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
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 ……………………………………………… ##
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
(2) preparing consolidated financial statements with a foreign subsidiary.
13A. If the foreign exchange rate falls from $1.40 to $1.30 during the time the U.S.
gains
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
Purchased 300 shares at $42 plus $250 fee.
May 30
Cash …………………………………………………………….…
300
300
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
Gain on Sale of Short–Term Investments ……..
750
Short–Term Investments—Trading (Kraft) ……
10,300
To record sale of trading securities.
200 shares at $56 less $150 fee
Quick Study C-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.
2015
Dec. 31
Fair Value Adjustment—Trading (ST) ……………………..
6
Unrealized Gain—Income …………………………..
6
Record fair value of securities.
$46 fair value – $42 cost; thus, FVA—Trading s/b $4 Dr.
Note: Unadjusted FVA is $2 Cr; Ending bal. FVA s/b $4 Dr;
thus, entry must $6 Dr FVA.
Note: “s/b” is abbreviation for “should be.”
2016
Dec. 31
Fair Value Adjustment—Trading (ST) ……………………..
5
Unrealized Gain—Income …………………………..
5
Record fair value of securities.
$69 fair value – $60 cost; thus, FVA—Trading s/b $9 Dr.
Note: Unadjusted FVA is $4 Dr; Ending bal. FVA s/b $9 Dr;
thus, entry must $5 Dr FVA.
2017
Dec. 31
Unrealized Loss—Income ……………………………….……..
10
Fair Value Adjustment—Trading (ST)* ……………..
10
Record fair value of securities.
$55 fair value – $56 cost; thus, FVA—Trading s/b $1 Cr.
Note: Unadjusted FVA is $9 Dr; Ending bal. FVA s/b $1 Cr;
thus, entry must $10 Cr FVA.
We could also use T-accounts to determine the needed adjustment to fair value:
12/31/2015—F.V. Adj—Trading
12/31/2016—F.V. Adj—Trading
12/31/2017—F.V. Adj—Trading
Unadj.
2
Unadj.
4
Unadj.
9
Adj.
6
Adj.
5
Adj.
10
End.
4
End.
9
End.
1
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).
Dec. 31
Interest Receivable …………………………………….………….
1,000
Interest Revenue …………………………………..………….
1,000
Record interest earned ($1,200 x 5/6).
Quick Study C-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
value.
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
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* …………………………………..
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)
Higo
100
$25.75
$2,575
$23
$2,300
$275*
Quick Study C-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
balance sheet. The unrealized loss of $12,000 is a reduction in equity.
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
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-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
Earnings from Investment (ORD) …………..………….
280,000
Record equity in investee earnings
($700,000 x 40%).
Quick Study C-12 (10 minutes)
1. Equity securities giving an investor significant influence are accounted for
using the equity method.
Quick Study C-13 (10 minutes)
Quick Study C-14 (10 minutes)
Quick Study C-15 (10 minutes)
1. Return on Total Assets = Profit margin x Total asset turnover
= x
2. Component analysis is useful as it allows the determination of whether
Quick Study C-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
Cash ………………………………………………………..……………
13,500
Foreign Exchange Loss …………………………………………
1,000
Accounts Receivable …………………………..
14,500
Cash received on account (£10,000 x $1.35/£).
Net income
Average total assets
Net income
Net sales
Net sales
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
Foreign Exchange Gain …………………………..
722
Accounts Receivable—Hamac …………….……………
9,076
Cash received on account
(20,000 ringgits x $0.4899/ringgit).
Quick Study C-18 (10 minutes)
For trading securities (and as explained in Carrefour’s description of its
EXERCISES
Exercise C-1 (10 minutes)
1. Debt securities reflect a creditor relationship such as investments in
notes, bonds, and certificates of deposit.
Exercise C-2 (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)