Quản trị Kinh doanh - Chapter 15: Investments and international operations

Investments and International OperationsChapter 15PowerPoint Editor: Beth Kane, MBA, CPACopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-C1: Basics of Investments 2Basics of InvestmentsCompanies transfer excess cash into investments to produce higher income.Some companies are set up to produce income from investments.Companies make investments for strategic reasons.Motivation for InvestmentsC13Investments of Selected CompaniesShort-Term (S-T) and Long-Term (L-T) Investments as a Percent of Total AssetsC14Short-Term InvestmentsC1Short-term investments are securities that:Management intends to convert to cash within one year or the operating cycle, whichever is longer.Are readily convertible to cash.Short-term investments do not include cash equivalents. Cash equivalents are investments that are both readily converted to known amounts of cash and mature within three months. 5Long-Term InvestmentsLong-term investments:are not readily convertible to cash. are not intended to be converted to cash in the short term.are reported in the noncurrent section of the balance sheet, often in its own category.C16Debt Securities versus Equity SecuritiesDebt SecuritiesReflect a creditor relationship Examples: Investments in notes, bonds, and CDsMay be issued by governments, companies, or individualsC1Equity SecuritiesReflect an owner relationship Examples: Investments in shares of stockIssued by companies7Classification and ReportingC1Accounting for Investments depends on three factors:Security type: debt or equity Intent to hold the security short or long termPercentage ownership in another company’s equity securities8 15-P2: Held-to-Maturity Securities 9Debt Securities: Accounting BasicsDebt securities are recorded at cost when purchased. Interest revenue for investments in debt securities is recorded when earned. On September 1, 2014, Music City paid $29,500 plus a $500 brokerage fee to buy Dell’s 7%, 2-year bonds payable with a $30,000 par value. The bonds pay interest semiannually on August 31st and February 28th. Music City plans to hold the bonds until they mature (HTM securities).P210Debt Securities: Accounting BasicsInterest earned but not received must be accrued on December 31, 2014. $30,000 par value × 7% × 4/12 = $700 interest earned.P211Debt Securities: Accounting BasicsOn February 28, 2015, Music City will record the receipt of the semiannual interest. The company’s accountants will make the following entry. $30,000 par value × 7% × 6/12 = $1,050 (Interest received).P2$30,000 par value × 7% × 4/12 = $700 (Interest earned in 2012).$30,000 par value × 7% × 2/12 = $350 (Interest earned in 2013).12Debt Securities: Accounting BasicsWhen the bonds mature, Music City will receive the amount of the par value in cash. The bonds have now been retired.P213 15-P1: Reporting of Noninfluential Investments 14Equity Securities: Accounting Basics Equity securities are recorded at cost when acquired, including commissions or brokerage fees paid. Any cash dividends received are credited to Dividend Revenue and reported in the income statement. When the securities are sold, sales proceeds are compared with cost, and any gain or loss is recorded.P115Reporting of Noninfluential InvestmentsCompanies must value and report most noninfluential investments at fair value. The exact reporting requirements depend on whether the investments are classified as (1) trading, (2) held- to-maturity, or (3) available-for-sale.P116Trading SecuritiesDebt and equity securitiesActively managed and traded for profitFrequent purchases and sales expectedReported at fair valueUnrealized gain or loss reported in the income statementP117Trading SecuritiesTechCom’s portfolio of trading securities had a total cost of $11,500, and a fair value of $13,000, on December 31, 2014, the first year the securities were held. The $1,500 difference between the cost of $11,500 and the fair value of $13,000 is an unrealized gain.P118Trading SecuritiesAssume TechCom sells trading securities that had cost $1,000 for $1,200 cash, on January 9, 2015.The gain is reported in the Other Revenues and Gains section of the Income Statement. Likewise, a loss would be reported in Other Expenses and Losses section.P119NEED-TO-KNOWBerkshire Co. purchases investments in trading securities at a cost of $130 on December 15, 20X1. (This is its firstand only purchase of such securities.) On December 28, Berkshire received a $15 cash dividend from the stock purchased on December 15. At December 31, 20X1, the trading securities had a fair value of $140.a. Prepare the December 15 acquisition entry for the trading securities’ portfolio.b. Prepare the December 28 receipt of cash dividends entry for the trading securities’ portfolio.20X1DebitCreditDec. 15Short-term investments - Trading130Cash130Dec. 28Cash15Dividend revenue15Dec. 15130General JournalShort-term investments - TradingP120NEED-TO-KNOWBerkshire Co. purchases investments in trading securities at a cost of $130 on December 15, 20X1. (This is its firstand only purchase of such securities.) On December 28, Berkshire received a $15 cash dividend from the stock purchased on December 15. At December 31, 20X1, the trading securities had a fair value of $140.a. Prepare the December 15 acquisition entry for the trading securities’ portfolio.b. Prepare the December 28 receipt of cash dividends entry for the trading securities’ portfolio.c. Prepare the December 31 year-end adjusting entry for the trading securities’ portfolio.Dec. 15130Unadjusted0Adjustment10Dec. 31130Adjusted10Step 1: Determine what the current account balance equals.$0Step 2: Determine what the current account balance should equal.$10Step 3: Record an adjusting entry to get from step 1 to step 2.$1020X1DebitCreditDec. 31Fair value adjustment - Trading10Unrealized gain - Income10Fair value adjustment - TradingGeneral JournalShort-term investments - TradingP121NEED-TO-KNOWBerkshire Co. purchases investments in trading securities at a cost of $130 on December 15, 20X1. (This is its firstand only purchase of such securities.) On December 28, Berkshire received a $15 cash dividend from the stock purchased on December 15. At December 31, 20X1, the trading securities had a fair value of $140.a. Prepare the December 15 acquisition entry for the trading securities’ portfolio.b. Prepare the December 28 receipt of cash dividends entry for the trading securities’ portfolio.c. Prepare the December 31 year-end adjusting entry for the trading securities’ portfolio.d. Explain how each account in entry c) is reported in financial statements.Dec. 15130Unadjusted0Adjustment10Dec. 31130Adjusted1020X1DebitCreditDec. 31Fair value adjustment - Trading10Unrealized gain - Income10Balance SheetCurrent assets:Short-term investments - Trading$130Fair value adjustment - Trading10Short-term investments - Trading (at fair value)$140Income StatementOther revenues and gains:Dividend revenue$15Unrealized gain - Income10Fair value adjustment - TradingGeneral JournalShort-term investments - TradingP122NEED-TO-KNOWBerkshire Co. purchases investments in trading securities at a cost of $130 on December 15, 20X1. (This is its firstand only purchase of such securities.) On December 28, Berkshire received a $15 cash dividend from the stock purchased on December 15. At December 31, 20X1, the trading securities had a fair value of $140.a. Prepare the December 15 acquisition entry for the trading securities’ portfolio.b. Prepare the December 28 receipt of cash dividends entry for the trading securities’ portfolio.c. Prepare the December 31 year-end adjusting entry for the trading securities’ portfolio.d. Explain how each account in entry c) is reported in financial statements.e. Prepare the January 3, 20X2, entry when a portion of its trading securities (that had originally cost $33) is sold for $36.Dec. 31130Dec. 3110Jan. 33320X2DebitCreditJan. 3Cash36Short-term investments - Trading33Gain on sale of short-term investments3Fair value adjustment - TradingShort-term investments - TradingGeneral JournalJan. 3 97P123 15-P2: Held-to-Maturity Securities 24Held-to-Maturity SecuritiesDebt securitiesIntent and ability to hold until maturityReported as:Current assets if their maturity dates are within one year or the operating cycle, whichever is longer.Noncurrent investments if their maturity dates are longer than one year or the normal operating cycle, whichever is longer.The portfolio of HTM securities is reported at amortized cost. There is no fair value adjustment to the portfolio.P225NEED-TO-KNOWPrepare journal entries to record the following transactions involving the short-term securitiesinvestments of LA Life.a. On May 14, paid $100 cash to purchase Muni’s 90-day short-term debt securities ($100 principal), datedMay 14, that pay 8% interest (categorized as held-to-maturity securities).b. On August 12, received a check from Muni in payment of the principal and 90 days’ interest on the debtsecurities purchased in transaction a.DebitCreditMay. 14Short-Term Investments - HTM (Muni)100Cash100Aug. 12Cash102Interest revenue($100 x .08 x 90/360)2Short-Term Investments - HTM (Muni)100General JournalP226 15-P3: Available-for-Sale Securities 27Available-for-Sale SecuritiesDebt and equity securities not classified as trading or held-to-maturity Not actively managed Report as: Short-term investments if the intent is to sell the securities within one year or the normal operating cycle, whichever is longer. Long-term investments if securities do not meet short-term investment criteria.Valued at fair valueUnrealized gains or loss reported in the equity section of the balance sheet as part of comprehensive incomeP328Equity Securities: Accounting Basics On December 20, Music City sells 500 shares of Intex in the open market for $45,000.Calculate original cost per share:$86,000 ÷ 1,000 shares = $86.00 per share cost.Calculate cost of shares sold:500 shares × $86 = $43,000.P329Available-for-Sale SecuritiesMusic City had no prior investments. In the current period, it acquired two available-for-sale securities. At December 31, 2014, the following information is provided:P330Available-for-Sale SecuritiesMusic CityPartial Balance SheetDecember 31, 2014Assets  Long-term investments‒AFS (at cost) $ 73,000 Fair value adjustment–AFS 1,550 Long-term investments‒AFS (at fair value)  $ 74,550   Equity   Add unrealized gain on AFS securities  $ 1,550 P331Available-for-Sale SecuritiesLet’s extend our example and assume that at December 31, 2015, the portfolio of long-term AFS securities has an $81,000 cost and an $82,000 fair value.P332Global ViewFair Value Option for Reporting Financial Assets Both U.S. GAAP and IFRS permit companies to use fair value in reporting financial assets. This option allows companies to report any financial asset at fair value and recognize value changes in income. This method was previously reserved only for trading securities, but now is an option for available-for-sale and held-to-maturity securities. 33NEED-TO-KNOWMay 8Sep. 2Oct. 2Sold 100 shares of its investment in FedEx stock at $47 per share and held the remaining 200 shares; broker’s commission was $225.Purchased 400 shares of Ajay stock for $60 per share plus $1,600 in commissions. The stock is held as a short-term investment in available-for-sale securities.Gard Company completes the following selected transactions related to its short-term investments during the current year. Prepare journal entries to record the following transactions. Purchased 300 shares of FedEx stock as a short-term investment in available-for-sale securities at $40 per share plus $975 in broker fees.P334NEED-TO-KNOWMay 8Sep. 2Oct. 2DebitCreditMay 8Short-term investments - AFS (FedEx)(300 x $40) + $97512,975Cash12,975Sep. 2Cash(100 x $47) - $2254,475Short-term investments - AFS (FedEx)($12,975 x 100/300)4,325Gain on sale of short-term investment150Oct. 2Short-term investments - AFS (Ajay)(400 x $60) + $1,60025,600Cash25,600Sold 100 shares of its investment in FedEx stock at $47 per share and held the remaining 200 shares; broker’s commission was $225.Purchased 400 shares of Ajay stock for $60 per share plus $1,600 in commissions. The stock is held as a short-term investment in available-for-sale securities.General JournalPurchased 300 shares of FedEx stock as a short-term investment in available-for-sale securities at $40 per share plus $975 in broker fees.May 812,975Sep. 24,325Oct. 225,600Dec. 3134,250Short-Term Investments - AFSP335NEED-TO-KNOWSharesCost per shareTotal costFair Value per ShareTotal Fair ValueUnrealized Gain (Loss)FedEx200$43.25$8,650$48.00$9,600Ajay400$64.0025,600$55.0022,000$34,250$31,600($2,650)May 812,9750Sep. 24,325Oct. 225,600Adj.2,650Dec. 3134,250Dec. 312,650DebitCreditDec. 31Unrealized Loss - Equity2,650Fair Value Adjustment - Available-for-Sale (ST)2,650General JournalShort-Term Investments - AFSFair Value Adjustment (AFS-ST)Prepare an adjusting journal entry as of December 31, 20X1, if the fair values of the equity securitiesheld by Gard Company are $48 per share for FedEx and $55 per share for Ajay. (Year 20X1 is thefirst year Gard Company acquired short-term investments.)P336 15-P4: Reporting of Influential Investments 37In some cases, influence or control may exist with less than 20% ownership.Investor Ownership of Investee Shares Outstanding0%20%50%100%Cost or Market Value MethodEquity MethodConsolidated Financial StatementsAccounting For Influential InvestmentsP438Significant influence is generally assumed with 20% to 50% ownership.Accounting For Influential InvestmentsInvestor Ownership of Investee Shares Outstanding0%20%50%100%Cost or Market Value MethodEquity MethodConsolidated Financial StatementsP439Investments in Equity Securities with Significant InfluenceOriginal investment is recorded at cost.The investment account is increased by a proportionate share of investee’s earnings.The investment account is decreased by dividends received.P440Investments in Equity Securities with Significant Influence On January 1, 2014, Micron Co. records the purchase of 3,000 shares (30%) of Star Co. common stock at a total cost of $70,650 cash. P441Investments in Equity Securities with Significant Influence For 2014, Star reports net income of $20,000, and pays total cash dividends of $10,000 on January 9, 2015.P4$10,000 × 30% = $3,000$20,000 × 30% = $6,00042P4Investments in Equity Securities with Significant Influence43 15-C2: Investment in Securities with Controlling Influence 44Investments in Securities with Controlling InfluenceRequired when investor’s ownership exceeds 50% of investee.Equity Method is used.Consolidated financial statements show the financial position, results of operations, and cash flows of all entities under the parent’s control.C245Accounting Summary for Investments in SecuritiesC246Comprehensive IncomeC2Comprehensive Income: all changes in equity during a period except those from owners’ investments and dividends. Examples of items not included in Net Income but which are part of Comprehensive Income include:Unrealized gains and losses on available-for-sale securitiesForeign currency adjustmentsCertain pension adjustments Comprehensive Income Reporting Options1. On a separate statement of comprehensive income that immediately follows the income statement.2. On the lower section of the income statement (as a single continuous statement of income and comprehensive income).47Global ViewAccounting for Influential Securities The accounting for influential securities is broadly similar between U.S. GAAP and IFRS. There are a couple of minor differences in terminology.Accounting for Noninfluential Securities The accounting for noninfluential securities is broadly similar between U.S. GAAP and IFRS. There are a couple of differences in terminology. Trading securities are referred to in IFRS as financial assets at fair value though profit and loss, and available-for-sale securities are referred to as available-for-sale financial assets.48 15-A1: Components of Return on Total Assets 49Components of Return on Total AssetsReturn ontotal assets=Profitmargin×Total assetturnoverNet incomeAverage total assets=×Net incomeNet salesNet salesAverage total assetsA150* 2013 sales and income data scaled by 52/53 due to the 53-week year..Return on Total AssetsHere are the returns on total assets for Gap, Inc. for the years 2010 through 20124:All companies desire a high return on total assets. To improve the return, the company must meet any decline in profit margin or total asset turnover with an increase in the other. Companies consider these components in planning strategies.A151 15-C3: Investments in International Operations 52Appendix 15A: Investments in International OperationsTwo major accounting challenges arise when companies have international operations:C3Accounting for sales and purchases listed in a foreign currency.Preparing consolidated financial statements with international subsidiaries.53Exchange Rates Between CurrenciesEach country uses its own currency for internal economic transactions.To make transactions in another country, units of that country’s currency must be acquired.The cost of those currencies is called the exchange rate.C354Sales in a Foreign CurrencyBoston Company, a U.S.-based manufacturer makes a credit sale to London Outfitters, a British retail company. On December 12, 2014, Boston sells £10,000 of goods with payment due on February 10, 2015. Boston keeps its record in U.S. dollars. At the date of sale, the British pound is valued at $1.80.£10,000 × $1.80 = $18,000C355Sales in a Foreign CurrencyBoston Company is a December 31, year-end company. On December 31, 2014, the British pound has an exchange rate of $1.84. The dollar value of the account receivable from London is $18,400 on this date. The receivable is to be valued in the balance sheet at its current dollar amount.Accounts Receivable – London OutfittersDateExplanationDebitCreditBalance12/12/14 Sale 18,000   18,000 12/31/14 Adjustment for foreign currency400   18,400   C356Sales in a Foreign CurrencyOn February 10, 2015, Boston receives London Outfitters’ payment of £10,000. Boston immediately exchanges the pounds for U.S. dollars. The exchange rate on this date is $1.78 per pound, so Boston receives $17,800 for the £10,000 received in settlement. Accounts Receivable – London OutfittersDateExplanationDebitCreditBalance12/12/14 Sale 18,000   18,000 12/31/14 Adjustment for foreign currency400   18,400 2/10/15 Payment received 18,400 -0-C357Purchases in a Foreign CurrencyNC Imports, a U.S. company, purchases products costing €20,000 from Hamburg Brewing on January 15, when the exchange rate is $1.20 per euro.€20,000 × $1.20 = $24,000C358Purchases in a Foreign CurrencyNC Imports makes payment in full on February 14 when the exchange rate is $1.25 per euro.€20,000 × $1.25 = $25,000C359Consolidated Statements with International SubsidiariesConsider a U.S.-based company that owns a controlling interest in a French company. The reporting currency of the U.S. company is the dollar. The French company maintains its books in Euros. Before preparing consolidated statements, the U.S. company must translate the French company’s statements into dollars. The process requires the parent company to select appropriate foreign exchange rates and to apply those rates to the foreign subsidiary’s account balances.TranslateAccount BalancesC360End of Chapter 1561