Appendix C
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
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
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) ……. ##
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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
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
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.
gains
15. Polaris reports $2,554 thousand in foreign currency adjustments for calendar year
18. Piaggio’s return on total assets as of December 31, 2011 is ($ thousands):
QUICK STUDIES
Quick Study C-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.
May 30
Cash …………………………………………………………….…
300
Dividend Revenue …………………………………..…
300
Received dividend of $1 per share.
Quick Study C-2 (10 minutes)
1. 2013
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. 2014
Apr. 6 Cash ……………………………………………………….……….. 26,000
Quick Study C-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 …….
750
Short-Term Investments—AFS (Kraft) ………..
10,300
To record sale of available-for-sale securities.
200 shares at $56 less $150 fee
Quick Study C-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 …….
135
Short-Term Investments—AFS (Higo) …………
2,575
To record sale of available-for-sale securities. The
original cost is $5,150 x 100/200 = $2,575
*($100 x $28) – $90
Dec. 31
Unrealized Loss – Equity* …………………………………..
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
Fair
Value per
share
Total
Fair
Value
Unrealized
Loss (Fair
Value-Cost)
Higo
100
$25.75
$23
$2,300
$275*
Quick Study C-5 (10 minutes)
Quick Study C-6 (10 minutes)
Quick Study C-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 …………………………………..………….
1,000
Record interest earned ($1,200 x 5/6).
Quick Study C-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
Long-Term Investments—AFS (ORD) ………….………….
1,000,000
Cash …………………………………………………….…
1,000,000
Record purchase of securities.
2014
Aug. 5
Cash …………………………..……………………………..………….
625,000
Long-Term Investments—AFS (ORD)* …..………….
500,000
Gain on Sale of Long-Term Investment ….………….
125,000
Record sale of securities. *(½ x $1,000,000)
Quick Study C-9 (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
Earnings from Investment (ORD) …………..………….
280,000
Record equity in investee earnings
($700,000 x 40%).
Quick Study C-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 C-11 (10 minutes)
2. A long-term investment classified as equity securities with controlling
Quick Study C-12 (10 minutes)
2. This ratio provides information to evaluate a company’s profitability
Quick Study C-13 (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
Average total assets
Quick Study C-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
Cash …………………………..…………………………………………
13,500
Foreign Exchange Loss …………………………………………
1,000
Accounts Receivable …………………………..
14,500
Cash received on account (£10,000 x $1.35/£).
Quick Study C-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
Cash …………………………..…………………………………………
9,798
Foreign Exchange Gain …………………………..
722
Accounts Receivable—Hamac …………….……………
9,076
Cash received on account
(20,000 ringgits x $0.4899/ringgit).
Quick Study C-16 (10 minutes)
For trading securities (and as explained in Carrefour’s description of its
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1398
EXERCISES
Exercise C-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.
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
Gain on Sale of Short-Term Investments …………
2,410
Sold 500 shares of stock.
* [(500 x $15) – $50] **($10,080/2)
Exercise C-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
Cash ……………………………………………………………...
1,025,000
Short-Term Investments—HTM (Remedy) ....
1,000,000
Interest Revenue ……………………………………...
25,000
Collected proceeds of debt securities
with interest of $1,000,000 x .10 x 90/360.
Exercise C-3 (10 minutes)
a.
Aug. 1
Short-Term Investments—AFS (Houtte) ………....
450,000
Cash ……………………………………………………….
450,000
Purchased 6-month, 10% debt securities.
b.
Oct. 30
Cash ……………………………………………………………………
10,125
Interest Revenue …………………………………….…
10,125
Received cash interest payment
($450,000 x .09 x 90/360).
Exercise C-4 (10 minutes)
1. Debt securities reflect a creditor relationship such as investments in
longer, and (2) are readily convertible to cash.
4. Long-term investments in securities are defined as those securities that
Exercise C-5 (10 minutes)
1. Consolidated financial statements show the financial position, results of
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Exercise C-6 (20 minutes)
1.
2013
Dec. 31
Fair Value Adjustment—Trading …………………...
6,000
Unrealized Gain—Income ………………………...
6,000
To reflect an unrealized gain in fair values of
trading securities.
2. The accounts in part (1) are reported on different financial statements.
i. The $6,000 debit balance in the Fair Value Adjustment—Trading
3.
2014
Jan. 3
Cash …………………………………………………………..…
35,000
Gain on Sale of Short-Term Investments ..…
2,000
Short-Term Investments—Trading ………….…
33,000
To record sale of trading securities.
Exercise C-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
Unrealized Loss—Equity……………………………………….
9,100
Fair Value Adjustment—AFS (ST) ………………
9,100
To reflect unrealized loss.
Exercise C-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
Long-Term Investments—AFS (Fran) ………………………….
35,850
Cash …………………………………………………….…
35,850
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 …………………………………..………….
4,000
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* …………………………………………………………………….
22,275
Long-Term Investments—AFS (Fran)** ………………….
17,925
Gain on Sale of L-T Investments ……………………….
4,350
Sold 350 shares of Fran stock.
*([350 x $64] – $125) **($35,850/2)
(g) Oct. 30
Cash …………………………..……………………………..………….
2,000
Interest Revenue …………………………………..………….
2,000
Received interest payment on 8% notes
($100,000 x .08 x 3/12).
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Exercise C-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 ………..…………………
46,300
44,800
$164,750
$163,900
$ (850)
Dec. 31
Unrealized Loss—Equity …………………………………..…..
850
Fair Value Adjustment—AFS (ST) ……………………..
850
Record fair value adjustment for securities.
Exercise C-10 (15 minutes)
Dec. 31
Fair Value Adjustment—AFS (LT) …………………………..
32,078
Unrealized Loss—Equity …………………………..
1,927
Unrealized Gain—Equity …………………………………..
30,151
Record fair value of AFS securities.
Computation of Fair Value Adjustment
12/31/2012
12/31/2013
Cost ……………..…………..
$120,483
$60,120
Fair value …………………..
118,556
90,271
Gain (loss) …….…………..
$ (1,927)
$30,151
Adjustment = $1,927 + $30,151 = $32,078
(recovery of unrealized loss &
recording of unrealized gain)
Exercise C-11 (30 minutes)
2011
Dec. 31
Unrealized Loss—Equity ………………………………..……..
11,140
Fair Value Adjustment—AFS (LT) ……………………..
11,140
Record fair value of securities
($372,000 – $360,860).
2012
Dec. 31
Fair Value Adjustment—AFS (LT)* …………………..……..
38,440
Unrealized Loss—Equity …………………………..
11,140
Unrealized Gain—Equity …………………………………..
27,300
Record fair value of securities.
* $428,500 – $455,800 = $27,300 net gain
($11,140 prior loss + $27,300 current period gain).
2013
Dec. 31
Fair Value Adjustment—AFS (LT)* …………………..……..
73,000
Unrealized Gain—Equity …………………………………..
73,000
Record fair value of securities.
* $600,200 – $700,500 = $100,300 net gain
($100,300 current period gain – $27,300 prior gain).
2014
Dec. 31
Unrealized Loss—Equity ………………………………..……..
96,700
Unrealized Gain—Equity ………………………………………..
100,300
Fair Value Adjustment—AFS (LT)* …………….……..
197,000
Record fair value of securities.
* $876,900 – $780,200 = $96,700 net loss
($100,300 prior gain + $96,700 current period loss).
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Exercise C-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) ……………………….….
Unrealized Gain⎯Equity ……………………………….….
10,825
Record fair value of securities ($255,800 – $266,625).
Long-term AFS securities
Cost
Fair Value
Buffa common stock …………..………………
$165,500
$178,000
Newton common stock ……….……………….
90,300
88,625
Totals ………………………………………………….
$255,800
$266,625
Exercise C-13 (30 minutes)
2013
Jan. 2
Long-Term Investments—Grecco* ……………………..……
411,000
Cash ………………………………………………………………..
411,000
Record purchase of investment ($408,000 + $3,000).
Long-Term Investments—Grecco ………………………..
Long-Term Investments—Grecco……………………….….
162,300
Earnings from Long-Term Investment ……….……..
June 1
Long-Term Investments—Grecco ………………………..
Long-Term Investments—Grecco……………………….….
234,250
Earnings from Long-Term Investment ……….……..
234,250
320,000
Gain on Sale of Investments ……………………..……
Long-Term Investments—Grecco* ………………..……..
233,183