This document discusses different methods for accounting for long-term investments. It describes accounting for available-for-sale investments using fair value, equity method investments using proportionate share of investee income and dividends, and held-to-maturity bond investments using amortized cost. It also covers consolidated financial statements which combine the financial statements of a parent company and its subsidiaries.

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3. Long-Term Investments and
International Operations
Chapter 10
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4. Key Terms
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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
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6. Accounting Methods for Long-Term
Investments
Percentage Ownership GAAP Accounting
by the Investor Method
Less than 20% ?
20 – 50% ?
Greater than 50% ?
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7. Account for available-for-sale investments
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8. Available-for-Sale Investments
• Reported at fair market value
• Adjusted at balance sheet date
• Earn dividend revenue
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9. Adjusting Investment to Market
JOURNAL
Date 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
JOURNAL
Date 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
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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
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11. Unrealized Gains and Losses
• Reported in two places on the financial
statements
▫ Other comprehensive income
▫ Accumulated other comprehensive income
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12. Selling an Available-for-Sale
Investment
• Results in a realized gain or loss
JOURNAL
Date Accounts and explanation Debit Credit
Cash
Loss on sale of investment If cash > cost, “Gain”
would be credited
Long-term investment
Sold investment
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13. Exercise 10-13A
JOURNAL
Date 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
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14. Exercise 10-13A
JOURNAL
Date Accounts and explanation Debit Credit
(d) Cash ($22 x 470)
Loss on sale of investment
Long-term investment
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15. Use the equity method for investments
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16. Accounting for Equity Method
Investments
• 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
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17. Recording Investee Income and
Dividends
JOURNAL
Date 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
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18. Summary of the Equity Method
Equity-Method Investment
Original cost Share of losses
Share of income Share of dividends
Balance
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19. Understand consolidated financial statements
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20. Consolidated Subsidiaries
• Investor controls investee
• Investor is called the parent company
• Investee is called the subsidiary
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21. Many investors (the stockholders)
own
The parent corporation
who
owns
The subsidiary
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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
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23. Goodwill and Noncontrolling
Interest
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
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24. Account for long-term investments in bonds
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25. Held-to-Maturity Investments
• Recorded at cost
• Receive face value at maturity
• Accounted for using the amortized cost method
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26. Accounting for Held-to-Maturity
Investments
JOURNAL
Date Accounts and explanation Debit Credit
4-1 Long-term investment in bonds 9,520
Cash 9,520
Purchased bond investments
10-1 Cash $10,000 x 6% x 1/2 300
Interest revenue 300
Received semi-annual interest
10-1 Long-term investment in bonds
Interest revenue [($10,000 – 9,520)/48x]x 6 60
To amortize bond investment 60
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27. Amortization of Held-to-Maturity
Investment
Increases Long-
Term Investment
account as it
Records interest
reaches maturity
revenue earned
from carrying
amount increase
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28. Summary of Accounting for
Investments
Accounting
Type 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
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29. Account for international operations
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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
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31. Foreign Currencies & Exchange
Rates
• 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
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32. Factors Affecting Exchange Rates
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33. Recording Foreign Currency
Transactions
• 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
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34. Short Exercise 10-9
JOURNAL
Date Accounts and explanation Debit Credit
9-12 Accounts receivable (500,000 x .36)
Sales
10-18 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
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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
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36. Consolidation of Foreign
Subsidiaries
• 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
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37. Report investing transactions on the statement
of cash flows
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38. Investments on the Cash Flow
Statement
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
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