Plain Background Power Point Slides Chapter 10 Longterm Investments International Operations 4108

8/9/2019 Plain Background Power Point Slides Chapter 10 Longterm Investments International Operations 4108

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

1

Long-Term Investmentsand International

Operations

Chapter 10


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2

Trading and Available-For-Sale

InvestmentsTrading - to be sold in the very near

future with the intent of generating

profits on the saleAvailable-for-sale - stock

investments other than tradingsecurities

Short term

Long term


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3

Learning Objective 1

Account for available-for-saleinvestments


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4

Available-for-Sale Investments

Market value method

Record initial investment at cost

Report on the balance sheet attheir current market value


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Accounting for

Available-for-Sale InvestmentsOn February 23, GE purchases 1,000

shares of Hewlett-Packard common

stock for $35,750. GE intends to holdthis stock for longer than one year.

General Journal

Date Accounts and Explanations PR Debit Credit

Feb 23 Long-term Investment(1,000 x $35.75) 35,750

Cash 35,750

Purchased investment



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What Value of an Investment

Is Most Relevant?The market value of GEs

investment in Hewlett-Packard is

$36,400 on December 31.ene al Jou nal

ate ccounts and xplanations ebit edit

ec 31 llowance to djust Investment

To Ma ket ($36,400-$35,750) 650Un ealized ain on Investment 650

Adjusted investment to market



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Is Most Relevant?

Long-Term Investment

Allowance to Adjust

Investment to Market

35,750 650

Investment carrying amount = Market value of $36,400


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Is Most Relevant?Unrealized Gain or Loss -

reported in two places in

financial statements:Other comprehensive income

Accumulated othercomprehensive income


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Is Most Relevant?Income statement:Revenues $10,000

Expenses, including income tax 6,000Net income $ 4,000Other comprehensive income:

Unrealized gain on investment $ 650

Less: Income tax (40%) ( 260) 390Comprehensive income $ 4,390



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Is Most Relevant?Balance sheet:

Assets:Total current assets $ XXXLong-term investments at market value 36,400

Property, plant, and equipment, net XXXStockholders equity:

Common stock $ 1,000Retained earnings 2,000

Accumulated other comprehensive income:Unrealized gain on investments $ 390

Total stockholders equity $ 3,3902006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren


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Selling an Available-

for-Sale InvestmentGE sells its investment in

Hewlett-Packard stock for

$34,000 during 20x9.

General Journal

Date Account and Explanat ons PR Debit redit

May 19 ash 34,000

Loss on Sale ofInvestment 1,750

Long-TermInvestment(cost) 35,750

Sold investment



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13


Use the equity method forinvestments.


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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren14

Equity Method Investments

Used to account forinvestments in which investor

owns 20 to 50% of investeesstock

Record initial investment at cost


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Equity Method Investments

Phillips Petroleum Companypays $400 million for 30% of the

common stock ofWhite RockNatural Gas Corporation.General Journal

Date Accounts and Explanations PR Debit redit

Jan 6 Long-TermInvestment 400

ash 400

To purchase equity-methodinvestment



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Investors Percentage

of Investee IncomeWhite Rock Natural Gas

Corporation reports net income

of $250 million for the year.

General Journal


Dec 31 Long-TermInvestment 75

Equity-Method InvestmentRevenue 75

To record investment revenue($250 x 0.30)



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Receiving Dividends

Under the Equity MethodWhite Rock declares and pays a

cash dividend of $100 million.

General Journal


Dec 31 Cash ($100 x 0.30) 30

Long-Term Investment 30

To record cash dividend receivedon equity-method investment



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Investment Account

Long-Term Investment

Jan. 6 Purchases 400

Dec. 31 Net income 75Dec. 31 Balance 445

Dec. 31 Dividends 30



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Financial Statements

Balance sheet (partial): millionsAssets

Total current assets $XXX

Long-term investments, at equity 445Property, plant, and equipment, net XXX

Income statement (partial): millionsIncome from operations $XXXOther revenue:

Equity-method investment revenue 75Net income $XXX


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Understand consolidatedfinancial statements.


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Consolidated Subsidiaries

Parent Company

Subsidiary A

100%ownership

Subsidiary B

85%ownership


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Consolidated Subsidiaries

Subsidiary

Financial

Statements

_____ _____ _____ _____

_____ _____

Consolidated

Financial

Statements _____ _____

_____ _____

_____ _____

Parent

Financial

Statements

_____ _____ _____ _____

_____ _____

_____ _____


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Consolidation Accounting

Method of combining financialstatements of two or morecompanies that are controlled bythe same owners

Assets, liabilities, revenues, andexpenses of each subsidiary areadded to parent companysaccounts


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Account for long-terminvestments in bonds.


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Long-Term Investments

in Bonds and NotesInvestor (Bondholder)

Investment in bonds

Interest revenue

Held-to-maturity investments are long-term

investments in bonds and notes.

Issuing CorporationBonds payable

Interest expense



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in Bonds and NotesAn investor purchases $10,000 of 6% CBSbonds at a price of 95.2 on April 1, 20X5.The investor intends to hold the bonds as a

long-term investment until their maturity.Interest dates are April 1 and October 1.

General Journal

Date Accounts and Explanations R Debit Credit

Apr1 Long-TermInvestment in Bonds 9,520

Cash 9,520

Purchased bond investment($10,000 x 0.925)



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Long-Term Investments in

Bonds

General Journal


Oct 1 Cash 300

Interest Revenue 300

Received semiannual interest

($10,000 x .06 x6/12)

O 1 L g-T m I v m B 60

I v 60

To amortize bond investment[($10,000 - $9,520) / 48] x 6


The discount is amortized by the straight-line method.


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in Bonds and Notes

Long-Term Investment in Bonds

4/1 9,52010/1 6012/31 30

9,610

Long-Term Investment in BondsLong-Term Investment in Bonds


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Account for internationaloperations.


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Foreign Currencies

and Exchange RatesForeign currencies exchange rate -

Measure of one currency against

anotherTranslation - Using an exchange

rate to convert the cost of an item

given in one currency to its cost ina second currency


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Foreign Currencies

and Exchange RatesTwo main factors determine thesupply and demand for a

particular currency:1. Ratio of a countrys imports to

its exports

2. Rate of return available in thecountrys capital market


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Managing Cash in

International TransactionsD. E. Shipp Belting sells goods to Artesde Mexico for a price of 1 million pesoson July 28. On that date, a peso wasworth $0.086.

General Journal

Date Accounts and Explanations PR Debit redit

Jul 28 Accounts Receivable Artes 86,000Sales Revenue 86,000

Sale on account(1,000,000 pesos x $0.086)



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Managing Cash inInternational Transactions

Shipp Belting buys inventory from GesellschaftLtd., a Swiss company. They decide on a priceof 20,000 Swiss francs. On September 15,

Shipp receives the goods. The Swiss franc isquoted at $0.80.

General Journal

Date Accounts and Explanations R Debit Credit

Sep 15 Inventory 16,000Accounts ayable-Gesellschaft 16,000

Purchase on account(20,000Swiss francs x $0.80)



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When Shipp pays on September 29, theSwiss franc has decreased in value to$0.78

General Journal


Sep 29 Accounts Payable-Gessellschaft 16,000

Cash 15,600

Foreign-CurrencyTransactionGain 400

Payment on account(20,000Swiss francs x $0.78)



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Report the net amount of foreigncurrency transaction gains and losseson the income statement as OtherRevenues and Gains or OtherExpenses and Losses

Foreign-currency transaction loss $3,000Foreign-currency transaction gain ( 400)Foreign-currency transaction loss, net $2,600


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Hedging- to protect oneself fromlosing money in one transaction by

engaging in counterbalancingtransactions.

Losses on the receipt of one

currency may be offset by gains ofthe payment on another currency.


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Consolidation of ForeignSubsidiaries

Subsidiarys statements mustbe brought into conformity with

American GAAPSubsidiary statements,

expressed in foreign currency,must be translated into dollars.


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Consolidation of ForeignSubsidiaries

Foreign-currency translationadjustment- balancing amount

that brings the dollar amount ofthe total liabilities andstockholders equity of a foreign

subsidiary into agreement withthe dollar amount of its totalassets.


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International AccountingStandards

International AccountingStandards Committee (IASC) -

primary organization working toachieve worldwide harmony ofaccounting standards is the


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Report investing transactions onthe statement of cash flows.


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Using the Statement of CashFlows

Cash flows from investingactivities:Addition to property and equipment $(15)

Disposition ofPP&E 7

Loans to others (14)

Payments for other companies (12)All other investing activities (6)

Cash used forinvestingactivities $(40)

General Electric Statement of Cash FlowsYearEnded December 31, 2001

(In Millions)



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2006 Prentice Hall Business Publishing Financial Accounting 6/e Harrison/Horngren45

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Plain Background Power Point Slides Chapter 10 Longterm Investments International Operations 4108

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