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© The McGraw-Hill Companies, Inc., 2002 lide 6-1 McGraw-Hill/Irwin 16 Long-Term Investments and International Transactions
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© The McGraw-Hill Companies, Inc., 2002
Slide 16-1
McGraw-Hill/Irwin
16Long-Term Investments and International Transactions
© The McGraw-Hill Companies, Inc., 2002
Slide 16-2
McGraw-Hill/Irwin
Classes of Long-Term Investments
Held-To-Maturity
Held-To-Maturity
Cost Method
Cost Method
Available-For-Sale
Available-For-Sale
Market Value
Method
Market Value
Method
Significant Influence
Significant Influence
Equity Method
Equity Method
Controlling Influence
Controlling Influence
ConsolidationConsolidation
Accounting Method
Exh.16.3
© The McGraw-Hill Companies, Inc., 2002
Slide 16-3
McGraw-Hill/Irwin
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
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.
Debt securities that a company intends to hold until maturity.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-4
McGraw-Hill/Irwin
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.
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.
Debt and equity securities that a company intends to sell in the future, before maturity.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-5
McGraw-Hill/Irwin
Unrealized holding gains
and losses from
available-for-sale securities are reported in the equity
section of the balance sheet.
Available-for-Sale Securities
© The McGraw-Hill Companies, Inc., 2002
Slide 16-6
McGraw-Hill/Irwin
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Prepare the journal entries for Foot, Inc. to adjust the securities to fair value at Dec. 31, 2001.
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.
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 McGraw-Hill Companies, Inc., 2002
Slide 16-7
McGraw-Hill/Irwin
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31 Investment in General Boots 4,500
Unrealized Holding Gains 4,500
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.
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.
The Unrealized Holding Gain is reported in the equity section of the Balance Sheet.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-8
McGraw-Hill/Irwin
{
In some cases, influence or control may exist with less than 20% ownership.
In some cases, influence or control may exist with less than 20% ownership.
Investor Ownership of Investee Shares
Outstanding
0% 20% 50% 100%
Cost or Market Value
MethodEquity Method
Consolidated Financial Statements
The Significance of the Size of the Investment
© The McGraw-Hill Companies, Inc., 2002
Slide 16-9
McGraw-Hill/Irwin
{Significant influence is generally
assumed with 20% to 50% ownership.
Significant influence is generally assumed with 20% to 50%
ownership.
Investor Ownership of Investee Shares
Outstanding
0% 20% 50% 100%
Equity Method
Consolidated Financial Statements
The Significance of the Size of the Investment
Cost or Market Value
Method
© The McGraw-Hill Companies, Inc., 2002
Slide 16-10
McGraw-Hill/Irwin
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.
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
© The McGraw-Hill Companies, Inc., 2002
Slide 16-11
McGraw-Hill/Irwin
The investment account is reported on the balance sheet as a single amount.
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”
The investment account is reported on the balance sheet as a single amount.
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
© The McGraw-Hill Companies, Inc., 2002
Slide 16-12
McGraw-Hill/Irwin
Let’s do an equity method
example.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-13
McGraw-Hill/Irwin
Equity Method Example
On January 1, 2001, Big Corp. buys 20% of Small Inc. for $2,000,000 cash.
Record Big’s journal entry.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-14
McGraw-Hill/Irwin
Equity Method Example
On December 31, 2001, Small reports net income for the year of $300,000.
Record Big’s journal entry.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-15
McGraw-Hill/Irwin
Equity Method Example
60,000
Big owns 20% of Small and gets credit for 20% of Small’s income.
20% × $300,000 = $60,000
60,000
© The McGraw-Hill Companies, Inc., 2002
Slide 16-16
McGraw-Hill/Irwin
Equity Method Example
On December 31, 2001, Big received a $25,000 dividend check from Small.
Record Big’s journal entry.
25,00060,000 25,000
© The McGraw-Hill Companies, Inc., 2002
Slide 16-17
McGraw-Hill/Irwin
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.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-18
McGraw-Hill/Irwin
Investments in International Operations
(1) Accounting for sales and purchases
listed in a foreign currency.
(1) Accounting for sales and purchases
listed in a foreign currency.
(2) Preparing consolidated financial
statements with international subsidiaries.
(2) Preparing consolidated financial
statements with international subsidiaries.
Two major accounting challenges arise when companies have international operations:
Two major accounting challenges arise when companies have international operations:
© The McGraw-Hill Companies, Inc., 2002
Slide 16-19
McGraw-Hill/Irwin
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.
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
© The McGraw-Hill Companies, Inc., 2002
Slide 16-20
McGraw-Hill/Irwin
As the relative strength of a country’s economy
changes . . .
. . . the exchange rate of the local currency relative to other
currencies also fluctuates.¥ = $?
Foreign Exchange Markets
© The McGraw-Hill Companies, Inc., 2002
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McGraw-Hill/Irwin
?
When a transaction When a transaction occurs on one date occurs on one date
(for example a (for example a credit sale) . . .credit sale) . . .
. . . but the cash flow is at a . . . but the cash flow is at a later date . . .later date . . .
. . . fluctuating exchange . . . fluctuating exchange rates can result in rates can result in
exchange rate gains exchange rate gains or losses.or losses.
Foreign Exchange Markets
© The McGraw-Hill Companies, Inc., 2002
Slide 16-22
McGraw-Hill/Irwin
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.
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
© The McGraw-Hill Companies, Inc., 2002
Slide 16-23
McGraw-Hill/Irwin
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.
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
© The McGraw-Hill Companies, Inc., 2002
Slide 16-24
McGraw-Hill/Irwin
Record the adjusting entry. Any resulting gain or loss should be reported on the
income statement.
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.
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.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-25
McGraw-Hill/Irwin
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.
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.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-26
McGraw-Hill/Irwin
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.
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.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-27
McGraw-Hill/Irwin
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.
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.
© The McGraw-Hill Companies, Inc., 2002
Slide 16-28
McGraw-Hill/Irwin
GAAP excludes some unrealized items from income, such as the change in market value of available-for-sale debt and equity investments.
GAAP excludes some unrealized items from income, such as the change in market value of available-for-sale debt and equity investments.
Comprehensive Income
© The McGraw-Hill Companies, Inc., 2002
Slide 16-29
McGraw-Hill/Irwin
Comprehensive Income
© The McGraw-Hill Companies, Inc., 2002
Slide 16-30
McGraw-Hill/Irwin
Let’s close this chapter!
End of Chapter 16
