Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall.   1
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   2
Long-Term Investments andInternational OperationsChapter 10             Copyright © 2010 Pearson Education Inc. Publishing...
Key Terms        Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall.   4
Investments on the Balance Sheet   Current Assets:    Cash                                                             $X ...
Accounting Methods for Long-TermInvestmentsPercentage Ownership                                     GAAP Accounting   by t...
Account for available-for-sale investments          Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall.   7
Available-for-Sale Investments• Reported at fair market value• Adjusted at balance sheet date• Earn dividend revenue      ...
Adjusting Investment to Market                                        JOURNALDate Accounts and explanation                ...
Carrying Amount of Investment        Original cost of investment         Debit balance in Allowance to                    ...
Unrealized Gains and Losses• Reported in two places on the financial  statements ▫ Other comprehensive income ▫ Accumulate...
Selling an Available-for-Sale Investment  • Results in a realized gain or loss                                        JOUR...
Exercise 10-13A                                        JOURNALDate Accounts and explanation                               ...
Exercise 10-13A                                          JOURNALDate Accounts and explanation                             ...
Use the equity method for investments          Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall.   15
Accounting for Equity MethodInvestments• Method used when investors owns between 20 –  50% of investee’s voting stock• Inv...
Recording Investee Income andDividends                                          JOURNALDate Accounts and explanation      ...
Summary of the Equity Method       Equity-Method Investment       Original cost                        Share of losses    ...
Understand consolidated financial statements          Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall....
Consolidated Subsidiaries• Investor controls investee• Investor is called the parent company• Investee is called the subsi...
Many investors (the stockholders)                              own         The parent corporation                         ...
Consolidation Accounting• Method of combining financial statements of all  companies controlled by same stockholders• Resu...
Goodwill and NoncontrollingInterest         Goodwill                                    Noncontrolling interest• Arises wh...
Account for long-term investments in bonds          Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall.  ...
Held-to-Maturity Investments• Recorded at cost• Receive face value at maturity• Accounted for using the amortized cost met...
Accounting for Held-to-Maturity Investments                                         JOURNALDate Accounts and explanation  ...
Amortization of Held-to-MaturityInvestment   Increases Long-  Term Investment     account as it                           ...
Summary of Accounting forInvestments                                                                                      ...
Account for international operations           Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall.   29
International Accounting:Transition• International Accounting Standards Board  (IASB) developing uniform worldwide standar...
Foreign Currencies & ExchangeRates• International business often results in  companies receiving or paying in a foreign  c...
Factors Affecting Exchange Rates         Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall.   32
Recording Foreign CurrencyTransactions• Items that are sold or purchased on account in a  foreign currency expose company ...
Short Exercise 10-9                                         JOURNALDate    Accounts and explanation                       ...
Foreign Currency Gains and Losses• Gains and losses are netted and reported in the  “Other” category on the Income Stateme...
Consolidation of ForeignSubsidiaries• Two challenges: ▫ Foreign subsidiary uses different accounting   principles ▫ Subsid...
Report investing transactions on the statementof cash flows          Copyright © 2010 Pearson Education Inc. Publishing as...
Investments on the Cash FlowStatement Transaction                                                Reported in the          ...
Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall.   39
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Hhtfa8e ch10 stud devry Accounting 212 FINANCIAL ACCOUNTING

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  • Hhtfa8e ch10 stud devry Accounting 212 FINANCIAL ACCOUNTING

    1. 1. Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 1
    2. 2. Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 2
    3. 3. Long-Term Investments andInternational OperationsChapter 10 Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 3
    4. 4. Key Terms Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 4
    5. 5. Investments on the Balance Sheet Current Assets: Cash $X Short-term investments X Accounts receivable X Inventories X Prepaid expenses X Total current assets $X Long-term investments X Property, plant and equipment X Intangible assets X Other assets X Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 5
    6. 6. Accounting Methods for Long-TermInvestmentsPercentage Ownership GAAP Accounting by the Investor MethodLess than 20% ?20 – 50% ?Greater than 50% ? Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 6
    7. 7. Account for available-for-sale investments Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 7
    8. 8. Available-for-Sale Investments• Reported at fair market value• Adjusted at balance sheet date• Earn dividend revenue Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 8
    9. 9. Adjusting Investment to Market JOURNALDate Accounts and explanation Debit Credit Allowance to adjust investment to market If market value is Unrealized gain on investment greater than carrying value Adjusted investment to market JOURNALDate Accounts and explanation Debit Credit Unrealized loss on investment If market value is Allowance to adjust investment to market less than carrying value Adjusted investment to market Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 9
    10. 10. Carrying Amount of Investment Original cost of investment Debit balance in Allowance to If fair Adjust Investments to Market value > cost OR If fair Credit balance in Allowance to value < Adjust Investments to Market cost Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 10
    11. 11. Unrealized Gains and Losses• Reported in two places on the financial statements ▫ Other comprehensive income ▫ Accumulated other comprehensive income Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 11
    12. 12. Selling an Available-for-Sale Investment • Results in a realized gain or loss JOURNALDate Accounts and explanation Debit Credit Cash Loss on sale of investment If cash > cost, “Gain” would be credited Long-term investment Sold investment Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 12
    13. 13. Exercise 10-13A JOURNALDate Accounts and explanation Debit Credit(a) Long-term investment Cash (470 x $13) Purchased investment(b) Cash Dividend revenue (470 X $1.70) Allowance to adjust investment to market Unrealized gain on investment Adjusted investment to market Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 13
    14. 14. Exercise 10-13A JOURNALDate Accounts and explanation Debit Credit(d) Cash ($22 x 470) Loss on sale of investment Long-term investment Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 14
    15. 15. Use the equity method for investments Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 15
    16. 16. Accounting for Equity MethodInvestments• Method used when investors owns between 20 – 50% of investee’s voting stock• Investment initially recorded at cost• Investor records its share of investee net income and dividends Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 16
    17. 17. Recording Investee Income andDividends JOURNALDate Accounts and explanation Debit Credit Long-term investment Equity-method investment revenue To record investment revenue Cash Long-term investment Received cash on equity method investment Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 17
    18. 18. Summary of the Equity Method Equity-Method Investment Original cost Share of losses Share of income Share of dividends Balance Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 18
    19. 19. Understand consolidated financial statements Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 19
    20. 20. Consolidated Subsidiaries• Investor controls investee• Investor is called the parent company• Investee is called the subsidiary Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 20
    21. 21. Many investors (the stockholders) own The parent corporation who owns The subsidiary Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 21
    22. 22. Consolidation Accounting• Method of combining financial statements of all companies controlled by same stockholders• Results is a single set of statements as if parent and its subsidiaries are one company• Gives better perspective on total operations than individual statements• Worksheet is used to combine parent and sub accounts Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 22
    23. 23. Goodwill and NoncontrollingInterest Goodwill Noncontrolling interest• Arises when parent pays • Arises when parent more to acquire a company owns less than subsidiary than the fair 100% of subsidiary stock value of its net assets• Recorded as an intangible • Recorded as a separate asset account in the stockholders’ equity section Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 23
    24. 24. Account for long-term investments in bonds Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 24
    25. 25. Held-to-Maturity Investments• Recorded at cost• Receive face value at maturity• Accounted for using the amortized cost method Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 25
    26. 26. Accounting for Held-to-Maturity Investments JOURNALDate Accounts and explanation Debit Credit4-1 Long-term investment in bonds 9,520 Cash 9,520 Purchased bond investments10-1 Cash $10,000 x 6% x 1/2 300 Interest revenue 300 Received semi-annual interest10-1 Long-term investment in bonds Interest revenue [($10,000 – 9,520)/48x]x 6 60 To amortize bond investment 60 Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 26
    27. 27. Amortization of Held-to-MaturityInvestment Increases Long- Term Investment account as it Records interest reaches maturity revenue earned from carrying amount increase Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 27
    28. 28. Summary of Accounting forInvestments AccountingType of Long-Term Investment Method ?Investor owns less than 20% of investee stock ?Investor owns between 20 – 50% of investee stock ?Investor owns more than 50% of investee stock ?Investor owns a long-term investment in bonds Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 28
    29. 29. Account for international operations Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 29
    30. 30. International Accounting:Transition• International Accounting Standards Board (IASB) developing uniform worldwide standards• U.S. standards gradually harmonizing with international standards (IFRS)• Securities and Exchange Commission (SEC) has provided a “road map” for U.S companies to transition to IFRS Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 30
    31. 31. Foreign Currencies & ExchangeRates• International business often results in companies receiving or paying in a foreign currency• Measure of one nation’s currency against another: ▫ Foreign currency exchange rate• Conversion of an item in one currency to another: ▫ Translation Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 31
    32. 32. Factors Affecting Exchange Rates Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 32
    33. 33. Recording Foreign CurrencyTransactions• Items that are sold or purchased on account in a foreign currency expose company to foreign- currency exchange risk• Changes in exchange rates can cause variations in the amount of foreign currency receivable or payable Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 33
    34. 34. Short Exercise 10-9 JOURNALDate Accounts and explanation Debit Credit9-12 Accounts receivable (500,000 x .36) Sales10-18 Cash (250,000 x .33) Foreign currency transaction loss Accounts receivable (1/2 x 180,000)10-1 Cash (250,000 x .39) Accounts receivable (1/2 x 180,000) Foreign currency transaction gain Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 34
    35. 35. Foreign Currency Gains and Losses• Gains and losses are netted and reported in the “Other” category on the Income Statement• Losses can be avoided by: ▫ Only accepting or paying in dollars ▫ Hedging ▫ Purchasing futures contracts Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 35
    36. 36. Consolidation of ForeignSubsidiaries• Two challenges: ▫ Foreign subsidiary uses different accounting principles ▫ Subsidiary’s statements expressed in foreign currency• Foreign currency translation adjustment needed ▫ Reported as other comprehensive income Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 36
    37. 37. Report investing transactions on the statementof cash flows Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 37
    38. 38. Investments on the Cash FlowStatement Transaction Reported in the Investing Section as an: Sale of available-for-sale securities ? Purchase of available-for-sale ? securities Purchase of long-term bond ? investments Purchases of equity method ? investments Proceeds from selling subsidiary ? companies Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 38
    39. 39. Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 39

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