1. 1 Long-Term Investments and International Operations Chapter 10

2. 2 Trading and Available-For-Sale Investments Trading - expected to be sold in the near future with the intent of generating profits on the sale Available-for-sale - stock investments other than trading securities, which would be sold if need for cash arose –Short term –Long term

3. 3 Learning Objective 1 Account for available-for-sale investments

4. 4 Available-for-Sale Investments Market value method Record initial investment at cost Report securities on the balance sheet at current market value

5. Accounting for Available-for-Sale Investments On February 23, GE purchases 1,000 shares of Hewlett- Packard common stock for $35,750. GE intends to hold this stock for longer than one year. Feb 23Long-term Investment (1,000 x $35.75)35,750 Cash35,750 Purchased investment ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

6. Accounting for Available-for-Sale Investments GE receives a $0.20 per share cash dividend on this investment. Jul 14Cash (1,000 x $.22)200 Dividend Revenue200 Received cash dividend ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

7. What Value of an Investment Is Most Relevant? The market value of GE’s investment in Hewlett-Packard is $36,400 on December 31. Dec 31Allowance to Adjust Investment To Market ($36,400-$35,750 [cost])650 Unrealized Gain on Investment650 Adjusted investment to market ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

8. 8 What Value of an Investment Is Most Relevant? Long-Term Investment Allowance to Adjust Investment to Market 35,750650 Investment carrying amount = Market value of $36,400

9. 9 What Value of an Investment Is Most Relevant? Unrealized Gain or Loss - reported in two places in financial statements: –Other comprehensive income, reported on income statement following net income –Accumulated other comprehensive income, a separate section of stockholders’ equity following retained earnings

10. What Value of an Investment Is Most Relevant? Income statement: Revenues$10,000 Expenses, including income tax 6,000 Net income$ 4,000 Other comprehensive income: Unrealized gain on investment$ 650 Less: Income tax (40%)( 260) 390 Comprehensive income$ 4,390 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

11. What Value of an Investment Is Most Relevant? Balance sheet: Assets: Total current assets$ XXX Long-term investments – at market value 36,400 Property, plant, and equipment, net XXX Stockholders’ equity: Common stock $ 1,000 Retained earnings2,000 Accumulated other comprehensive income: Unrealized gain on investments$ 390 Total stockholders’ equity$ 3,390 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

12. Selling an Available- for-Sale Investment GE sells its investment in Hewlett-Packard stock for $34,000 during 20x9. May 19Cash34,000 Loss on Sale of Investment1,750 Long-Term Investment (cost)35,750 Sold investment ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

13. 13 Learning Objective 2 Use the equity method for investments.

14. 14 Equity Method Investments Used to account for investments in which investor has significant influence, defined as owning 20% to 50% of investee’s stock Record initial investment at cost

15. Equity Method Investments Phillips Petroleum Company pays $400 million for 30% of the common stock of White Rock Natural Gas Corporation. Jan 6Long-Term Investment400 Cash400 To purchase equity-method investment ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

16. Investor’s Percentage of Investee Income White Rock Natural Gas Corporation reports net income of $250 million for the year. Dec 31Long-Term Investment75 Equity-Method Investment Revenue75 To record investment revenue ($250 x 0.30) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

17. Receiving Dividends Under the Equity Method White Rock declares and pays a cash dividend of $100 million. Dec 31Cash ($100 x 0.30)30 Long-Term Investment30 To record cash dividend received on equity-method investment ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

18. Investment Account Long-Term Investment Jan. 6Purchases400 Dec. 31Net income 75 Dec. 31Balance445 Dec. 31Dividends30 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

19. 19 Financial Statements Balance sheet (partial):millions Assets Total current assets$XXX Long-term investments, at equity445 Property, plant, and equipment, netXXX Income statement (partial): millions Income from operations$XXX Other revenue: Equity-method investment revenue 75 Net income $XXX

20. 20 Learning Objective 3 Understanding consolidated financial statements.

21. 21 Consolidated Subsidiaries Parent Company Subsidiary A 100% ownership Subsidiary B 85% ownership

22. 22 Consolidated Subsidiaries Subsidiary Financial Statements _____ Consolidated Financial Statements _____ Parent Financial Statements _____

23. 23 Consolidation Accounting Method of combining financial statements of a parent company and those subsidiary companies that are controlled by the parent company: a substance and form issue Control is presumed by 50% or more ownership Assets, liabilities, revenues, and expenses of each subsidiary are added to parent company’s accounts, with elimination of intercompany receivables and payables, etc.

24. 24 Goodwill and Minority Interest Goodwill - intangible asset - represents parent company’s excess payment over net fair value to acquire subsidiary Minority interest - arises when parent company purchases less than 100% of the stock of a subsidiary company

25. 25 Learning Objective 4 Account for long-term investments in bonds.

26. Long-Term Investments in Bonds and Notes Investor (Bondholder) Investment in bonds Interest revenue Held-to-maturity investments are long-term investments in bonds and notes only. Issuing Corporation Bonds payable Interest expense ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

27. Long-Term Investments in Bonds and Notes 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 in four years. Interest dates are April 1 and October 1. Apr 1Long-Term Investment in Bonds9,520 Cash9,520 Purchased bond investment ($10,000 x 0.925) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

28. Long-Term Investments in Bonds Oct 1Cash300 Interest Revenue300 Received semiannual interest ($10,000 x.06 x 6 / 12 ) Oct 1Long-Term Investment in Bonds60 Interest Revenue60 To amortize bond investment [($10,000 - $9,520) / 48] x 6 months ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren The discount is amortized by the straight-line method.

29. Long-Term Investments in Bonds and Notes Dec 31Interest Receivable150 Interest Revenue150 To accrue interest revenue ($10,000 x.06 x 3 / 12 ) Dec 31Long-Term Investment in Bonds30 Interest Revenue30 To amortize bond investment [($10,000 - $9,520) / 48] x 3 months ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

30. 30 Long-Term Investments in Bonds and Notes Long-Term Investment in Bonds 4/19,520 10/1 60 12/31 30 9,610 Long-Term Investment in Bonds

31. 31 Learning Objective 5 Account for international operations.

32. 32 Foreign Currencies and Exchange Rates Foreign currencies exchange rate - Measure of one currency against another Translation - Using an exchange rate to convert the cost of an item given in one currency to its cost in a second currency

33. 33 Foreign Currencies and Exchange Rates Two main factors determine the supply and demand for a particular currency: 1.Ratio of a country’s imports to its exports 2.Rate of return available in the country’s capital market 3.It’s all about supply and demand of the currencies

34. 34 Import/Export Considerations A net importer nation (like the U.S.) must buy foreign currencies by selling its native currency This increases demand for the foreign currency, driving its value up relative to the dollar This increases supply of the dollar, driving his value down relative to the foreign currency

35. 35 Capital Market Considerations U.S. securities markets are widely viewed as being the fairest and most stable in the world Foreign investors must pay in dollars: –This increases demand for the dollar, driving its value up relative to the foreign currency –This increases the supply of foreign currency, driving its value down relative to the dollar

36. Managing Cash in International 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 $0.086. Jul 28Accounts Receivable – Artes86,000 Sales Revenue86,000 Sale on account (1,000,000 pesos x $0.086) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

37. Managing Cash in International Transactions On August 28, the peso is worth $0.083. Shipp receives 1 million pesos from Artes. Aug 28Cash (1,000,000 pesos x $0.083)83,000 Foreign Currency Transaction Loss3,000 Accounts Receivable – Artes86,000 Collection on account ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

38. Managing Cash in International Transactions Shipp Belting buys inventory from Gesellschaft Ltd., a Swiss company. They decide on a price of 20,000 Swiss francs. On September 15, Shipp receives the goods. The Swiss franc is quoted at $0.80. Sep 15Inventory16,000 Accounts Payable-Gesellschaft16,000 Purchase on account (20,000 Swiss francs x $0.80) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

39. Managing Cash in International Transactions When Shipp pays on September 29, the Swiss franc has decreased in value to $0.78 Sep 29Accounts Payable-Gessellschaft16,000 Cash15,600 Foreign-Currency Transaction Gain400 Payment on account (20,000 Swiss francs x $0.78) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

40. 40 Managing Cash in International Transactions Report the net amount of foreign currency transaction gains and losses on the income statement as “Other Revenues and Gains” or “Other Expenses and Losses” Foreign-currency transaction loss$3,000 Foreign-currency transaction gain( 400) Foreign-currency transaction loss, net$2,600

41. 41 Managing Cash in International Transactions Hedging - 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.

42. 42 Consolidation of Foreign Subsidiaries Subsidiary’s statements must be brought into conformity with American GAAP Subsidiary statements, expressed in foreign currency, must be translated into dollars.

43. 43 Consolidation of Foreign Subsidiaries Foreign-currency translation adjustment - 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. A detailed example: text pages 488-489

44. 44 International Accounting Standards International Accounting Standards Committee (IASC) - primary organization working to achieve worldwide harmony of accounting standards Supported by United States, most of British Commonwealth, Japan, France, Germany, Netherlands, and Mexico However, IASB has no authority to require compliance

45. 45 Learning Objective 6 Report investing transactions on the statement of cash flows.

46. Using the Statement of Cash Flows Cash flows from investing activities: Addition to property and equipment$(15) Disposition of PP&E 7 Loans to others (14) Payments for other companies (12) All other investing activities (6) Cash used for investing activities$(40) General Electric Statement of Cash Flows Year Ended December 31, 2001 (In Millions) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren