Long-Term Investment Accounting Methods

Long-Term Investments and
International Operations
Chapter 10


Key Terms


Investments on the Balance Sheet
Current Assets:
Cash $X
Short-term investments X
Accounts receivable X
Inventories X
Prepaid expenses X
Total current assets $X
Long-term investments X
Property, plant and equipment X
Intangible assets X
Other assets X


Accounting Methods for Long-Term
Investments

Percentage Ownership GAAP Accounting
by the Investor Method
Less than 20% ?
20 – 50% ?
Greater than 50% ?


Account for available-for-sale investments


Available-for-Sale Investments
• Reported at fair market value
• Adjusted at balance sheet date
• Earn dividend revenue


Adjusting Investment to Market
JOURNAL
Date Accounts and explanation Debit Credit
Allowance to adjust investment to market If market value is
Unrealized gain on investment greater than
carrying value
Adjusted investment to market

JOURNAL
Unrealized loss on investment If market value is
Allowance to adjust investment to market less than carrying
value


Carrying Amount of Investment
Original cost of investment

Debit balance in Allowance to If fair
Adjust Investments to Market value >
cost

OR
If fair
Credit balance in Allowance to value <
Adjust Investments to Market cost


Unrealized Gains and Losses
• Reported in two places on the financial
statements
▫ Other comprehensive income
▫ Accumulated other comprehensive income


Selling an Available-for-Sale
Investment
• Results in a realized gain or loss

JOURNAL
Cash
Loss on sale of investment If cash > cost, “Gain”
would be credited
Long-term investment
Sold investment


Exercise 10-13A
JOURNAL
(a) Long-term investment
Cash (470 x $13)
Purchased investment
(b) Cash
Dividend revenue (470 X $1.70)

Allowance to adjust investment to market
Unrealized gain on investment

Exercise 10-13A
JOURNAL
(d) Cash ($22 x 470)
Loss on sale of investment


Use the equity method for investments


Accounting for Equity Method
Investments
• Method used when investors owns between 20 –
50% of investee’s voting stock
• Investment initially recorded at cost
• Investor records its share of investee net income
and dividends


Recording Investee Income and
Dividends
JOURNAL
Equity-method investment revenue
To record investment revenue
Cash
Received cash on equity method investment


Summary of the Equity Method

Equity-Method Investment

Original cost Share of losses

Share of income Share of dividends

Balance


Understand consolidated financial statements


Consolidated Subsidiaries
• Investor controls investee
• Investor is called the parent company
• Investee is called the subsidiary


Many investors (the stockholders)

own

The parent corporation

who
owns

The subsidiary

Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 21

Consolidation Accounting
• Method of combining financial statements of all
companies controlled by same stockholders
• Results is a single set of statements as if parent
and its subsidiaries are one company
• Gives better perspective on total operations than
individual statements
• Worksheet is used to combine parent and sub
accounts


Goodwill and Noncontrolling
Interest
Goodwill Noncontrolling interest
• Arises when parent pays • Arises when parent
more to acquire a company owns less than
subsidiary than the fair 100% of subsidiary stock
value of its net assets
• Recorded as an intangible • Recorded as a separate
asset account in the
stockholders’ equity
section


Account for long-term investments in bonds


Held-to-Maturity Investments
• Recorded at cost
• Receive face value at maturity
• Accounted for using the amortized cost method


Accounting for Held-to-Maturity
Investments
JOURNAL
4-1 Long-term investment in bonds 9,520
Cash 9,520
Purchased bond investments
10-1 Cash $10,000 x 6% x 1/2 300
Interest revenue 300
Received semi-annual interest
10-1 Long-term investment in bonds
Interest revenue [($10,000 – 9,520)/48x]x 6 60
To amortize bond investment 60

Amortization of Held-to-Maturity
Investment
Increases Long-
Term Investment
account as it
Records interest
reaches maturity
revenue earned
from carrying
amount increase


Summary of Accounting for
Investments
Accounting
Type of Long-Term Investment Method
?
Investor owns less than 20% of investee stock
?
Investor owns between 20 – 50% of investee stock
?
Investor owns more than 50% of investee stock
?
Investor owns a long-term investment in bonds


Account for international operations


International Accounting:
Transition
• International Accounting Standards Board
(IASB) developing uniform worldwide standards
• U.S. standards gradually harmonizing with
international standards (IFRS)
• Securities and Exchange Commission (SEC) has
provided a “road map” for U.S companies to
transition to IFRS


Foreign Currencies & Exchange
Rates
• International business often results in
companies receiving or paying in a foreign
currency
• Measure of one nation’s currency against
another:
▫ Foreign currency exchange rate
• Conversion of an item in one currency to
another:
▫ Translation


Factors Affecting Exchange Rates


Recording Foreign Currency
Transactions
• Items that are sold or purchased on account in a
foreign currency expose company to foreign-
currency exchange risk
• Changes in exchange rates can cause variations in
the amount of foreign currency receivable or
payable


Short Exercise 10-9
JOURNAL
9-12 Accounts receivable (500,000 x .36)
Sales

10-18 Cash (250,000 x .33)
Foreign currency transaction loss
Accounts receivable (1/2 x 180,000)

10-1 Cash (250,000 x .39)
Accounts receivable (1/2 x 180,000)
Foreign currency transaction gain


Foreign Currency Gains and Losses
• Gains and losses are netted and reported in the
“Other” category on the Income Statement
• Losses can be avoided by:
▫ Only accepting or paying in dollars
▫ Hedging
▫ Purchasing futures contracts


Consolidation of Foreign
Subsidiaries
• Two challenges:
▫ Foreign subsidiary uses different accounting
principles
▫ Subsidiary’s statements expressed in foreign
currency
• Foreign currency translation adjustment needed
▫ Reported as other comprehensive income


Report investing transactions on the statement
of cash flows


Investments on the Cash Flow
Statement
Transaction Reported in the
Investing Section as an:
Sale of available-for-sale securities ?
Purchase of available-for-sale ?
securities
Purchase of long-term bond ?
investments
Purchases of equity method ?
investments
Proceeds from selling subsidiary ?
companies

Long-Term Investment Accounting Methods

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