Investments and International Operations

Investments and International Operations
Chapter 15 Chapter 15: Investments and International Operations

Motivation for Investments
Basics of Investments C1 Motivation for Investments Companies transfer excess cash into investments to produce higher income. Some companies are set up to produce income from investments. Companies make investments for strategic reasons. Companies make investments for at least three reasons. First, companies transfer excess cash into investments to produce higher income. Second, some entities, such as mutual funds and pension funds, are set up to produce income from investments. Third, companies make investments for strategic reasons. Examples are investments in competitors, suppliers, and even customers.

Investments of Selected Companies
Short-Term (S-T) and Long-Term (L-T) Investments as a Percent of Total Assets This chart shows the relative proportion of short-term and long-term investments for four different companies. Notice the difference between the investments as a percent of total assets between Microsoft and Coca-Cola. Also notice the different emphasis on short-term vs. long-term investments for Microsoft and Coca-Cola.

Short-Term Investments
C1 Short-term investments are securities that: Management intends to convert to cash within one year or the operating cycle, whichever is longer. Are readily convertible to cash. Short-term investments do not include cash equivalents. Cash equivalents are investments that are both readily converted to known amounts of cash and mature within three months. Cash equivalents are investments that are both readily converted to known amounts of cash and mature within three months. Many investments, however, mature between 3 and 12 months. These investments are short-term investments, also called temporary investments and marketable securities. Specifically, short-term investments are securities that (1) management intends to convert to cash within one year or the operating cycle, whichever is longer, and (2) are readily convertible to cash. Short-term investments are reported under current assets and serve a purpose similar to cash equivalents.

Long-Term Investments
C1 Long-term investments: are not readily convertible to cash. are not intended to be converted to cash in the short term. are reported in the noncurrent section of the balance sheet, often in its own category. Long-term investments in securities are defined as those securities that are not readily convertible to cash or are not intended to be converted into cash in the short term. Long-term investments can also include funds earmarked for a special purpose, such as bond sinking funds and investments in land or other assets not used in the company’s operations. Long-term investments are reported in the noncurrent section of the balance sheet, often in its own separate line titled Long-Term Investments.

Debt Securities versus Equity Securities
Reflect a creditor relationship Examples: Investments in notes, bonds, and CDs May be issued by governments, companies, or individuals Investments in securities can include both debt and equity securities. Debt securities reflect a creditor relationship such as investments in notes, bonds, and certificates of deposit; they are issued by governments, companies, and individuals. Equity securities reflect an owner relationship such as shares of stock issued by companies. Equity Securities Reflect an owner relationship Examples: Investments in shares of stock Issued by companies

Classification and Reporting
Accounting for Investments depends on three factors: Security type: debt or equity Intent to hold the security short or long term Percentage ownership in another company’s equity securities Accounting for investments in securities depends on three factors: (1) security type, either debt or equity, (2) the company’s intent to hold the security either short-term or long-term, and (3) the company’s (investor’s) percent ownership in the other company’s (investee’s) equity securities. Using these three factors, we can identify five classes of securities. Each class of securities has standard reporting requirements. Trading securities include both debt and equity investments that are actively traded and are reported in the balance sheet at fair value. Held-to-maturity investments represent investment in debt instruments of another company. In the balance sheet, held-to-maturity investments are shown at amortized cost. Available-for-sale investments are those investments that cannot be classified as held-to-maturity or trading. Like trading securities, available-for-sale securities are shown in the balance sheet at fair value rather than historical cost. A company that owns between 20 and 50 percent of the voting common stock of another company is assumed to have significant influence over the operating policies of that company. When a company has significant influence over another company, the equity method of accounting for the investment is used. When a company owns more than 50 percent of the voting common stock of another company, it has a controlling influence over that company. In this case, consolidation is the proper accounting treatment.

Debt Securities: Accounting Basics
P2 Debt securities are recorded at cost when purchased. Interest revenue for investments in debt securities is recorded when earned. On September 1, 2012, Music City paid $29,500 plus a $500 brokerage fee to buy Dell’s 7%, 2-year bonds payable with a $30,000 par value. The bonds pay interest semiannually on August 31st and February 28th. Music City plans to hold the bonds until they mature (HTM securities 持有至到期证券). Debt securities are recorded at cost when purchased. Interest revenue for investments in debt securities is recorded when earned. Debt securities may be classified as either trading securities, held-to-maturity securities, or available for sale securities. All held-to-maturity securities involve investment in debt instruments of another company. On September 1, 2012, Music City paid $29,500 plus a $500 brokerage fee to buy Dell’s 7%, 2-year bonds payable with a $30,000 par value. The bonds pay interest semiannually on August 31st and February 28th. Music City plans to hold the bonds until they mature, Held to Maturity or HTM securities. The entry on the date of purchase is to debit Long-Term Investments–HTM (Dell) for $30,000, the cost of the bonds, $29,500, plus the $500 brokerage fees, and credit Cash for $30,000.

P2 Interest earned but not received must be accrued on December 31, 2012. $30,000 par value × 7% × 4/12 = $700 interest earned. On December 31, 2012, interest that has been earned but not yet received must be accrued. To calculate the amount of interest, use the par value of $30,000 times the 7% interest rate times 4/12, because 4 months have passed. There is $700 interest that needs to be accrued. The adjusting entry to accrue the interest on December 31, 2012 is to debit Interest Receivable and credit Interest Revenue for $700. In the Income Statement for the year ended December 31, 2012, the company will report Interest Revenue of $700 from its investment. In the Balance Sheet, the investment will be reported at its amortized cost of $30,000.

P2 On February 28, 2013, Music City will record the receipt of the semiannual interest. The company’s accountants will make the following entry. $30,000 par value × 7% × 6/12 = $1,050 (Interest received). $30,000 par value × 7% × 4/12 = $700 (Interest earned in 2012). $30,000 par value × 7% × 2/12 = $350 (Interest earned in 2013). On February 28, 2013, Music City will record the receipt of the semiannual interest. The semiannual interest receipt is $1,050, calculated as $30,000 par value times 7% contract rate times one-half of a year. The interest that was accrued last year on December 31 was $700 and the interest earned this year since December 31 is $350. Music City will debit Cash for $1,050, the semiannual interest, credit Interest Receivable for $700, to zero out the accrual from December 31, and credit Interest Revenue for $350, two-months of interest earned this year.

P2 When the bonds mature, Music City will receive the amount of the par value in cash. The bonds have now been retired. When the bonds mature, Music City will receive the amount of the par value in cash. Music City will prepare the following entry when the cash is received: debit Cash for $30,000, the par value of the bonds, and credit Long-Term Investments–HTM (Dell) for the same amount. The bonds have now been retired or extinguished.

Equity Securities: Accounting Basics
P1 Equity securities are recorded at cost when acquired, including commissions or brokerage fees paid. Any cash dividends股利 received are credited to Dividend Revenue and reported in the income statement. When the securities are sold, sales proceeds are compared with cost, and any gain or loss is recorded. Equity securities are recorded at cost when acquired, including commissions or brokerage fees paid. Any cash dividends received are credited to Dividend Revenue and reported in the income statement. When the securities are sold, sales proceeds are compared with cost, and any gain or loss is recorded.

P3 On October 10, 2012, Music City purchases 1,000 shares of Intex common stock for $86,000 in the open market. The securities are classified by management of Music City as “available-for-sale” (AFS) securities. On October 10, 2012, Music City purchases 1,000 shares of Intex common stock for $86,000 in the open market. The securities are classified by management of Music City as “available-for-sale” (AFS). Music City will debit Long-Term Investments–AFS (Intex) for $86,000 and credit Cash for the same amount. Each share of common stock has a cost basis of $86 ($86,000 divided by 1,000 shares).

P3 On November 2, Music City receives a $1,720 quarterly dividend on its investment in Intex. On November 2, Music City receives a $1,720 quarterly dividend on its investment in Intex. Music City will debit Cash for $1,720, and credit Dividend Revenue for the same amount. The dividend per share was $1.72 ($1,720 divided by 1,000 common shares owned).

P3 On December 20, Music City sells 500 shares of Intex in the open market for $45,000. Calculate original cost per share: $86,000 ÷ 1,000 shares = $86.00 per share cost. Calculate cost of shares sold: 500 shares × $86 = $43,000. On December 20, Music City sells 500 shares of Intex in the open market for $45,000. The original cost per share of Music City’s Intex stock is $86. The company sold 500 shares, so the cost of the shares sold is equal to $43,000 ($86 times 500 shares). To record the sale, Music City will debit Cash for $45,000, the proceeds from the sale, credit Long-Term Investments–AFS (Intex) for $43,000, the cost basis of the shares sold, and credit Gain on Sale of Long-Term Investments for the difference of $2,000. We have a gain because the proceeds from the sale exceed the cost of the shares sold.

Trading Securities交易性证券
P1 Debt and equity securities Actively managed and traded for profit Frequent purchases and sales expected Reported at fair value Unrealized gain or loss reported in the income statement Trading securities are debt and equity securities that the company intends to actively manage and trade for profit. Frequent purchases and sales are expected. The entire portfolio of trading securities is reported at its fair value; this requires a “fair value adjustment” from the cost of the portfolio of securities. Any unrealized gain or loss from a change in the fair value of the portfolio of trading securities is reported in the income statement.

Trading Securities P1 TechCom’s portfolio of trading securities had a total cost of $11,500, and a fair value of $13,000, on December 31, 2012, the first year the securities were held. The $1,500 difference between the cost of $11,500 and the fair value of $13,000 is an unrealized gain. TechCom’s portfolio of trading securities had a total cost of $11,500, and a fair value of $13,000, on December 31, 2012, the first year the securities were held. The $1,500 difference between the cost of $11,500 and the fair value of $13,000 is an unrealized gain. The adjusting journal entry on December 31, 2010 is to debit Fair Value Adjustment–Trading for $1,500, and credit Unrealized Gain–Income for the same amount. The Fair Value Adjustment–Trading account has a debit balance and is an adjunct asset account that will increase the Short-Term Investments–Trading account in the balance sheet.

Trading Securities P1 Assume TechCom sells trading securities that had cost $1,000 for $1,200 cash, on January 9, 2013. Assume TechCom sells trading securities that had cost $1,000 for $1,200 cash, on January 9, TechCom will debit Cash for $1,200, the proceeds from the sale, credit Short-Term Investments–Trading for $1,000, cost, and credit Gain on Sale of Short-Term Investments for the difference of $200. The gain is reported in the Other Revenues and Gains section of the income statement. Likewise, a loss would be reported in the Other Expenses and Losses section. The gain is reported in the Other Revenues and Gains section of the Income Statement. Likewise, a loss would be reported in Other Expenses and Losses section.

Held-to-Maturity Securities 持有至到期证券
P2 Debt securities Intent and ability to hold until maturity Reported as: Current assets if their maturity dates are within one year or the operating cycle, whichever is longer. Noncurrent investments if their maturity dates are longer than one year or the normal operating cycle, whichever is longer. Held-to-maturity (HTM) securities are debt securities a company intends and is able to hold until maturity. They are reported in the current assets if their maturity dates are within one year or the operating cycle, whichever is longer. The securities are classified as noncurrent investments if their maturity dates are longer than one year or the normal operating cycle, whichever is longer. The portfolio of HTM securities is reported at amortized cost. There is no fair value adjustment to the HTM portfolio. The portfolio of HTM securities is reported at amortized cost. There is no fair value adjustment to the portfolio.

Available-for-Sale Securities 可供销售的证券
P3 Debt and equity securities not classified as trading or held-to-maturity Not actively managed Report as: Short-term investments if the intent is to sell the securities within one year or the normal operating cycle, whichever is longer. Long-term investments if securities do not meet short-term investment criteria. Valued at fair value Unrealized gains or loss reported in the equity section of the balance sheet as part of comprehensive income Available-for-sale (AFS) securities are debt and equity securities not classified as trading or held-to-maturity. They are not actively managed like trading securities. If the intent is to sell the securities within one year or the normal operating cycle, whichever is longer, the securities are classified as short-term investments. Otherwise, they are classified as long-term investments. Like trading securities, the AFS securities portfolio is valued at fair value. This is done with a fair value adjustment to the total portfolio cost. Any unrealized gain or loss is reported in the equity section of the balance sheet as part of comprehensive income.

Available-for-Sale Securities
P3 Music City had no prior investments. In the current period, it acquired two available-for-sale securities. At December 31, 2012, the following information is provided: Music City had no prior investments. In the current period, it acquired two available-for-sale securities. At December 31, 2012, the following information is provided about the cost and fair value of its two securities, Improv bonds and Intex common stock. For the entire portfolio, there is an unrealized gain of $1,550. In the adjusting entry, Music City will debit Market Adjustment–Available-for-Sale (LT) for $1,550, and credit Unrealized Gain–Equity for the same amount. Unlike trading securities, the unrealized gain will be reported in the equity section of the balance sheet.

P3 Music City Partial Balance Sheet December 31, 2012 Assets Long-term investments‒AFS (at cost) $ 73,000 Fair value adjustment–AFS 1,550 Long-term investments‒AFS (at fair value) $ 74,550 Equity Add unrealized gain on AFS securities $ 1,550 The AFS securities of Music City are classified by management as long-term. The market adjustment on AFS securities is an adjunct asset account that increases the long-term investment account. The market adjustment to recognize the unrealized gain on the AFS securities appears in the equity section of the balance sheet.

P3 Let’s extend our example and assume that at December 31, 2013, the portfolio of long-term AFS securities has an $81,000 cost and an $82,000 fair value. Let’s extend our example and assume that at December 31, 2013, the portfolio of long-term AFS securities has an $81,000 cost and an $82,000 fair value. The adjusting entry is not obvious. The difference between cost and fair value for the portfolio is $1,000. However, we need only an adjustment to debit Unrealized Gain–Equity for $550, and a credit to Fair Value Adjustment–Available-for-Sale (LT) for the same amount. When we post the adjusting entry, we achieve the desired results of having an account balance of $1,000. Neither the Unrealized Gain nor the Fair Value Adjustment accounts were closed at the end of the previous year. They are both permanent accounts and not closed. The purpose of the adjustment for AFS securities is to determine the amount needed to get the account balances stated properly.

Fair Value Option for Reporting Financial Assets
Global View Fair Value Option for Reporting Financial Assets Both U.S. GAAP and IFRS permit companies to use fair value in reporting financial assets. This option allows companies to report any financial asset at fair value and recognize value changes in income. This method was previously reserved only for trading securities, but now is an option for available-for-sale and held-to-maturity securities. Both U.S. GAAP and IFRS permit companies to use fair value in reporting financial assets (referred to as the fair value option). This option allows companies to report any financial asset at fair value and recognize value changes in income. This method was previously reserved only for trading securities, but now is an option for available-for-sale and held-to-maturity securities. Standards set a 3-level system to determine fair value: —Level 1: Use quoted market values —Level 2: Use observable values from related assets or liabilities —Level 3: Use unobservable values from estimates or assumptions To date, a fairly small set of companies has chosen to broadly apply the fair value option.

Accounting For Influential Investments
P4 Investor Ownership of Investee Shares Outstanding Cost or Market Value Method成本或市场价值 Equity Method 权益法 Consolidated Financial Statements合并财务报表 So far, we have studied the accounting for securities where the investor lacks significant influence or control over the investee. Generally speaking, this is true for equity investments of less than 20% of a company’s voting stock. 0% 20% 50% 100% In some cases, influence or control may exist with less than 20% ownership.

Accounting For Influential Investments
P4 Investor Ownership of Investee Shares Outstanding Cost or Market Value Method Equity Method Consolidated Financial Statements Now we consider accounting for influential investments, starting with when a company has significant influence, which is generally assumed to be ownership of between 20 and 50 percent of the voting common stock of another company. When the company has significant influence over the operating policies of the investee, the equity method is used. 0% 20% 50% 100% Significant influence显著影响is generally assumed with 20% to 50% ownership.

Investments in Equity Securities with Significant Influence
P4 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. Under the equity method of accounting, the investment is recorded at cost. We will increase the investment account and recognize income when the investee reports earnings. When dividends are received from the company (investee), we will reduce the balance in the investment account (investor).

P4 On January 1, 2012, Micron Co. records the purchase of 3,000 shares (30%) of Star Co. common stock at a total cost of $70,650 cash. On January 1, 2012, Micron Co. records the purchase of 3,000 shares (30%) of Star Co. common stock at a total cost of $70,650 cash. Micron will debit Long-Term Investments–Star for $70,650, and credit Cash for the same amount.

P4 For 2012, Star reports net income of $20,000, and pays total cash dividends of $10,000 on January 9, 2013. $20,000 × 30% = $6,000 On December 31, 2012, Star Co. reported net income for the year of $20,000 and paid a total cash dividend to its shareholders of $10,000 on January 9, Micron will debit, or increase, the Long-Term Investments‒Star, and credit Earnings from Long-Term Investment for $6,000. The $6,000 is 30% of the total income of $20,000. The earnings from long-term investments will appear in the income statement of Micron for To record the dividends, Micron will debit Cash for $3,000, 30% of the total dividends of $10,000, and credit, or reduce, the Long-Term Investment‒Star. Under the equity method, the receipt of dividends is a return of a portion of the investment. $10,000 × 30% = $3,000

P4 After we post the journal entries, the balance in the Long-Term Investments–Star account is $73,650. The investment balance is increased by our share of the earnings of Star, and reduced by our share of the dividends received from Star. The balance in the Long-Term Investments–Star account will appear in the Investments section of the Balance Sheet.

Investments in Securities with Controlling Influence控制性影响
Required when investor’s ownership exceeds 50% of investee. 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. An investor who owns more than 50% of a company’s voting stock has control over the investee. This investor can dominate all other shareholders in electing the corporation’s board of directors and has control over the investee’s management. In some cases, controlling influence can extend to situations of less than 50% ownership. The equity method with consolidation is used to account for long-term investments in equity securities with controlling influence. The investor reports consolidated financial statements when owning such securities. The controlling investor is called the parent, and the investee is called the subsidiary.

Accounting Summary for Investments in Securities
This summary presents the accounting methods used for the various classifications of investments.

Comprehensive Income Reporting Options
Comprehensive Income: all changes in equity during a period except those from owners’ investments and dividends. Examples of items not included in Net Income but which are part of Comprehensive Income include: Unrealized gains and losses on available-for-sale securities Foreign currency adjustments Certain pension adjustments Comprehensive income is defined as all changes in equity during a period except those from owners’ investments and dividends. Specifically, comprehensive income is computed by adding or subtracting other comprehensive income to net income. Other comprehensive income includes unrealized gains and losses on available-for-sale securities, foreign currency adjustments, and certain pension adjustments. Comprehensive income is reported in financial statements in one of two ways (which reflects new FASB guidance as of 2012): 1. On a separate statement of comprehensive income that immediately follows the income statement. 2. On the lower section of the income statement (as a single continuous statement of income and comprehensive income). Comprehensive Income Reporting Options 1. On a separate statement of comprehensive income that immediately follows the income statement. 2. On the lower section of the income statement (as a single continuous statement of income and comprehensive income).

Global View Accounting for Noninfluential Securities
The accounting for noninfluential securities is broadly similar between U.S. GAAP and IFRS. There are a couple of differences in terminology. Trading securities are referred to in IFRS as financial assets at fair value though profit and loss, and available-for-sale securities are referred to as available-for-sale financial assets. Accounting for Noninfluential Securities The accounting for noninfluential securities is broadly similar between U.S. GAAP and IFRS. There are a couple of differences in terminology. Trading securities are referred to in IFRS as financial assets at fair value though profit and loss, and available-for-sale securities are referred to as available-for-sale financial assets. Accounting for Influential Securities The accounting for influential securities is broadly similar across U.S. GAAP and IFRS. There are a couple of minor differences in terminology. Accounting for Influential Securities The accounting for influential securities is broadly similar between U.S. GAAP and IFRS. There are a couple of minor differences in terminology.

Components of Return on Total Assets
资产回报率 Profit margin利润率 Total asset Turnover 资产周转率 = × Net income Average total assets = × Net income Net sales Net sales Return on total assets is calculated by multiplying the company’s profit margin times its total asset turnover. We can break the equation into two components. Profit margin is defined as net income divided by net sales. Total asset turnover is equal to net sales divided by average total assets. You can see that net sales is common to both profit margin and total asset turnover. As a result, return on assets may be defined as net income divided by average total assets.

Return on Total Assets A1 Here are the returns on total assets for Gap, Inc. for the years 2008 through 2012: Here are the returns on total assets and its components for Gap, Inc. for the years 2008 through All companies desire a high return on total assets. To improve the return, the company must meet any decline in profit margin or total asset turnover with an increase in the other. Companies consider these components in planning strategies. * Differences due to rounding. All companies desire a high return on total assets. To improve the return, the company must meet any decline in profit margin or total asset turnover with an increase in the other. Companies consider these components in planning strategies.

Appendix 15A: Investments in International Operations
C3 Two major accounting challenges arise when companies have international operations: Accounting for sales and purchases listed in a foreign currency. Preparing consolidated financial statements with international subsidiaries. Appendix 15A: Investments in International Operations As accountants, we are faced with two major challenges when dealing with international operations. First, how do we account for sales and purchases in a foreign currency. And second, how do we prepare consolidated financial statements when individual companies use different currencies to measure assets, liabilities, equities, revenues, and expenses.

Exchange Rates Between Currencies
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. When we purchase or sell items internationally, we must at some point deal with the acquisition of a foreign currency. We must be sensitive to the exchange rates between our local currency and the foreign currency we will be buying and/or selling. In addition to the profit or loss incurred on selling and buying products internationally, we may incur a profit or loss on the trading in foreign currency.

Sales in a Foreign Currency
Boston Company, a U.S.-based manufacturer makes a credit sale to London Outfitters, a British retail company. On December 12, 2012, Boston sells £10,000 of goods with payment due on February 10, Boston keeps its record in U.S. dollars. At the date of sale, the British pound is valued at $1.80. Boston Company, a U.S.-based manufacturer makes a credit sale to London Outfitters, a British retail company. On December 12, 2012, Boston sells £10,000 of goods with payment due on February 10, Boston keeps its record in U.S. dollars. At the date of sale, the British pound is valued at $1.80. On December 12th, Boston will record the sale by translating the pounds into dollars. Each pound is valued at $1.80, so the sale will be recorded at $18,000. Boston will debit Accounts Receivable–London Outfitters and credit Sales for $18,000. £10,000 × $1.80 = $18,000

Boston Company is a December 31, year-end company. On December 31, 2012, the British pound has an exchange rate of $1.84. The dollar value of the account receivable from London is $18,400 on this date. The receivable is to be valued in the balance sheet at its current dollar amount. Accounting principles require that the receivables be reported in the balance sheet at its current dollar value. Boston Company is a December 31, year-end company. On December 31,2012, the British pound has an exchange rate of $1.84. The dollar value of the account receivable from London is $18,400 on this date. Boston will prepare the following adjusting entry: debit Accounts Receivable–London Outfitters for $400, and credit Foreign Exchange Gain for the same amount. The gain will be reported in the current period income statement. The Account Receivable‒London Outfitters at December 31st is $18,400, which is the current dollar value, as required by accounting principles. Accounts Receivable – London Outfitters Date Explanation Debit Credit Balance 12/12/12 Sale 18,000 12/31/12 Adjustment for foreign currency 400 18,400

On February 10, 2012, Boston receives London Outfitters’ payment of £10,000. Boston immediately exchanges the pounds for U.S. dollars. The exchange rate on this date is $1.78 per pound, so Boston receives $17,800 for the £10,000 received in settlement. On February 10, 2012, Boston receives London Outfitters’ payment of £10,000. Boston immediately exchanges the pounds for U.S. dollars. The exchange rate on this date is $1.78 per pound, so Boston receives $17,800 for the £10,000 received in settlement. To record the payment, Boston will debit Cash for $17,800, the amount received when exchanging £10,000 , debit Foreign Current Loss for $600, and credit Accounts Receivable–London Outfitters for $18,400, the balance in the account. After the payment, the balance in the Accounts Receivable–London Outfitters is zero. Accounts Receivable – London Outfitters Date Explanation Debit Credit Balance 12/12/12 Sale 18,000 12/31/12 Adjustment for foreign currency 400 18,400 2/10/13 Payment received -0-

Purchases in a Foreign Currency
NC Imports, a U.S. company, purchases products costing €20,000 from Hamburg Brewing on January 15, when the exchange rate is $1.20 per euro. NC Imports, a U.S. company, purchases products costing €20,000 from Hamburg Brewing on January 15, when the exchange rate is $1.20 per euro. NC Imports will debit inventory for $24,000 (€20,000 X $1.20) and credit Accounts Payable–Hamburg Brewing for the same amount. €20,000 × $1.20 = $24,000

Purchases in a Foreign Currency
NC Imports makes payment in full on February 14 when the exchange rate is $1.25 per euro. NC Imports makes payment in full on February 14 when the exchange rate is $1.25 per euro. On the date of payment, the cost to acquire €20,000 is $25,000, while the balance in the Accounts Receivable for Hamburg Brewing is $24,000. As a result, we have an exchange loss of $1,000. To record the payment, NC Imports will debit Accounts Payable–Hamburg Brewing for $24,000, to zero out the account, debit Foreign Currency Loss for $1,000, and credit Cash for $25,000, the cost of €20,000. €20,000 × $1.25 = $25,000

Consolidated Statements with International Subsidiaries
Consider a U.S.-based company that owns a controlling interest in a French company. The reporting currency of the U.S. company is the dollar. The French company maintains its books in Euros. Before preparing consolidated statements, the U.S. company must translate the French company’s statements into dollars. The process requires the parent company to select appropriate foreign exchange rates and to apply those rates to the foreign subsidiary’s account balances. A second challenge in accounting for international operations involves preparing consolidated financial statements when the parent company has one or more international subsidiaries. Consider a U.S.-based company that owns a controlling interest in a French company. The reporting currency of the U.S. company is the dollar. The French company maintains its books in Euros. Before preparing consolidated statements, the U.S. company must translate the French company’s statements into dollars. The process requires the parent company to select appropriate foreign exchange rates and to apply those rates to the foreign subsidiary’s account balances. We will discuss the specifics of the translation process in an advanced course. Translate Account Balances

End of Chapter 15 End of Chapter 15.

Investments and International Operations

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