial Statements _____ _____ _____ _____ _____ _____ _____ _____ Subsidiary Financial Statements _____ _____ _____ _____ _____ _____ Consolidated Financial Statements _____ _____ _____ _____ _____ _____

  23. Consolidation Accounting • Method of combining financial statements of two or more companies that are controlled by the same owners • Assets, liabilities, revenues, and expenses of each subsidiary are added to parent company’s accounts

  24. Goodwill and Minority Interest • Goodwill- intangible asset - represents parent company’s excess payment to acquire subsidiary • Minority interest - arises when parent company purchases less than 100% of the stock of a subsidiary company

  25. Learning Objective 4 Account for long-term investments in bonds.

  26. Long-Term Investmentsin Bonds and Notes Issuing Corporation Bonds payable Interest expense Investor (Bondholder) Investment in bonds Interest revenue Held-to-maturity investmentsare long-term investments in bonds and notes. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  27. Long-Term Investmentsin Bonds and Notes An investor purchases $10,000 of 6% CBS bonds at a price of 95.2 on April 1, 20X5. The investor intends to hold the bonds as a long-term investment until their maturity. Interest dates are April 1 and October 1. Apr 1 Long-Term Investment in Bonds 9,520 Cash 9,520 Purchased bond investment ($10,000 x 0.925) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  28. Long-Term Investments in Bonds The discount is amortized by the straight-line method. Oct 1 Cash 300 Interest Revenue 300 Received semiannual interest ($10,000 x .06 x 6/12) Oct 1 Long-Term Investment in Bonds 60 Interest Revenue 60 To amortize bond investment [($10,000 - $9,520) / 48] x 6 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  29. Long-Term Investmentsin Bonds and Notes Dec 31 Interest Receivable 150 Interest Revenue 150 To accrue interest revenue ($10,000 x .06 x 3/12) Dec 31 Long-Term Investment in Bonds 30 Interest Revenue 30 To amortize bond investment [($10,000 - $9,520) / 48] x 3 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  30. Long-Term Investmentsin Bonds and Notes Long-Term Investment in Bonds Long-Term Investment in Bonds Long-Term Investment in Bonds 4/1 9,520 10/1 60 12/31 30 9,610

  31. Learning Objective 5 Account for international operations.

  32. Foreign Currenciesand Exchange Rates • Foreign currencies exchange rate - Measure of one currency against another • Translation - Using an exchange rate to convert the cost of an item given in one currency to its cost in a second currency

  33. Foreign Currenciesand Exchange Rates Two main factors determine the supply and demand for a particular currency: • Ratio of a country’s imports to its exports • Rate of return available in the country’s capital market

  34. Managing Cash inInternational Transactions D. E. 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 $0.086. Jul 28 Accounts Receivable – Artes 86,000 Sales Revenue 86,000 Sale on account (1,000,000 pesos x $0.086) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  35. Managing Cash inInternational Transactions On August 28, the peso is worth $0.083. Shipp receives 1 million pesos from Artes. Aug 28 Cash (1,000,000 pesos x $0.083) 83,000 Foreign Currency Transaction Loss 3,000 Accounts Receivable – Artes 86,000 Collection on account ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  36. Managing Cash inInternational Transactions Shipp Belting buys inventory from Gesellschaft Ltd., a Swiss company. They decide on a price of 20,000 Swiss francs. On September 15, Shipp receives the goods. The Swiss franc is quoted at $0.80. Sep 15 Inventory 16,000 Accounts Payable-Gesellschaft 16,000 Purchase on account(20,000 Swiss francs x $0.80) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  37. Managing Cash inInternational Transactions When Shipp pays on September 29, the Swiss franc has decreased in value to $0.78 Sep 29 Accounts Payable-Gessellschaft 16,000 Cash 15,600 Foreign-Currency Transaction Gain 400 Payment on account (20,000 Swiss francs x $0.78) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  38. Managing Cash inInternational Transactions • Report the net amount of foreign currency transaction gains and losses on the income statement as “Other Revenues and Gains” or “Other Expenses and Losses” Foreign-currency transaction loss $3,000 Foreign-currency transaction gain ( 400) Foreign-currency transaction loss, net $2,600

  39. Managing Cash inInternational Transactions • Hedging - to protect oneself from losing money in one transaction by engaging in counterbalancing transactions. • Losses on the receipt of one currency may be offset by gains of the payment on another currency.

  40. Consolidation of Foreign Subsidiaries • Subsidiary’s statements must be brought into conformity with American GAAP • Subsidiary statements, expressed in foreign currency, must be translated into dollars.

  41. Consolidation of Foreign Subsidiaries • Foreign-currency translation adjustment - balancing amount that brings the dollar amount of the total liabilities and stockholders’ equity of a foreign subsidiary into agreement with the dollar amount of its total assets.

  42. International Accounting Standards International Accounting Standards Committee (IASC) - primary organization working to achieve worldwide harmony of accounting standards is the

  43. Learning Objective 6 Report investing transactions on the statement of cash flows.

  44. Using the Statement of Cash Flows General Electric Statement of Cash Flows Year Ended December 31, 2001 (In Millions) Cash flows from investingactivities: Addition to property and equipment $(15) Disposition of PP&E 7 Loans to others (14) Payments for other companies (12) All other investing activities (6) Cash used for investing activities $(40) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  45. End of Chapter 10

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