Appendix C
Investments and International Operations
QUESTIONS
1. To be classified as current assets, investments must be (i) capable of being
operating cycle, whichever is longer).
2. Short-term investments in trading securities are reported on the balance sheet at the
3. The $2,000 difference between the proceeds ($12,000) and the cost ($10,000) is
4. The three classes of noninfluential investments in securities are:
a) debt and equity trading securities.
The two classes of influential investments in securities are:
a) equity securities giving an investor a significant influence over an investee.
5. To be classified as current assets, investments must be capable of being converted
into cash quickly and management must intend to sell the investments as a source
of cash to satisfy the needs of current operations. To be classified as long term,
6. Unrealized holding gains and losses are not reported on the standard income
statement for available-for-sale securities. Unrealized gains and losses for these
7. Unrealized lossEquity……………………………………….……… ##
Fair Value Adjustment—Available-for-Sale (LT)........ ##
8. The portfolio for investments in available-for-sale securities should be reported on
9. The portfolio of long-term investments in debt securities is reported at cost adjusted
for amortization of any difference between cost and maturity when the investments
10. The equity method is used when the investor has a “significant influence” over the
investee corporation; i.e., generally when the investor owns 20% or more of the
11. A company prepares consolidated statements if the company has control over a
subsidiary as a result of owning more than 50% of the subsidiary’s voting stock.
12A. Two major challenges in accounting for international operations include (1)
13A. If the foreign exchange rate falls from $1.40 to $1.30 during the time the U.S.
company holds a receivable that is denominated in the foreign currency, the U.S.
14A. No. If a sales agreement requires a foreign customer to pay U.S. dollars to the United
15. Apple reports $112 million in foreign currency adjustments for the year ended
September 28, 2013. This reflects an unrealized loss.
16. Google reports $392 million of net unrealized losses for its AFS investments for the
17. Samsung’s financial statements, including its income statement, are all labeled as
QUICK STUDIES
Quick Study C-1 (10 minutes)
Quick Study C-2 (10 minutes)
a. D
e. D
i. D
Quick Study C-3 (10 minutes)
[Note: This actively managed (for profit) short-term investment in equity securities would
be classified as Trading Securities.]
Apr. 18 Short-Term Investments—Trading (XLT)…………………12,850
Cash…………………………………..…………….….…… 12,850
Received dividend of $1 per share.
Quick Study C-4 (10 minutes)
May 7 Short-Term Investments—Trading (Kraft)............. 10,300
Cash………………………………………….….…….….…. 10,300
Purchased 200 shares at $50 plus $300 fee.
June 6 Cash……………………………………………….….….…….…. 11,050
Quick Study C-5 (20 minutes)
2014
Dec. 31 Unrealized Loss—Income…………………………….………… 2
2015
Dec. 31 Fair Value Adjustment—Trading (ST)………….….….…… 6
Unrealized Gain—Income………..………………….……. 6
Record fair value of securities.
2016
Dec. 31 Fair Value Adjustment—Trading (ST)………….….….…… 5
Unrealized Gain—Income………..………………….……. 5
Record fair value of securities.
2017
Dec. 31 Unrealized Loss—Income…………..……………….…………. 10
Quick Study C-6 (10 minutes)
July 31 Cash…………………………..…………….……………………………1,200
Interest Revenue………..……………….….….…….….….. 1,200
Record interest earned ($40,000 x 6% x 6/12).
Quick Study C-7 (10 minutes)
1. 2015
Dec. 31 Unrealized Loss—Equity……………..…………..….…….. 3,000
Fair Value Adjustment—Available-for-Sale (ST) 3,000
2. Both accounts in part (1) are reported on the balance sheet.
i. The Unrealized Loss is reported as a reduction in the equity section
(and in comprehensive income).
3. 2016
Apr. 6 Cash…….……………………………..……..…………………..…. 26,000
Gain on Sale of Short-Term Investments……... 1,000
Quick Study C-8 (10 minutes)
May 9 Short-Term Investments—AFS (Higo)………………….. 5,150
Cash………………………………………..……..….…….. 5,150
Purchased 200 shares at $25 plus $150 fee.
June 2 Cash*…….………………………………….……………………. 2,710
Gain on Sale of Short-Term Investments....... 135
As of
Dec. 31
Number
of
Shares
Cost
per
share
Total
Cost
Fair
Value per
share
Total
Fair
Value
Unrealized
Loss (Fair
Value-Cost)
Quick Study C-9 (10 minutes)
1.
Dec. 31 Unrealized LossEquity……………….……………….….…... 12,000
2. Each of the accounts used in the entry for (1) would be reported on the
balance sheet. The unrealized loss of $12,000 is a reduction in equity.
Financial and Managerial Accounting, 6th Edition
6
Quick Study C-10 (10 minutes)
Valuation Method: The fair value method is used to account for this investment in
long-term equity securities (AFS portfolio).
2015
May 20 Long-Term Investments—AFS (ORD)…………….………..1,000,000
Cash………………………………………..………………………. 1,000,000
Record purchase of securities.
2016
Aug. 5 Cash……………………………………………………………………...625,000
Quick Study C-11 (10 minutes)
a.
Nov. 1 Cash …………………………….…………….…………………………40,000
Long-Term Investment—ORD……….…….….….….…. 40,000
Received cash dividends ($100,000 x 40%).
b.
Dec. 31 Long-Term Investments—ORD…………….….….…….…...280,000
Quick Study C-12 (10 minutes)
1. Equity securities giving an investor significant influence are accounted for
using the equity method.
2. Available-for-sale debt securities are reported on the balance sheet at fair
Quick Study C-13 (10 minutes)
1. The controlling investor is called the parent, and the investee is called the
subsidiary.
Quick Study C-14 (10 minutes)
1. Return on total assets =
2. This ratio provides information to evaluate a company‘s profitability
(efficiency) in using its available assets.
Quick Study C-15 (10 minutes)
1. Return on Total Assets = Profit margin x Total asset turnover
2. Component analysis is useful as it allows the determination of whether
return on assets is achieved primarily due to profitability or efficiency of
Quick Study C-16A (10 minutes)
Date of Sale
Accounts Receivable……………..……………..….…….……..14,500
Date of Payment
Cash……………………………………………………………………...13,500
Foreign Exchange Loss……….………………..……….……...1,000
Accounts Receivable………………………..…….….……. 14,500
Cash received on account (£10,000 x $1.35/£).
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Net income
Average total assets
Net income
Net sales
Net sales
Average total assets
Net income
Average total assets
Quick Study C-17A (10 minutes)
Mar. 1 Account Receivable—Hamac…………………..………….….9,076
Sales……….………………………………………..….…….…... 9,076
Record credit sale in value of ringgits
(20,000 ringgits x $0.4538/ringgit).
Mar. 31 Cash…………………….……………..…………………..…………....9,798
Quick Study C-18 (10 minutes)
For trading securities (and as explained in Carrefour’s description of its
trading securities), these assets “are valued at their fair value with
EXERCISES
Exercise C-1 (10 minutes)
2. Equity securities reflect an owner relationship such as shares of stock
issued by companies.
3. Short-term investments are securities that (1) management intends to
4. Long-term investments in securities are defined as those securities that
Exercise C-2 (15 minutes)
a.
Mar. 22 Short-Term Investments—Trading (RIP)….......... 10,080
b.
Sept. 1 Cash……….…………………..…………….………………….. 1,000
Dividend Revenue……..…………..……..….……... 1,000
Received dividend on stock (1,000 x $1.00).
c.
Oct. 8 Cash*……………………………………………….…….….…. 7,450
Short-Term Investments—Trading (RIP)**..... 5,040