Chapter 15 – Investments and International Operations
CHAPTER 15
C1. Distinguish between debt and
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C2. Describe how to report equity
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C3. Explain foreign exchange rates
between currencies and record
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A1. Compute and analyze the
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P2. Account for held-to-maturity
securities.
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P3. Account for available-for-sale
securities.
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P4. Account for securities with
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15-3A can be completed with Sage 50 or QuickBooks
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1. Companies transfer excess cash to investments to produce
higher income.
2. Some entities, such as mutual funds and pension funds, are set
up to produce income from investments.
3. Strategic reasons. Examples: investments in competitors,
1. Cash equivalents are investments that are both readily
2. Short-term investments (temporary investments or marketable
securities) -current assets that must meet these 2 requirements:
1. Are not readily convertible to cash and not intended to be
converted to cash in short-term.
2. Can also include funds earmarked for special purpose funds or
investments in land or other assets not used in business
1. Debt securities reflect a creditor relationship.
2. Equity securities reflect an owner relationship.
1. Security type—either debt or equity.
2. Holding intention—either short term or long term.
3. Percentage of ownership.
E. Classifications of investments and reporting approach:
1. Trading securities (always short-term)—reported at fair value.
2. Held-to-maturity (debt securities)—reported at amortized cost
3. Available-for-sale (debt and non-influential equity securities)
—reported at fair value.
4. Significant influence (equity securities)—reported under
equity method.
5. Controlling influence (equity securities)—reported in
consolidated statements.
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1. Debt Securities
a. Acquisition is recorded at cost (including any fees).
2. Equity Securities.
a. Acquisition is recorded at cost (including any fees).
b. Dividends received are recorded as dividend revenue and
1. Entire portfolio is reported at fair value.
2. Fair value adjustment from cost results in unrealized gain (or
loss) which is reported on the income statement.
3. Upon sales of individual securities, the difference between
their cost and net proceeds is recognized as gain or loss.
1. Classify as long-term investment when maturity date extends
beyond one year or the operating cycle, whichever is longer.
2. Record interest revenue when earned.
3. Amortize the difference between cost and maturity value over
4. Adjustments to fair value are not required.
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20% of voting stock) securities that are not intended to be held to
maturity. Intent is to sell them in future.
1. Long vs. short-term classification depends on when they are
intended to be sold.
2. Entire portfolio is reported at fair value.
3. Unrealized gains or losses are not reported on income
statement. It is reported in equity section of the balance sheet
1. An investor who owns more than 20% (but not more than
50%) is presumed to have a significant influence over the
investee.
2. Equity method is used. Under this method the investor
a. records its share of the investee’s earnings as increase to
its investment and on its income statement.
b. reduces investment by share of losses and also reports
1. The equity method with consolidation (subject for advanced
course) is used.
2. The controlling investor is called the parent company and the
investee company is called the subsidiary.
3. Investor also reports consolidated financial statements
(subject for advanced course) to the public when owning such
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1. Includes: Unrealized gains and losses on AFS securities,
foreign currency adjustments and certain pension adjustments.
2. Can be reported in financial statements in one of two ways
(new FASB guidelines):
a. on a separate statement of comprehensive income that
immediately follows the income statement
1. Profit margin (net income divided by net sales) reflects the
percentage of net income in each dollar of net sales.
2. Total asset turnover (net sales divided by average total assets)
reflects a company’s ability to produce net sales from total
1. Price of one currency stated in terms of another currency is
called a foreign exchange rate.
2. These rates fluctuate due to changing economic and political
1. Companies making sales (or purchases) for which they receive
2. Prior to statements, and/or at point of collection/payment,
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2015
Jan 1 Investor Corporation purchased 8,000 shares (20%) of Investee
Company’s outstanding stock at a cost of $150,000.
May 31 Investee Company declared and paid a cash dividend of $1.50 per
share.
Dec 31 Investee Company announced that its net income for the year was
$100,000.
2016
Oct 1 Investee Company declared and paid a cash dividend of $1.00 per
share.
Dec 31 Investee Company announced that its net income for the year was
$80,000.
2017
Jan 1 Investor Corporation sold all of its shares of Investee Company
1. Prepare journal entries on Investor Corporation’s books using the
2. Prepare journal entries on Investor Corporation’s books using the cost
method, which assumes that even though Investor owns 20% of
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