1. 16 - 1 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Investments and International Operations Chapter 16

2. 16 - 2 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Stock Price Information for McDonald’s Corporation: 52 weeks HighLowStock SymbolDividend Volume 100s Close 49 56 29 81 MCD.20 2067670 29 88 The financial community quotes stock prices in dollars and cents. Stock Prices

3. 16 - 3 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Trading investments are investments to be sold in the very near future with the intent of generating profits on price changes. Available-for-sale investments are investments other than trading securities in which the investor cannot exercise significant influence over the investee. Trading and Available-For-Sale Investments

4. 16 - 4 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 1 Account for trading investments.

5. 16 - 5 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Trading Investments Example l Assume that on October 23, Des Moines, Inc., had purchased 600 shares of Bowie Corp. stock for $30,000. l Des Moines' management team hopes to sell this stock within three months. l What is the entry?

6. 16 - 6 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Trading Investments Example Bowie pays a cash dividend of $1.40 per share on November 14. Bowie pays a cash dividend of $1.40 per share on November 14. October 23 Short-Term Investment30,000 Cash30,000 Purchased investment October 23 Short-Term Investment30,000 Cash30,000 Purchased investment

7. 16 - 7 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting for Trading Investments Example November 14 Cash 840 Dividend Revenue840 Received cash dividend November 14 Cash 840 Dividend Revenue840 Received cash dividend What is Des Moines’ entry to receive this cash dividend? What is Des Moines’ entry to receive this cash dividend?

8. 16 - 8 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Reporting Trading Investments l Trading investments are reported on the balance sheet at current market value. l Assume that Bowie’s stock has decreased in value. l On December 31, Des Moines' investment in Bowie is worth $25,000 ($5,000 less than the purchase price).

9. 16 - 9 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Reporting Trading Investments December 31 Loss on Trading Investment5,000 Short-term Investment5,000 Adjusted trading investment to market value December 31 Loss on Trading Investment5,000 Short-term Investment5,000 Adjusted trading investment to market value What is the adjusting entry that Des Moines would make at year end? What is the adjusting entry that Des Moines would make at year end?

10. 16 - 10 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Reporting Trading Investments Balance Sheet (partial): ASSETS Current assets: Short-term investments, at market value$25,000 Balance Sheet (partial): ASSETS Current assets: Short-term investments, at market value$25,000 Income Statement (partial): Other gains and losses: Gain (loss) on trading investment $(5,000) Income Statement (partial): Other gains and losses: Gain (loss) on trading investment $(5,000)

11. 16 - 11 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Reporting Trading Investments l When a company sells a trading investment, the gain or loss on the sale is the difference between the sale proceeds and the last carrying amount of the investment. l Suppose Des Moines sells the Bowie stock for $23,000 on January 10. l How would Des Moines record the sale?

12. 16 - 12 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Reporting Trading Investments January 10 Cash23,000 Loss on Sale of Investment 2,000 Short-Term Investment25,000 Sold investment January 10 Cash23,000 Loss on Sale of Investment 2,000 Short-Term Investment25,000 Sold investment

13. 16 - 13 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 2 Account for available-for-sale investments.

14. 16 - 14 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Available-for-Sale Investments... – are stock investments other than trading securities. l The market value method is used to account for these investments. l Assume that the market value of Bowie’s investment in Gomez’s common stock is $37,400 on December 31, 2002. l Bowie paid $36,000 for the stock on May 1.

15. 16 - 15 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber December 31, 2002 Allowance to Adjust Investment to Market1,400 Unrealized Gain on Available-for-Sale Investment1,400 Adjusted investment to market value December 31, 2002 Allowance to Adjust Investment to Market1,400 Unrealized Gain on Available-for-Sale Investment1,400 Adjusted investment to market value What is the adjusting entry? Reporting Available-for-Sale Investments

16. 16 - 16 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber ASSETS Long-term available-for-sale investments–at market value$37,400 ASSETS Long-term available-for-sale investments–at market value$37,400 STOCKHOLDERS’ EQUITY Common stock……… Retained earnings…… Unrealized gain on available-for-sale investment$ 1,400 STOCKHOLDERS’ EQUITY Common stock……… Retained earnings…… Unrealized gain on available-for-sale investment$ 1,400 Reporting Available-for-Sale Investments

17. 16 - 17 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Selling an Available-for-Sale Investment l Selling the investment can result in a realized gain or loss. l Realized gains and losses measure the difference between the amount received from the sale and the cost of the investment. l Suppose that Bowie sells its investment for $38,000 on January 15.

18. 16 - 18 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Selling an Available-for-Sale Investment January 15, 2003 Cash38,000 Gain on Sale of Investment 2,000 Long-Term Available-for-Sale Investment (cost)36,000 Sold investment January 15, 2003 Cash38,000 Gain on Sale of Investment 2,000 Long-Term Available-for-Sale Investment (cost)36,000 Sold investment

19. 16 - 19 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 3 Use the equity method for investments.

20. 16 - 20 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Equity Method l Where the investor can exert significant influence over the investee, the equity method of accounting is used. l Accountants believe that some measure of the investee’s success and failure should be included in accounting for the investment.

21. 16 - 21 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Equity Method January 10 Long-Term Equity-Method Investment500,000 Cash500,000 Purchased equity-method investment January 10 Long-Term Equity-Method Investment500,000 Cash500,000 Purchased equity-method investment Des Moines, Inc., purchases 30% of the voting stock of Bowie Corp. for $500,000 on January 10. Des Moines, Inc., purchases 30% of the voting stock of Bowie Corp. for $500,000 on January 10.

22. 16 - 22 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Equity Method l The initial investment is recorded at cost. l Adjustments are made to the investment account for the investor’s prorata share of income or loss. l Suppose Bowie Corp. reported a $200,000 net loss for year two.

23. 16 - 23 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Equity Method December 31, Year 2 Equity-Method Investment Loss60,000 Long-Term Equity-Method Investment60,000 Recorded investment loss December 31, Year 2 Equity-Method Investment Loss60,000 Long-Term Equity-Method Investment60,000 Recorded investment loss What journal entry would Des Moines make?

24. 16 - 24 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Equity Method l If Bowie Corp. pays a $100,000 dividend on January 15 of year three, Des Moines would debit Cash for $30,000 and credit the Long- Term Equity-Method Investment. l Dividends decrease the investee’s owners’ equity and so it also reduces the investor’s investment.

25. 16 - 25 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording the Sale of an Equity-Method Investment l Suppose that on February 8, Des Moines sells one-tenth of Bowie Corp. common stock for $33,000. l What is the carrying amount of the investment? l $500,000 – $60,000 – $30,000 = $410,000

26. 16 - 26 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording the Sale of an Equity-Method Investment l What is the gain or loss? l $8,000 loss l $410,000 ÷ 10 = $41,000 carrying amount of the investment l Cash received = $33,000

27. 16 - 27 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Joint Ventures... – are defined as a separate entity or project owned and operated by a small group of businesses. l Investors account for their investment in a joint venture by the equity method even when the investor owns less than 20% of the venture.

28. 16 - 28 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 4 Understand consolidated financial statements.

29. 16 - 29 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Consolidation Accounting... – is a method of combining the financial statements of two or more companies that are controlled by the same owners. l The assets, liabilities, revenues, and expenses of each subsidiary are added to the parent company’s accounts.

30. 16 - 30 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Goodwill Goodwill is an intangible asset that arises when the purchase price to acquire a subsidiary company is greater than the sum of the market value of the subsidiary’s assets minus liabilities.

31. 16 - 31 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Minority Interest... – is the portion (less than 50%) of a subsidiary’s stock that is owned by stockholders other than the parent company. l The parent company reports on its consolidated balance sheet an account titled Minority Interest. l Most companies list Minority Interest among their liabilities.

32. 16 - 32 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounting Methods for Stock Investment 50% or more Consolidation Method 20%–50% Equity Method Less than 20% Market-Value Method The percentage of ownership determines the accounting method to be used.

33. 16 - 33 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 5 Account for long-term investments in bonds.

34. 16 - 34 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Long-Term Investments in Bonds Example l Suppose that Bryan Insurance purchases $10,000 of College Station’s 6% bonds at a price of $9,520 on April 1, 2002. l Interest dates are April 1 and October 1. l Bryan intends to hold the bonds as long- term investments until their maturity date of April 1, 2006.

35. 16 - 35 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Long-Term Investments in Bonds Example April 1 Long-Term Investment in Bonds9,520 Cash9,520 Purchased bond investment April 1 Long-Term Investment in Bonds9,520 Cash9,520 Purchased bond investment What are the journal entries for April 1 and October 1, 2002? What are the journal entries for April 1 and October 1, 2002?

36. 16 - 36 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Long-Term Investments in Bonds Example October 1 Cash ($10,000 ×.06 × 6/12)300 Interest Revenue300 Received semiannual interest October 1 Cash ($10,000 ×.06 × 6/12)300 Interest Revenue300 Received semiannual interest

37. 16 - 37 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Long-Term Investments in Bonds Example October 1 Long-Term Investment in Bonds ($10,000 – $9,520) ÷ 48 × 660 Interest Revenue60 Amortized discount on bond investment October 1 Long-Term Investment in Bonds ($10,000 – $9,520) ÷ 48 × 660 Interest Revenue60 Amortized discount on bond investment What is the straight-line amortization on October 1? What is the straight-line amortization on October 1?

38. 16 - 38 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Long-Term Investments in Bonds and Notes l The amortization entry has two effects: 1 It increases the Long-Term Investment account. 2 It records the related interest revenue that Bryan has earned as a result of the increase in the carrying amount of the investment.

39. 16 - 39 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Objective 6 Account for transactions stated in a foreign currency.

40. 16 - 40 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Company Percent of International Sales McDonald’s62% Toys “Я” Us27% Procter & Gamble49% Company Percent of International Sales McDonald’s62% Toys “Я” Us27% Procter & Gamble49% Accounting for business activities across national boundaries makes up the field of international accounting. Accounting for business activities across national boundaries makes up the field of international accounting. Accounting for International Operations

41. 16 - 41 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Foreign-Currency Exchange Rates l Foreign-currency exchange rate is the measure of one currency against another. l Transactions stated (denominated) in a foreign currency must first be translated into dollars before recording. l Accounts stated in a foreign currency often give rise to foreign currency transaction gains or losses.

42. 16 - 42 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Foreign-Currency Exchange Rates Example l Bryan Insurance buys a Rolls Royce for 100,000 British pounds on April 1, when the price of the pound is at U.S. $1.65. l Payment is due April 30.

43. 16 - 43 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Foreign-Currency Exchange Rates Example April 1 Equipment165,000 Accounts Payable165,000 Recorded purchase of car at 1.65 rate April 1 Equipment165,000 Accounts Payable165,000 Recorded purchase of car at 1.65 rate Bryan records the purchase in U.S. dollars at the exchange rate on the date of purchase. Bryan records the purchase in U.S. dollars at the exchange rate on the date of purchase.

44. 16 - 44 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Foreign-Currency Exchange Rates Example When payment is due on April 30, the price of a pound is $1.68. When payment is due on April 30, the price of a pound is $1.68. April 30 Accounts Payable 165,000 Foreign-Currency Transaction Loss3,000 Cash168,000 Payment of account April 30 Accounts Payable 165,000 Foreign-Currency Transaction Loss3,000 Cash168,000 Payment of account

45. 16 - 45 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber International Transactions l Hedging means to protect oneself from losing money in one transaction by engaging in counterbalancing transactions. l Losses on the receipt of one currency may be approximately offset by gains of the payment on another currency.

46. 16 - 46 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Consolidation of Foreign Subsidiaries l The foreign subsidiary statements must be conformed to GAAP and translated into dollars before consolidation. l The process of translating a foreign subsidiary’s financial statements into dollars usually creates a foreign-currency translation adjustment.

47. 16 - 47 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber International Accounting Standards l Most methods of accounting are consistent throughout the world. l Differences, however, do exist among countries. l A company that sells its stock through a foreign stock exchange must follow the accounting principles of the foreign country.

48. 16 - 48 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Reporting Comprehensive Income l What are the elements of comprehensive income? Net income, plus other comprehensive income: Unrealized gains and losses on available-for-sale investments Net income, plus other comprehensive income: Unrealized gains and losses on available-for-sale investments

49. 16 - 49 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber End of Chapter 16