Notes for Chapter 10 In-class Lecture

8/8/2019 Notes for Chapter 10 In-class Lecture

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Chapter 10 Long-term Investments & International Operations

1. Stock investment terminologya. investor entity that owns stock

b. investee corporation that issued stock

2. Reporting stock investments on the balance sheeta. short term stock investments

i. also called marketable securities and often classified as trading securitiesii. must be liquidiii. intended to be converted to cash within one year

b. long term stock investments expected to be held longer than one year

3. Accounting methods for long-term investments

Percent owned by investor Accounting methodUp to 20% Available-for-sale20 50% Equity methodMore than 50% Consolidation

4. Available for sale investmentsa. Can be classified as current or long-term

b. Initially recorded at costc. Cash dividends received are recorded as revenued. Reported at market value on the balance sheet


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5. Carrying amount of investmentOriginal cost of investment+ Debit balance in Allowance to Adjust Investments to Market if fair value > costOR - Credit balance in Allowance to Adjust Investments to Market if fair value < cost

6. Unrealized gain or lossa. reported in two places on financial statements

i. Income statementii. Balance sheet

b. Unrealized gains or losses on available-for-sale investments do not impact net income

7. Selling available-for-sale investments

E10-13A, p. 634

a. Long-term investmentCash

To purchase investment

b. CashDividend Revenue

To receive dividends

c. Allowance to adjust investment to marketUnrealized gain on investment

To adjust to market

d. CashLoss on sale of investments

Long-term investmentTo sell investment


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8. Equity methoda. Investor owns 20 50% of investees voting stock

b. Investor has significant influence over investeec. Investment recorded at costd. Investment increased by investee earningse. Investment decreased by investee dividends

E10-15A, p. 634

a. Long-term investmentCash

To purchase investment

b. Long-term investmentsEquity method investment revenue

To receive dividends

c. CashLong-term investment

To sell investment

9. Consolidated subsidiariesa. investor owns more than 50% of voting stock of investee

b. investor controls investeec. investor is called the parent companyd. investee is called a subsidiarye. financial statements of a parent and its subs are combined consolidated

10. Consolidated worksheeta. tools to combine parent and sub financial statements at year end

b. parent and sub accounts are placed side by sidec. worksheet entries are made to eliminate reciprocal accounts

i. parents investment and subs equityii. receivables and payables between parent and sub


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12. Long term bond investmenta. Major investors

b. Called held-to-maturity investmentsc. Reported at amortized cost bonds carrying amount is amortized to face value by maturity

13. Amortization of held-to-maturity investment Amortization entry:a. Increases long-term investment account as it reaches maturity

b. Records interest revenue earned from carrying amount increase

S10-7, p. 632


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S10-8, p. 632

a. Long-term investment in bondsCash

To purchase bond investment

b. CashInterest Revenue

To receive semiannual interest

c. Interest revenueLong-term investment in bonds

To amortize bond investment

d. CashLong-term investment in bonds

To receive face value at maturityE10-19A, pp. 635636

a. Long-term investment in bondsCash

To purchase bond investment

b. Interest receivableInterest revenue

To accrue interest earned Dec 31

c. Long-term investment in bondsInterest revenue

To amortize discount on Dec 31

14. Accounting for international operationsa. global integration

b. foreign currency- exchange rate- translation converting cost of an item stated in one currency into another - import/export ratio

- strong currency- weak currency

15. Factors affecting exchange ratesa. ratio of imports to exports

i. if exports exceed imports, increase in demand drives up price of currencyii. if imports exceed exports, supply increases and currency price falls

b. rate of return on capital marketsi. if high, increases international investments and demand for currency


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ii. currencies are described as strong or weak

16. Accounting for foreign currency transactionsa. export

b. importc. changes in exchange rates between sale or purchase and payment will result in a foreigncurrency gain or loss

17. Foreign currency gains and lossesa. gains and losses are netted and reported in Other category on income stmt

b. losses can be avoided byi. only accepting or paying in dollars


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ii. hedgingiii. purchasing futures contracts

18. Consolidation of foreign subsidiaries two challengesa. foreign accounting practices differ from U.S. GAAP

b. subsidiary statements may be in foreign currency and need translationresults in a foreign currency translation adjustment

19. Translation adjustmenta. Assets and liabilities are translated into dollars at current exchange rate

b. Stockholders equity is translated into dollars at older, historical exchange ratesc. Differing rates creates out-of-balance conditiond. Foreign currency translation adjustment is the balancing amount

20. International standardsa. most accounting methods are consistent throughout the world

b. Differences do exist for:i. Inventory LIFO method of inventory not used in UK ii. Goodwill In Germany & Japan, account is amortized (not in the US)iii. R & D costs capitalized in Japan; expensed in US

S10-9, p. 633

a. Accounts receivableSales revenue

Sales on account

b. CashForeign-currency transaction loss

Accounts receivableCollection on account

c. CashAccounts receivableForeign-currency transaction gain

Collection on account

S10-10, p. 633

a. CashAccounts receivable

Foreign-currency transaction gainCollection on account

b. Accounts payableForeign-currency transaction loss

Accounts receivable Payment on account


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Currency Strengthened WeakenedDollar XPeso X

Dollar X

Swiss franc X

21. Investing activities on the cash flow statement

a. purchases and sales of long-term investments are investing activities b. investing inflow proceeds from sales of long-term investments (available-for-sale, equitymethod, and held-to-maturity)c. investing outflow purchases of all categories of long-term investments

Notes for Chapter 10 In-class Lecture

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