Appendix C – Investments and International Operations
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 loss⎯Equity ……………………………………………… ##
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.
company holds a receivable that is denominated in the foreign currency, the U.S.
gains
Appendix C – Investments and International Operations
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
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. 2014
Apr. 6 Cash ………………………………………………………………… 26,000
Gain on Sale of Short-Term Investments …….. 1,000
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
Cost
per
share
Total
Cost
Fair
Value per
share
Total
Fair
Value
Unrealized
Loss (Fair
Value-Cost)
Higo
$25.75
$2,575
$23
$2,300
$275*
Quick Study C-5 (10 minutes)
Quick Study C-6 (10 minutes)
1. Equity method 4. Interest revenue (or interest earned)
2. Fair value 5. Parent, subsidiary
3. Current (or short-term)
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
balance sheet. The unrealized loss of $12,000 is a reduction in equity.
Quick Study C-11 (10 minutes)
1. The controlling investor is called the parent, and the investee is called the
2. A long-term investment classified as equity securities with controlling
investee.
Quick Study C-12 (10 minutes)
1. Return on total assets =
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
return on assets is achieved primarily due to profitability or efficiency of
Net income
Average total assets
Net income
Net sales
Net sales
Average total assets
Net income
Average total assets
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-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)
Dec. 31
Unrealized Loss—Equity……………………………………….
9,100
Fair Value Adjustment—AFS (ST) ………………
9,100
To reflect unrealized loss.