Chapter 15
Investments and International Operations
QUESTIONS
1. To be classified as current assets, investments must be (i) capable of being
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.
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 loss⎯Equity ……………………………………………… ##
Fair Value Adjustment—Available-for-Sale (LT) ……. ##
Fundamental Accounting Principles, 21st Edition
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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. Polaris reports $2,554 thousand in foreign currency adjustments for calendar year
2011. This reflects an unrealized gain.
17. KTM’s financial statements, including its balance sheet, are all labeled as being
consolidated statements.
18. Piaggio’s return on total assets as of December 31, 2011 is ($ thousands):
QUICK STUDIES
Quick Study 15-1 (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
Purchased 300 shares at $42 plus $250 fee.
Dividend Revenue …………………………………..…
Received dividend of $1 per share.
Quick Study 15-2 (10 minutes)
1. 2013
Dec. 31 Unrealized Loss—Equity …………………………………… 3,000
Fair Value Adjustment—Available-for-Sale (ST) 3,000
To reflect an unrealized loss in fair value
of the available-for–sale securities’ portfolio.
2. Both accounts in part (1) are reported on the balance sheet.
3. 2014
Apr. 6 Cash ……………………………………………………….……….. 26,000
Gain on Sale of Short-Term Investments …….. 1,000
Quick Study 15-3 (10 minutes)
May 7
Short-Term Investments—AFS (Kraft) …………………..
Cash ………………………………………………………….
10,300
Purchased 200 shares at $50 plus $300 fee.
June 6
Cash ……………………………………………………………….
Gain on Sale of Short-Term Investments …….
10,300
200 shares at $56 less $150 fee
Quick Study 15-4 (10 minutes)
May 9
Short-Term Investments—AFS (Higo) …………………..
Cash ………………………………………………………….
5,150
Purchased 200 shares at $25 plus $150 fee.
June 2
Cash* ……………………………………………………………..
Gain on Sale of Short-Term Investments …….
2,575
As of
Dec. 31
Number
of
Shares
Cost
per
share
Fair
Value per
share
Total
Fair
Value
Unrealized
Loss (Fair
Value-Cost)
Quick Study 15-5 (10 minutes)
Quick Study 15-6 (10 minutes)
Quick Study 15-7 (10 minutes)
July 31
Cash …………………………..……………………………..………….
1,200
Interest Revenue …………………………………..………….
1,200
Record interest earned ($40,000 x 6% x 6/12).
Dec. 31
Interest Receivable …………………………………….………….
1,000
Interest Revenue …………………………………..………….
Record interest earned ($1,200 x 5/6).
Quick Study 15-8 (10 minutes)
Valuation Method: The fair value method is used to account for this investment in
long-term equity securities (AFS portfolio).
2013
May 20
Cash …………………………………………………….…
Record purchase of securities.
Aug. 5
Cash …………………………..……………………………..………….
Gain on Sale of Long-Term Investment ….………….
Record sale of securities. *(½ x $1,000,000)
Quick Study 15-9 (10 minutes)
a.
Nov. 1
Cash …………………………..…………………………….………….
40,000
Long-Term Investment—ORD ……………….………….
40,000
Received cash dividends ($100,000 x 40%).
Dec. 31
Earnings from Investment (ORD) …………..………….
Quick Study 15-10 (10 minutes)
1.
Dec. 31
Unrealized Loss⎯Equity ……………………………………….
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
Quick Study 15-11 (10 minutes)
1. The controlling investor is called the parent, and the investee is called the
subsidiary.
Quick Study 15-12 (10 minutes)
1. Return on total assets =
Quick Study 15-13 (10 minutes)
2. Component analysis is useful as it allows the determination of whether
return on assets is achieved primarily due to profitability or efficiency of
Net income
Average total assets
Quick Study 15-14A (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
13,500
1,000
Accounts Receivable …………………………..
Quick Study 15-15A (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
9,798
Foreign Exchange Gain …………………………..
9,076
Cash received on account
Quick Study 15-16 (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
Fundamental Accounting Principles, 21st Edition
872
EXERCISES
Exercise 15-1 (15 minutes)
a.
Mar. 22
Short-Term Investments—Trading (RIP) ………....
10,080
Cash ……………………………………………………….
10,080
Purchased 1,000 shares of stock for
(1,000 x $10) + $80 brokerage fee.
b.
Dividend Revenue …………………………………....
Received dividend on stock (1,000 x $1.00).
Short-Term Investments—Trading (RIP)** …...
Exercise 15-2 (10 minutes)
a.
Jun. 15
Short-Term Investments—HTM (Remedy) ………....
1,000,000
Cash ……………………………………………………….
1,000,000
Purchased 90-day, 10% debt securities.
b.
Sep. 16
1,025,000
1,000,000
Interest Revenue ……………………………………...
25,000
Exercise 15-3 (10 minutes)
a.
Aug. 1
Short-Term Investments—AFS (Houtte) ………....
450,000
Cash ……………………………………………………….
450,000
Purchased 6-month, 10% debt securities.
b.
Interest Revenue …………………………………….…
($450,000 x .09 x 90/360).
Exercise 15-4 (10 minutes)
1. Debt securities reflect a creditor relationship such as investments in
notes, bonds, and certificates of deposit.
3. Short-term investments are securities that (1) management intends to
4. Long-term investments in securities are defined as those securities that
Exercise 15-5 (10 minutes)
1. Consolidated financial statements show the financial position, results of
Fundamental Accounting Principles, 21st Edition
874
Exercise 15-6 (20 minutes)
1.
2013
Dec. 31
Fair Value Adjustment—Trading …………………...
6,000
6,000
2. The accounts in part (1) are reported on different financial statements.
i. The $6,000 debit balance in the Fair Value Adjustment—Trading
Gains section of the income statement.
3.
2014
Jan. 3
Cash …………………………………………………………..…
35,000
2,000
33,000
Exercise 15-7 (15 minutes)
Unrealized
Available-for-Sale Portfolio Cost Fair Value Gain (Loss)
Verrizano Corporation bonds payable ………….. $ 89,600 $ 91,600
Preble Corporation notes payable ………………… 70,600 62,900
Dec. 31
Exercise 15-8 (30 minutes)
2013
(a) Feb. 15
Short-Term Investments—HTM (A.G.) ……………..………….
160,000
Cash …………………………………………………….…
160,000
Purchased 90-day, 10% notes.
(b) Mar. 22
Cash …………………………………………………….…
Purchased 700 shares of Fran common
stock ([700 x $51] + $150).
(c) May 15
Cash …………………………..……………………………..………….
164,000
Short-Term Investments—HTM (A.G.) ………..………….
160,000
Interest Revenue …………………………………..………….
Collected proceeds of 10% notes
($160,000 x 10% x 90/360).
(d) July 30
Short-Term Investments—Trading (MP3) ………….………….
100,000
Cash …………………………………………………….…
100,000
Purchased 8% notes, due Jan. 30, 2014.
(e) Sept. 1
Cash …………………………..……………………………..………….
700
Dividend Revenue ………………………………..………….
700
Received dividend on Fran shares
(700 x $1).
(f) Oct. 8
Cash* …………………………………………………………………….
Long-Term Investments—AFS (Fran)** ………………….
Gain on Sale of L-T Investments ……………………….
Sold 350 shares of Fran stock.
*([350 x $64] – $125) **($35,850/2)
(g) Oct. 30
Cash …………………………..……………………………..………….
Interest Revenue …………………………………..………….
Received interest payment on 8% notes
($100,000 x .08 x 3/12).
Fundamental Accounting Principles, 21st Edition
876
Exercise 15-9 (15 minutes)
Computation of Fair Value Adjustment
Cost
Fair
Value
Unrealized
Gain (Loss)
Nintendo Co. common stock ……………….………….
$ 44,450
$ 48,900
Atlantic bonds payable ……………………….….
49,000
47,000
Kellogg Company notes payable …………………………..
25,000
23,200
McDonald’s Corp. common stock ………..…………………
Dec. 31
Unrealized Loss—Equity …………………………………..…..
850
Fair Value Adjustment—AFS (ST) ……………………..
850
Record fair value adjustment for securities.
Exercise 15-10 (15 minutes)
Dec. 31
Fair Value Adjustment—AFS (LT) …………………………..
32,078
Unrealized Loss—Equity …………………………..
Unrealized Gain—Equity …………………………………..
Record fair value of AFS securities.
Computation of Fair Value Adjustment
12/31/2012
12/31/2013
Cost ……………..…………..
$120,483
$60,120
$30,151
Exercise 15-11 (30 minutes)
2011
Dec. 31
Unrealized Loss—Equity ………………………………..……..
11,140
Fair Value Adjustment—AFS (LT) ……………………..
11,140
2012
Dec. 31
Fair Value Adjustment—AFS (LT)* …………………..……..
38,440
Unrealized Loss—Equity …………………………..
11,140
Unrealized Gain—Equity …………………………………..
27,300
2013
Dec. 31
Fair Value Adjustment—AFS (LT)* …………………..……..
73,000
Unrealized Gain—Equity …………………………………..
73,000
2014
Dec. 31
Unrealized Loss—Equity ………………………………..……..
96,700
Unrealized Gain—Equity ………………………………………..
100,300
Fair Value Adjustment—AFS (LT)* …………….……..
Fundamental Accounting Principles, 21st Edition
878
Exercise 15-12 (15 minutes)
1. Classification of Investments in Securities
a. The Brava Company bonds are a long-term investment in held-to–
maturity debt securities.
2. Fair Value Adjustment entry at December 31, 2013
Dec. 31
Fair Value Adjustment—AFS (LT) ……………………….….
Long-term AFS securities
Cost
Fair Value
Buffa common stock …………..………………
$165,500
$178,000
$255,800
$266,625
Exercise 15-13 (30 minutes)
2013
Jan. 2
Long-Term Investments—Grecco* ……………………..……
411,000
Cash ………………………………………………………………..
411,000
Record purchase of investment ($408,000 + $3,000).
* Kodax’s investment equals 33 1/3% of Grecco’s stock (30,000/90,000).
Kodax should use the equity method to account for its investment.
Cash …………………………..………………………………….……..
Long-Term Investments—Grecco ………………………..
Record receipt of cash dividend (30,000 x $1.50).
Dec. 31
Long-Term Investments—Grecco……………………….….
162,300
Earnings from Long-Term Investment ……….……..
Record equity in investee earnings ($486,900/3).
June 1
Cash …………………………..………………………………….……..
Long-Term Investments—Grecco ………………………..
Record receipt of cash dividend (30,000 x $2.10).
Dec. 31
Long-Term Investments—Grecco……………………….….
234,250
Earnings from Long-Term Investment ……….……..
234,250
Record equity in investee earnings ($702,750/3).
Dec. 31
Cash …………………………..………………………………….……..
320,000
Gain on Sale of Investments ……………………..……
Long-Term Investments—Grecco* ………………..……..
233,183