Long-Term Investments and International Operations

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Long-Term Investments and International Operations
Chapter 10
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Stock Prices, Investors,and Investees
Common Stock Information for General Electric
Company
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Reporting Investmentson the Balance Sheet
Current Assets X Cash
X Short-term investments X Accounts
receivable X Inventories
X Prepaid expenses X Total current
assets X Long-term investments
(Investments) X Property, plant, and
equipment X Intangible assets
X Other assets X
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Trading and Available-For-Sale Investments
Trading investments are investments to be sold in
the very near future with the intent of
generating profits on the sale.
Available-for-sale investments are
stock investments other than trading securities.
Short-term
Long-term
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Learning Objective 1
Account for available- for-sale investments
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Available-for-Sale Investments
The market value method is used.
Cost is used only as the initial amount for
recording the investments.
These investments are reported on the balance
sheet at their current market value.
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Accounting forAvailable-for-Sale Investments
Suppose that on February 23, 2004, GE purchases
1,000 shares of Hewlett-Packard common stock for
35,750.
GE intends to hold this stock for longer than one
year.
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Accounting forAvailable-for-Sale Investments
2004 February 23 Long-term Investment (1,000
35.75) 35,750 Cash 35,750 Purcha
sed investment
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Accounting forAvailable-for-Sale Investments
Assume that GE receives a 0.22 per share cash
dividend on this investment.
2004 July 14 Cash (1,000 .22)
220 Dividend Revenue 220 Received cash
dividend
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What Value of an InvestmentIs Most Relevant?
Assume that the market value of GEs investment
in Hewlett-Packard is 36,400 on December 31,
2004.
2004 December 31 Allowance to Adjust Investment
to Market (36,400 35,750) 650 Unrealiz
ed Gain on Investment 650 Adjusted
investment to market value
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What Value of an InvestmentIs Most Relevant?
Long-Term Investment
Allowance to Adjust Investment to Market
35,750
650
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What Value of an InvestmentIs Most Relevant?
Unrealized Gain account or the Unrealized Loss
account is reported in two places in the
financial statements
Other comprehensive income
Accumulated other comprehensive income
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What Value of an InvestmentIs Most Relevant?
Income statement Revenues 10,000 Expe
nses, including income tax 6,000 Net
income 4,000 Other comprehensive
income Unrealized gain on investment 650
Less Income tax (40) 260
390 Comprehensive income 4,390
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What Value of an InvestmentIs Most Relevant?
Balance sheet Assets Total current
assets XXX Long-term investments
at market value (35,750 650)
36,400 Property, plant, and equipment, net
XXX Stockholders equity Common
stock 1,000 Retained
earnings 2,000 Accumulated other
comprehensive income Unrealized gain on
investments 390 Total stockholders
equity 3,390
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Selling an Available-for-Sale Investment
Suppose GE sells its investment in
Hewlett-Packard stock for 34,000 during 2006.
2006 May 19 Cash 34,000 Loss on Sale
of Investment 1,750 Long-Term Investment
(cost) 35,750 Sold investment
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Learning Objective 2
Use the equity method for investments.
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Equity Method Investments
The equity method is used to account for
investments in which the investor owns 20 to 50
of the investees stock.
Investments accounted for by the equity method
are recorded initially at cost.
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Equity Method Investments
Investor Company
Owns between 20 and 50 of another company
Affiliate
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Equity Method Investments
Phillips Petroleum Company pays 400 million for
30 of the common stock of White Rock Natural Gas
Corporation.
January 6 Long-Term Investment
400 Cash 400 To purchase
equity-method investment
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Investors Percentageof Investee Income
White Rock Natural Gas Corporation reports net
income of 250 million for the year.
Phillips records 30 of this amount as follows
December 31 (in millions) Long-term Investment
(250 0.30) 75 Equity-Method Investment
Revenue 75 To record investment revenue
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Receiving DividendsUnder the Equity Method
White Rock declares and pays a cash dividend of
100 million.
Phillips records 30 of this amount as follows
December 31 (in millions) Cash (100
0.30) 30 Long-Term Investment 30 To
receive cash dividend on equity-method investment
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Investment Account
After the preceding entries are posted,
Phillips Investment account reflects its equity
in the net assets of White Rock (in millions)
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Financial Statements
Balance sheet (partial) millions Assets
Total current assets XXX Long-term
investments, at equity 445 Property,
plant, and equipment, net XXX
Income statement (partial) millions Income
from operations XXX Other revenue
Equity-method investment revenue 75 Net
income XXX
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Learning Objective 3
Understand consolidated financial statements.
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Consolidated Subsidiaries
Parent Company
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Consolidated Subsidiaries
Subsidiary Financial Statements _____
_____ _____ _____ _____ _____
Parent Financial Statements _____ _____ _____
_____ _____ _____ _____ _____
Consolidated Financial Statements _____
_____ _____ _____ _____ _____
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Accounting Methods forStock Investment
The percentage of ownership determines the
accounting method to be used.
2050 Equity Method
50 or more Consolidation Method
Less than 20 Market Value Method
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Consolidation Accounting
It is a method of combining the
financial statements of two or more companies
that are controlled by the same owners.
The assets, liabilities, revenues, and expenses
of each subsidiary are added to the parent
companys accounts.
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Work Sheet forConsolidated Balance Sheet
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Goodwill and Minority Interest
Goodwill is the intangible asset that represents
the parent companys excess payment to acquire
the subsidiary.
Minority interest arises when a parent company
purchases less than 100 of the stock of a
subsidiary company.
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Income of a Consolidated Entity
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Learning Objective 4
Account for long-term investments in bonds.
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Long-Term Investmentsin Bonds and Notes
Investor (Bondholder) Investment in
bonds Interest revenue
Issuing Corporation Bonds payable Interest expense
Held-to-maturity investments are
long-term investments in bonds and notes.
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Long-Term Investmentsin Bonds and Notes
Suppose an investor purchases 10,000 of 6 CBS
bonds 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.
Assuming amortization of the discount by the
straight-line method, following are the entries
for this long-term investment.
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Long-Term Investmentsin Bonds and Notes
April 1 Long-Term Investment in Bonds (10,000
0.952) 9,520 Cash 9,520 To
purchase bond investment
October 1 Cash (10,000 0.06 6/12)
300 Interest Revenue
300 To receive semiannual interest
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Long-Term Investmentsin Bonds and Notes
October 1 Long-Term Investment in Bonds (10,000
9,520) 48 6 60 Interest
Revenue 60 To amortize bond investment
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Long-Term Investmentsin Bonds and Notes
December 31 Interest Receivable (10,000 0.06
3/12) 150 Interest Revenue 150 To
accrue interest revenue
December 31 Long-Term Investment in
Bonds (10,000 9,520) 48 3
30 Interest Revenue 30 To amortize
bond investment
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Long-Term Investmentsin Bonds and Notes
Long-Term Investment in Bonds
4/1 9,520 10/1 60 12/31 30 9,610
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Learning Objective 5
Account for international operations.
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Extent of International Business
Accounting for business activities across
national boundaries is called international
accounting.
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Foreign Currenciesand Exchange Rates
The measure of one currency against another is
called the foreign-currency exchange rate.
Using an exchange rate to convert the cost of an
item given in one currency to its cost in a
second currency is called a translation.
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Foreign Currenciesand Exchange Rates
Country
Monetary Unit
U.S. Dollar Value
Real (R) Dollar () Euro () Euro () Pound
() Euro () Yen () Peso (P)
0.43 0.64 0.89 0.89 1.45 0.89 0.0077 0.108
Brazil Canada France Germany United
Kingdom Italy Japan Mexico
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Foreign Currenciesand Exchange Rates
Two main factors determine the supply and demand
for a particular currency
1. The ratio of a countrys imports to its exports
2. The rate of return available in the
countrys capital market
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Managing Cash inInternational Transactions
D. E. Shipp Belting sells goods to Artes de
Mexico for a price of 1 million pesos on July 28.
On that date, a peso was worth 0.107.
On August 28, when the peso is worth only 0.104,
Shipp receives 1 million pesos from Artes, but
the dollar value of Shipps cash receipt is
3,000 less than expected.
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Managing Cash inInternational Transactions
July 28 Accounts Receivable Artes (1,000,000
pesos 0.107) 107,000 Sales
Revenue 107,000 Sale on account
August 28 Cash (1,000,000 pesos
0.104) 104,000 Foreign Currency Transaction
Loss 3,000 Accounts Receivable
Artes 107,000 Collection on account
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Managing Cash inInternational Transactions
Assume Shipp Belting buys inventory from
Gesellschaft Ltd., a Swiss company.
They decide on a price of 20,000 Swiss francs.
On September 15, when Shipp receives the goods,
the Swiss franc is quoted at 0.7999.
When Shipp pays on September 29, the Swiss franc
has decreased in value to 0.7810.
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Managing Cash inInternational Transactions
September 15 Inventory (20,000 Swiss francs
0.799) 15,980 Accounts Payable Gesellschaft
Ltd. 15,980 Purchase on account
September 29 Accounts Payable Gesellschaft
Ltd. 15,980 Cash (20,000 Swiss francs
0.781) 15,620 Foreign-Currency Transaction
Gain 360 Payment on account
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Managing Cash inInternational Transactions
The company reports the net amount of
foreign currency transaction gains and losses on
the income statement as Other Revenues
and Gains or Other Expenses and Losses.
Shipp Belting
Foreign-currency transaction loss 3,000 Foreig
n-currency transaction gain
360 Foreign-currency transaction loss, net 2,640
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Managing Cash inInternational Transactions
Hedging means to protect oneself from
losing money in one transaction by engaging
in counterbalancing transactions.
Losses on the receipt of one currency may
be offset by gains of the payment on another
currency.
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Consolidation of Foreign Subsidiaries
Special Challenges
Accountants must first bring the subsidiarys
statements into conformity with American GAAP.
When the subsidiary statements are expressed in
foreign currency, they must be translated into
dollars.
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Consolidation of Foreign Subsidiaries
The foreign-currency translation adjustment is
the balancing amount that brings the
dollar amount of the total liabilities and
stockholders equity of a foreign subsidiary into
agreement with the dollar amount of its total
assets.
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Translation of Foreign-Currency Balance Sheet
Into Dollars
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International Accounting Standards
A company that sells its stock through a foreign
stock exchange must follow the accounting
principles of the foreign country.
The primary organization working to achieve
worldwide harmony of accounting standards is the
International Accounting Standards Committee
(IASC).
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Learning Objective 6
Report investing transactions on the statement of
cash flows.
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Using the Statement of Cash Flows
General Electric Statement of Cash Flows Year
Ended December 31, 2001 (In Millions)
Cash flows from investing activities Addition to
property and equipment (15) Disposition of
PPE 7 Loans to others
(14) Payments for other companies (12) All
other investing activities (6) Cash used
for investing activities (40)
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End of Chapter 10