Long-Term Investments
and International
Operations
Chapter 10
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Trading and Available-For-Sale
Investments
 Trading - to be sold in the very near
future with the intent of generating
profits on the sale
 Available-for-sale - stock
investments other than trading
securities
 Short
term
 Long term
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 1
Account for available-for-sale
investments
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Available-for-Sale Investments
Market value method
Record initial investment at cost
Report on the balance sheet at
their current market value
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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.
General Journal
Date
Accounts and Explanations
PR
Feb 23 Long-term Investment
(1,000 x $35.75)
Cash
Purchased investment
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Debit
Credit
35,750
35,750
Accounting for
Available-for-Sale Investments
GE receives a $0.20 per share
cash dividend on this investment.
General Journal
Date
Accounts and Explanations
PR
Jul 14 Cash (1,000 x $.22)
Dividend Revenue
Received cash dividend
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Debit
Credit
200
200
What Value of an Investment
Is Most Relevant?
The market value of GE’s
investment in Hewlett-Packard is
$36,400 on December 31.
General Journal
Date
Accounts and Explanations
PR
Dec 31 Allowance to Adjust Investment
To Market ($36,400-$35,750)
Unrealized Gain on Investment
Adjusted investment to market
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Debit
Credit
650
650
What Value of an Investment
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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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
What Value of an Investment
Is Most Relevant?
Unrealized Gain or Loss reported in two places in
financial statements:
 Other
comprehensive income
 Accumulated other
comprehensive income
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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
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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 earnings
2,000
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
Selling an Availablefor-Sale Investment
GE sells its investment in
Hewlett-Packard stock for
$34,000 during 20x9.
General Journal
Date
Accounts and Explanations
PR
May 19 Cash
Loss on Sale of Investment
Long-Term Investment (cost)
Sold investment
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Debit
Credit
34,000
1,750
35,750
Learning Objective 2
Use the equity method for
investments.
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Equity Method Investments
Used to account for
investments in which investor
owns 20 to 50% of investee’s
stock
Record initial investment at cost
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Equity Method Investments
Phillips Petroleum Company
pays $400 million for 30% of the
common stock of White Rock
General
Journal
Natural Gas
Corporation.
Date
Jan 6
Accounts and Explanations
PR
Long-Term Investment
Cash
To purchase equity-method
investment
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Debit
Credit
400
400
Investor’s Percentage
of Investee Income
White Rock Natural Gas
Corporation reports net income
of $250 million for the year.
General Journal
Date
Accounts and Explanations
PR
Dec 31 Long-Term Investment
Equity-Method Investment
Revenue
To record investment revenue
($250 x 0.30)
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Debit
Credit
75
75
Receiving Dividends
Under the Equity Method
White Rock declares and pays a
cash dividend of $100 million.
General Journal
Date
Accounts and Explanations
PR
Dec 31 Cash ($100 x 0.30)
Long-Term Investment
To record cash dividend received
on equity-method investment
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Debit
Credit
30
30
Investment Account
Long-Term Investment
Jan. 6 Purchases
Dec. 31 Net income
Dec. 31 Balance
400 Dec. 31 Dividends
75
445
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Financial Statements
Balance sheet (partial):
Assets
Total current assets
Long-term investments, at equity
Property, plant, and equipment, net
millions
Income statement (partial):
Income from operations
Other revenue:
Equity-method investment revenue
Net income
millions
$XXX
$XXX
445
XXX
75
$XXX
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 3
Understand consolidated
financial statements.
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Consolidated Subsidiaries
Parent Company
100%
ownership
85%
ownership
Subsidiary A
Subsidiary B
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Consolidated Subsidiaries
Parent
Financial
Statements
_____ _____
_____ _____
_____ _____
_____ _____
Subsidiary
Financial
Statements
_____ _____
_____ _____
_____ _____
Consolidated
Financial
Statements
_____ _____
_____ _____
_____ _____
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Consolidation Accounting
 Method of combining financial
statements of two or more
companies that are controlled by
the same owners
 Assets, liabilities, revenues, and
expenses of each subsidiary are
added to parent company’s
accounts
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Goodwill and Minority Interest
 Goodwill - intangible asset -
represents parent company’s
excess payment to acquire
subsidiary
 Minority interest - arises when
parent company purchases less
than 100% of the stock of a
subsidiary company
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 4
Account for long-term
investments in bonds.
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Long-Term Investments
in 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 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.
Interest dates are April 1 and October 1.
General Journal
Date
Apr 1
Accounts and Explanations
PR
Long-Term Investment in Bonds
Cash
Purchased bond investment
($10,000 x 0.925)
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Debit
Credit
9,520
9,520
Long-Term Investments in
Bonds
The discount is amortized by the straightline method.
Date
Oct 1
Oct 1
General Journal
Accounts and Explanations
PR
Cash
Interest Revenue
Received semiannual interest
($10,000 x .06 x 6/12 )
Long-Term Investment in Bonds
Interest Revenue
To amortize bond investment
[($10,000 - $9,520) / 48] x 6
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Debit
Credit
300
300
60
60
Long-Term Investments
in Bonds and Notes
Date
General Journal
Accounts and Explanations
PR
Dec 31 Interest Receivable
Interest Revenue
To accrue interest revenue
($10,000 x .06 x 3/12 )
Dec 31 Long-Term Investment in Bonds
Interest Revenue
To amortize bond investment
[($10,000 - $9,520) / 48] x 3
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Debit
Credit
150
150
30
30
Long-Term Investments
in Bonds and Notes
Long-Term Investment in Bonds
4/1 9,520
10/1
60
12/31
30
9,610
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 5
Account for international
operations.
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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
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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
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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.
General Journal
Date
Accounts and Explanations
PR
Jul 28 Accounts Receivable – Artes
Sales Revenue
Sale on account
(1,000,000 pesos x $0.086)
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Debit
Credit
86,000
86,000
Managing Cash in
International Transactions
On August 28, the peso is worth $0.083.
Shipp receives 1 million pesos from Artes.
General Journal
Date
Accounts and Explanations
PR
Aug 28 Cash (1,000,000 pesos x $0.083)
Foreign Currency Transaction
Loss
Accounts Receivable – Artes
Collection on account
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Debit
Credit
83,000
3,000
86,000
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.
General Journal
Date
Accounts and Explanations
PR
Sep 15 Inventory
Accounts Payable-Gesellschaft
Purchase on account
(20,000 Swiss francs x $0.80)
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Debit
Credit
16,000
16,000
Managing Cash in
International Transactions
When Shipp pays on September 29, the
Swiss franc has decreased in value to
$0.78
General Journal
Date
Accounts and Explanations
PR
Sep 29 Accounts Payable-Gessellschaft
Cash
Foreign-Currency Transaction
Gain
Payment on account
(20,000 Swiss francs x $0.78)
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Debit
Credit
16,000
15,600
400
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
Foreign-currency transaction gain
Foreign-currency transaction loss, net
$3,000
( 400)
$2,600
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
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.
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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.
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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.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
International Accounting
Standards
International Accounting
Standards Committee (IASC) primary organization working to
achieve worldwide harmony of
accounting standards is the
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 6
Report investing transactions on
the statement of cash flows.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
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
Disposition of PP&E
Loans to others
Payments for other companies
All other investing activities
Cash used for investing activities
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$(15)
7
(14)
(12)
(6)
$(40)
End of Chapter 10
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