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Chapter 15 - Investments and International Operations
Chapter 15
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
fair (market) value of the portfolio of trading securities.
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.
b) debt securities held-to-maturity.
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
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)........ ##
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Chapter 15 - Investments and International Operations
8. The portfolio for investments in available-for-sale securities should be reported on
the balance sheet at fair (market) value—this is separated into short- and long-term.
9. The portfolio of long-term investments in debt securities is reported at cost adjusted
10. The equity method is used when the investor has a “significant influence” over 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.
year ended December 31, 2013.
17. Samsung’s financial statements, including its income statement, are all labeled as
being consolidated statements.
QUICK STUDIES
Quick Study 15-1 (10 minutes)
Quick Study 15-2 (10 minutes)
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Chapter 15 - Investments and International Operations
Quick Study 15-3 (10 minutes)
[Note: This actively managed (for profit) short-term investment in equity securities would
be classified as Trading Securities.]
Quick Study 15-4 (10 minutes)
May 7 Short-Term Investments—Trading (Kraft)............. 10,300
Cash.................................................................... 10,300
Purchased 200 shares at $50 plus $300 fee.
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Chapter 15 - Investments and International Operations
Quick Study 15-5 (20 minutes)
2014
Dec. 31 Unrealized Loss—Income.............................................. 2
Fair Value Adjustment—Trading (ST)..................... 2
Record fair value of securities
$35 fair value - $37 cost; thus, FVA—Trading = $2 Cr.
2017
Dec. 31 Unrealized Loss—Income.............................................. 10
Fair Value Adjustment—Trading (ST)*................... 10
Chapter 15 - Investments and International Operations
Quick Study 15-6 (10 minutes)
Quick Study 15-7 (10 minutes)
1. 2015
Dec. 31 Unrealized Loss—Equity........................................... 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
Short-Term Investments—AFS......................... 25,000
To record sale of one-half of the available-for-sale
securities. (Cost = $50,000 x 1/2)
Quick Study 15-8 (10 minutes)
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Chapter 15 - Investments and International Operations
Dec. 31 Unrealized Loss – Equity*......................................... 275
Fair Value Adjustment—Available-for-Sale (ST) .. 275
To reflect an unrealized loss in fair value of
available-for-sale securities.
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 15-9 (10 minutes)
1.
Dec. 31 Unrealized LossEquity................................................. 12,000
Fair Value Adjustment—Available-for-Sale (LT)..... 12,000
Record change in value of securities.
2. Each of the accounts used in the entry for (1) would be reported on the
reporting of the asset (long-term investment) at its fair value.
Quick Study 15-10 (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
Quick Study 15-11 (10 minutes)
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Education.
Chapter 15 - Investments and International Operations
a.
Nov. 1 Cash ................................................................................40,000
Long-Term Investment—ORD................................. 40,000
Received cash dividends ($100,000 x 40%).
Quick Study 15-12 (10 minutes)
1. Equity securities giving an investor significant influence are accounted for
using the equity method.
5. The controlling investor (more than 50% ownership) is called the parent, and
the investee company is called the subsidiary.
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Chapter 15 - Investments and International Operations
Quick Study 15-13 (10 minutes)
1. The controlling investor is called the parent, and the investee is called the
subsidiary.
Quick Study 15-14 (10 minutes)
1. Return on total assets =
Quick Study 15-15 (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
several years and when comparisons are made with competitors.
Quick Study 15-16A (10 minutes)
Date of Sale
Accounts Receivable.....................................................14,500
Sales.......................................................................... 14,500
Record credit sale in value of pounds
(10,000 pounds x $1.45/pound).
Date of Payment
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Net income
Average total assets
Chapter 15 - Investments and International Operations
Quick Study 15-17A (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).
Quick Study 15-18 (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 15-1 (10 minutes)
1. Debt securities reflect a creditor relationship such as investments in
notes, bonds, and certificates of deposit.
4. Long-term investments in securities are defined as those securities that
are not readily convertible to cash or are not intended to be converted
into cash in the short term.
Exercise 15-2 (15 minutes)
a.
Mar. 22 Short-Term Investments—Trading (RIP)............. 10,080
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Chapter 15 - Investments and International Operations
Cash.................................................................. 10,080
Purchased 1,000 shares of stock for
(1,000 x $10) + $80 brokerage fee.
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