1. ©2008 Pearson Prentice Hall. All rights reserved. 10-1 Long-Term Investments and International Operations Chapter 10

2. ©2008 Pearson Prentice Hall. All rights reserved. 10-2 Stock Investments Investor – entity that owns stock of a corporation Investee – corporation that issued the stock ABC Company purchases 1000 shares of XYZ Corporation: ABC is the investorXYZ is the investee

3. ©2008 Pearson Prentice Hall. All rights reserved. 10-3 Reporting Investments on the Balance Sheet Assets to the investor Short-term investments  Also called marketable securities and often classified as trading securities  Must be liquid  Intended to be converted to cash within one year Long-term investments  Expected to be held longer than one year

4. ©2008 Pearson Prentice Hall. All rights reserved. 10-4 Accounting Methods for Long-Term Investments Percent owned by investorAccounting method Up to 20%Cost Method 20 - 50%Equity Method More than 50%Consolidation

5. ©2008 Pearson Prentice Hall. All rights reserved. 10-5 Learning Objective 1 Account for available-for-sale investments

6. ©2008 Pearson Prentice Hall. All rights reserved. 10-6 Available-for-Sale Investments Can be classified as current or long-term  Based on how long management intends to hold the investment Initially recorded at cost Cash dividends received are recorded as revenue  Stock dividends indicated by memorandum Reported at market value on the balance sheet  Considered more relevant for decision making

7. ©2008 Pearson Prentice Hall. All rights reserved. 10-7 Valuing Investments at Year-End Increase in market valueDecrease in market value Unrealized GainUnrealized Loss Allowance to Adjust Investment to Market is a companion account to Long-Term Investments Debit balance = Market > Cost Credit balance = Market < Cost

8. ©2008 Pearson Prentice Hall. All rights reserved. 10-8 Unrealized Gain or Loss Reported in two places on the financial statements Income Statement  Other comprehensive income – separate section below net income Balance Sheet  Accumulated other comprehensive income – separate section of stockholders’ equity Unrealized gains or losses on available-for-sale investments do not impact net income

9. ©2008 Pearson Prentice Hall. All rights reserved. 10-9 Selling Available-for-Sale Investments Results in a realized gain or loss reported on the income statement Difference between cost and selling price

10. E10-13 Journalize the following available for sale investment transaction of Solomon Brothers Department Stores: a.Purchased 400 common shares from 4,000 common shares of Kraft Foods outstanding at $32 per share b.Received cash dividend of $1 per share on the Kraft investment c.At year end, adjusted the investment account to current market value of $38 per share d.Sold the Kraft stock for the market price of $23 per share

11. ©2008 Pearson Prentice Hall. All rights reserved. 10-11 E10-13 DateAccountsDebitCredit (a)AFS Investment (400 x $32)$12,800 Cash $12,800 (b)Cash$400 Dividend revenue $400

12. ©2008 Pearson Prentice Hall. All rights reserved. 10-12 E10-13 Market value at year end 15,200 (400 shares x $38) Balance in LT Investment 12,800 Unrealized gain 2,400 DateAccountsDebitCredit (c)Allowance to Adjust Investment to Market$2,400 Unrealized Gain on Investment $2,400

13. ©2008 Pearson Prentice Hall. All rights reserved. 10-13 E10-13 The investment is sold when the market value is $23 This results in a loss  Cost minus selling price DateAccountsDebitCredit (d)Cash ($23 x $400)$9,200 Loss on sale of investments6,000 Long-term Investment (cost from letter a) $15,200 What amount will balance the entry?

14. ©2008 Pearson Prentice Hall. All rights reserved. 10-14 Learning Objective 2 Use the equity method to account for investments

15. ©2008 Pearson Prentice Hall. All rights reserved. 10-15 The Equity Method Investor owns 20 – 50% of investee’s voting stock Investor has significant influence over the investee Investment recorded at cost Investment is increased by investee earnings Investment is decreased by investee dividends

16. ©2008 Pearson Prentice Hall. All rights reserved. 10-16 Long-Term Investment Original Cost Share of Dividends Ending Balance Share of Net Income

17. E10-15 Intel Corp owns equity-method investment in several companies. Suppose Intel paid $1,000,000 to acquire 25% investment in Thai Software Company. Thai Software reported net income of $640,000 for the first year and declared and paid cash dividends of $420,000 1.Record the following in Intel’s journal: a) purchase of investment, b) Intel’s proportion of Thai Software’s net income, and c) receipt of cash dividend 2.What is the ending balance in Intel’s investment account?

18. ©2008 Pearson Prentice Hall. All rights reserved. 10-18 E10-15 DateAccountsDebitCredit (a)Long-term Investments$1,000,000 Cash $1,000,000 (b)Long-term Investments $160,000 Equity method investment revenue $160,000 Multiply the percent the investor owns by the investee net income

19. ©2008 Pearson Prentice Hall. All rights reserved. 10-19 E10-14 DateAccountsDebitCredit (c)Cash$105,000 Long-term investments $105,000 Long-Term Investments (a) 1,000,000 (b) 160,000 (c)105,000 1,055,000 Enter the amounts from entry (a) and (c)

20. ©2008 Pearson Prentice Hall. All rights reserved. 10-20 Learning Objective 4 Account for long-term investments in bonds

21. ©2008 Pearson Prentice Hall. All rights reserved. 10-21 Long-Term Bond Investments Major investors  Financial institutions  Insurance companies Called held-to-maturity investments Reported at amortized cost  Bonds carrying amount is amortized to face value at maturity value

22. ©2008 Pearson Prentice Hall. All rights reserved. 10-22 Bonds Issuing Corporation Investor (Bondholder) Investment in bondsBonds payable Interest revenue Interest expense

23. E-19 Assume on Sept 30, 20X3, Fiat Inc paid 97 for 6 ½% bonds of Skoda Corp as Held to Maturity Investment. The maturity value of the bonds will be $20,000 on September 30, 20X8. The bonds pay interest on March 31 and September 30 1.Using the straight-line method of amortizing the bonds, journalize all of Fiat’s transaction on the bonds for 20X3 2.Show how Fiat would report everything related to bond investment on its balance sheet at December 31, 20X3

24. ©2008 Pearson Prentice Hall. All rights reserved. 10-24 E10-19 Skoda should use the amortized cost method to account for the bond investment The investment is recorded at cost  $20,000 x.97

25. ©2008 Pearson Prentice Hall. All rights reserved. 10-25 E10-19 On December 31, interest earned on the bond investments is accrued  3/12 x 6.5% x 20,000 Amortization is recorded  $20,000 – 19,400 = $600  $600/60 months = $10 per month  $10 per month x 3 months = $30 Face value x interest rate x months/12

26. ©2008 Pearson Prentice Hall. All rights reserved. 10-26 Learning Objective 6 Report investing transactions on the statement of cash flows

27. ©2008 Pearson Prentice Hall. All rights reserved. 10-27 Investing Activities on the Cash Flow Statement Purchases and sales of long-term investments are investing activities Investing inflow  Proceeds from sales of long-term investments (available-for-sale, equity method and held-to- maturity) Investing outflow  Purchases of all categories of long-term investments