Investments and International Operations Appendix B Copyright © 2007 Prentice-Hall. All rights reserved

Stock Investments Short-term (marketable securities) –Current assets –Must be liquid –Management intends to sell within one year Long-term (all other investments) –Management intends to hold for more than one year –Or securities that are not readily marketable Copyright © 2007 Prentice-Hall. All rights reserved2

Trading and Available-For-Sale Investments Trading investments –Short-term –To be sold in very near future –Intent is to generate profits on price changes Available-for-sale investments –Investments other than trading securities –Investor cannot exercise significant influence over investee –Short-term if management intends to sell within a year Copyright © 2007 Prentice-Hall. All rights reserved3

Trading Investments Market-value method Recorded at cost at acquisition Interest revenue recorded as accrued (debt securities) Dividends recorded as revenue (equity securities) Copyright © 2007 Prentice-Hall. All rights reserved4

Trading Investments Carrying amount is adjusted to market value each period –Recognize gain or loss When investment is sold –Recognize gain or loss = difference between proceeds and last carrying amount on balance sheet Copyright © 2007 Prentice-Hall. All rights reserved5

6 EB-1EB-1 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 2004 Dec6Short-term investment52,250 Cash52,250 23Cash1,100 Dividend Revenue1,100 31Loss on trading investment2,250 Short-term investment2,250 ($52,250 – $50,000) Record at cost at acquisition Interest revenue recorded as accrued (debt securities) Dividends recorded as revenue (equity securities) Carrying amount is adjusted to Market Value each period

Long-term Available-for-Sale Investments Recorded at cost at acquisition Interest revenue recorded as accrued (debt securities) Dividends recorded as revenue when received (equity securities) Copyright © 2007 Prentice-Hall. All rights reserved7

Available-for-Sale Securities Carrying amount adjusted to Market Value each period –Unrealized – gain or loss that results from change in market value, not from sale of investment –Unrealized gain/losses – stockholders’ equity account –Allowance account – companion account to investment account Copyright © 2007 Prentice-Hall. All rights reserved 8

Available-for-Sale Securities Selling investment results in realized gain or loss – reported on income statement Copyright © 2007 Prentice-Hall. All rights reserved9

10 EB-2EB-2 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 2007 Jan14Long-term available-for-sale investment13,200 Cash13,200 Aug22Cash180 Dividend revenue180 Dec31Unrealized loss on investment1,200 Allowance to adjust investment to market1,200 ($13,200 - $12,000) Valuation account to “Available for Sale Investments” on Balance Sheet Stockholders’ equity account on Balance Sheet

Balance Sheet (partial) Assets Long-term assets: Long-term available for sale investments, at market value$12,000 Stockholders’ Equity Common stock$xxxx Retained earningsxxxx Unrealized loss on investments(1,200) Total stockholders’ equity$xxxx Copyright © 2007 Prentice-Hall. All rights reserved11

Copyright © 2007 Prentice-Hall. All rights reserved 12 EB-3EB-3 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 2008 Aug4Cash13,500 Gain on sale of available-for- sale investments300 Long-term available-for-sale investments13,200 This gain on sale of investment is a realized gain. The loss recorded at December 31, 2007 was unrealized because it resulted from a change in the investment’s market value, not from the sale of the investment

Gains and Losses Notice: two kinds of gains and losses Realized: when the investment is actually sold – appears on income statement Unrealized: to adjust investment to market at end of fiscal period – in stockholders’ equity section if available-for-sale Copyright © 2007 Prentice-Hall. All rights reserved13

Copyright © 2007 Prentice-Hall. All rights reserved 14 Equity Method Use when investor can exert significant influence over investee (20-50% of outstanding voting stock) Original investment – recorded at cost Investment account is increased by a proportionate share of investee’s earnings Investment account is decreased by dividends received

Copyright © 2007 Prentice-Hall. All rights reserved 15 Equity Method Investment account – reported on balance sheet Investor’s share of the investee’s earnings – reported on investor’s income statement as “Equity-Method Investment Revenue”

Copyright © 2007 Prentice-Hall. All rights reserved 16 b.Long-term equity method investment156,000 Equity method investment revenue156,000 (780,000 x 20%) GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 2005 (in millions) Jan6Long-term equity method investments500 Cash500 Dec31Long-term equity method investments ($60 x 40%)24 Equity-method investment revenue24 EB-4EB-4 Net income increases investee’s owners’ equity and so it also increases investor’s investment

Copyright © 2007 Prentice-Hall. All rights reserved 17 b.Long-term equity method investment156,000 Equity method investment revenue156,000 (780,000 x 20%) GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 2005 (in millions) Dec31Cash ($50 x 40%)20 Long-term equity method investments ($60 x 40%)20 EB-4EB-4 Dividends decrease investee’s owners’ equity and so it also reduces investor’s investment

Copyright © 2007 Prentice-Hall. All rights reserved 18 EB-4EB-4 Long-term Equity Method Investments Initial investment 500 Share of net inc Share of dividends Balance 504

Copyright © 2007 Prentice-Hall. All rights reserved 19 Consolidated Subsidiaries Use when investor has controlling interest (more than 50% of outstanding voting stock)

Copyright © 2007 Prentice-Hall. All rights reserved 20 Consolidation Accounting Combines the financial statement of two or more companies that have the same owners Accounts of each subsidiary is added to the parent company’s accounts

Copyright © 2007 Prentice-Hall. All rights reserved 21 Bond Investments Record at cost If management has intent to hold until maturity –Amortize any discount or premium to interest revenue –Report at amortized cost on the balance sheet

Copyright © 2007 Prentice-Hall. All rights reserved 22 EB-5EB-5 1. Purchase price ($1,000,000 x.98) = $980,000 Maturity value = $1,000, Cash interest per year ($1,000,000 x.08) = $80,000

Copyright © 2007 Prentice-Hall. All rights reserved 23 EB-5EB-5 3. Annual interest revenue: Bond discount amortization/year = $20,000/5 = $4,000 Amortization of discount increases interest revenue. Cash interest per year$80,000 Discount amortization20,000 Annual interest revenue$100,000

Copyright © 2007 Prentice-Hall. All rights reserved 24 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 2004 Jan2Long-term investment in bonds980,000 Cash980,000 Dec31Cash80,000 Interest revenue80,000 31Long-term investment in bonds20,000 Interest revenue20,000 EB-6EB-6

Copyright © 2007 Prentice-Hall. All rights reserved 25 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT 2009 Jan2Cash 1,000,000 Long-term investment in bonds 1,000,000 EB-6EB-6

Copyright © 2007 Prentice-Hall. All rights reserved 26 Accounting for International Operations Foreign currency exchange rate – Price of a foreign currency –Used to translate price of item stated in one currency to its price in a second currency

Copyright © 2007 Prentice-Hall. All rights reserved 27 Collecting and Paying Cash in a Foreign Currency Translate into U.S. dollars when receivable or payable arises Recognize Foreign-Currency Gain or Loss when cash changes hand if the exchange rate has gone up or down Report net amount of gains and losses on the income statement under “Other Gains and Losses”

Copyright © 2007 Prentice-Hall. All rights reserved 28 EB-7EB-7 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Mar14Accounts receivable (2,000,000 rubles x $.030)60,000 Sales revenue60,000 Apr19Cash (1,000,000 rubles x.038)38,000 Foreign-currency gain8,000 Accounts receivable30,000 May10Cash (1,000,000 rubles x.036)36,000 Foreign-currency gain6,000 Accounts receivable30,000

End of Appendix B