Chapter 10 – Long-term Investments & International Operations

1. Stock investment terminology

a. investor – entity that owns stock
b. investee – corporation that issued stock

2. Reporting stock investments on the balance sheet

a. short term stock investments
i. also called marketable securities and often classified as trading securities
ii. must be liquid
iii. intended to be converted to cash within one year
b. long term stock investments – expected to be held longer than one year

3. Accounting methods for long-term investments

Percent owned by investor Accounting method

Up to 20% Available-for-sale
20 – 50% Equity method
More than 50% Consolidation

4. Available for sale investments

a. Can be classified as current or long-term
b. Initially recorded at cost
c. Cash dividends received are recorded as revenue
d. Reported at market value on the balance sheet
5. Carrying amount of investment
Original cost of investment
+ Debit balance in Allowance to Adjust Investments to Market if fair value > cost
OR
- Credit balance in Allowance to Adjust Investments to Market if fair value < cost

6. Unrealized gain or loss

a. reported in two places on financial statements
i. Income statement
ii. Balance sheet
b. Unrealized gains or losses on available-for-sale investments do not impact net income

7. Selling available-for-sale investments

E10-13A, p. 634

a. Long-term investment
Cash
To purchase investment

b. Cash
Dividend Revenue
To receive dividends

c. Allowance to adjust investment to market

Unrealized gain on investment
To adjust to market

d. Cash
Loss on sale of investments
Long-term investment
To sell investment
8. Equity method
a. Investor owns 20 – 50% of investee’s voting stock
b. Investor has significant influence over investee
c. Investment recorded at cost
d. Investment increased by investee earnings
e. Investment decreased by investee dividends

E10-15A, p. 634

a. Long-term investment
Cash
To purchase investment

b. Long-term investments
Equity method investment revenue
To receive dividends

c. Cash
Long-term investment
To sell investment

9. Consolidated subsidiaries
a. investor owns more than 50% of voting stock of investee
b. investor controls investee
c. investor is called the parent company
d. investee is called a subsidiary
e. financial statements of a parent and its subs are combined – consolidated

10. Consolidated worksheet

a. tools to combine parent and sub financial statements at year end
b. parent and sub accounts are placed side by side
c. worksheet entries are made to eliminate reciprocal accounts
i. parent’s investment and sub’s equity
ii. receivables and payables between parent and sub
11. Goodwill and minority interest
a. Goodwill
i. recorded in consolidation process as an intangible asset
ii. occurs when parent purchases sub for more than fair value of its net assets
b. Minority interest
i. recorded in consolidation process and can be included in liabilities
ii. occurs when parent owns less than 100% of sub
12. Long term bond investment
a. Major investors
b. Called held-to-maturity investments
c. Reported at amortized cost – bonds carrying amount is amortized to face value by maturity

13. Amortization of held-to-maturity investment – Amortization entry:

a. Increases long-term investment account as it reaches maturity
b. Records interest revenue earned from carrying amount increase

S10-7, p. 632

S10-8, p. 632

a. Long-term investment in bonds

Cash
To purchase bond investment

b. Cash
Interest Revenue
To receive semiannual interest

c. Interest revenue
Long-term investment in bonds
To amortize bond investment

d. Cash
Long-term investment in bonds
To receive face value at maturity
E10-19A, pp. 635636

a. Long-term investment in bonds

Cash
To purchase bond investment

b. Interest receivable
Interest revenue
To accrue interest earned Dec 31

c. Long-term investment in bonds

Interest revenue
To amortize discount on Dec 31

14. Accounting for international operations

a. global integration
b. foreign currency
- exchange rate
- translation – converting cost of an item stated in one currency into another
- import/export ratio
- strong currency
- weak currency

15. Factors affecting exchange rates

a. ratio of imports to exports
i. if exports exceed imports, increase in demand drives up price of currency
ii. if imports exceed exports, supply increases and currency price falls
b. rate of return on capital markets
i. if high, increases international investments and demand for currency
ii. currencies are described as strong or weak

16. Accounting for foreign currency transactions

a. export
b. import
c. changes in exchange rates between sale or purchase and payment will result in a foreign
currency gain or loss
17. Foreign currency gains and losses
a. gains and losses are netted and reported in “Other” category on income stmt
b. losses can be avoided by
i. only accepting or paying in dollars
ii. hedging
iii. purchasing futures contracts

18. Consolidation of foreign subsidiaries – two challenges

a. foreign accounting practices differ from U.S. GAAP
b. subsidiary statements may be in foreign currency and need translation
results in a foreign currency translation adjustment
19. Translation adjustment
a. Assets and liabilities are translated into dollars at current exchange rate
b. Stockholders’ equity is translated into dollars at older, historical exchange rates
c. Differing rates creates out-of-balance condition
d. Foreign currency translation adjustment is the balancing amount

20. International standards

a. most accounting methods are consistent throughout the world
b. Differences do exist for:
i. Inventory – LIFO method of inventory not used in UK
ii. Goodwill – In Germany & Japan, account is amortized (not in the US)
iii. R & D costs – capitalized in Japan; expensed in US

S10-9, p. 633

a. Accounts receivable
Sales revenue
Sales on account

b. Cash
Foreign-currency transaction loss
Accounts receivable
Collection on account

c. Cash
Accounts receivable
Foreign-currency transaction gain
Collection on account

S10-10, p. 633

a. Cash
Accounts receivable
Foreign-currency transaction gain
Collection on account

b. Accounts payable
Foreign-currency transaction loss
Accounts receivable
Payment on account

Currency Strengthened Weakened

Dollar X
Peso X

Dollar X
Swiss franc X
21. Investing activities on the cash flow statement

a. purchases and sales of long-term investments are investing activities

b. investing inflow – proceeds from sales of long-term investments (available-for-sale, equity
method, and held-to-maturity)
c. investing outflow – purchases of all categories of long-term investments