Accounting Appendix C Homework Intent Sell Them Future Long Vs Short term

John J. Wild, Financial Accounting: Information for Decisions, 8th Edition

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APPENDIX C

INVESTMENTS AND

INTERNATIONAL OPERATIONS

Related Assignment Materials

Student Learning Objectives

Questions

Quick

Studies*

Exercises*

Problems*

Beyond the

Numbers

Conceptual objectives:

C1. Distinguish between debt and

equity securities and between

short-term investments and

long-term investments.

1, 2, 5

C-1, C-2

C-1, C-11

C-5, C-6

C2. Describe how to report equity

securities with controlling

influence.

16, 17, 18

C-12, C-13

C-13

C-5,

GL C-2

C-6

C3. Explain foreign exchange rates

and record transactions listed in

a foreign currency. (Appendix

C-A)

12, 13, 14,

15

C-16, C-17

C-15, C-16

C-6

C-1, C-7,

C-8

Analytical objectives:

A1. Compute and analyze the

components of return on total

assets.

C-14, C-15

C-14

C-1, C-2,

C-9

Procedural objectives:

P1. Account for trading securities.

C-3, C-4,

C-5, C-16,

C-18

C-2, C-3,

C-6, C-8

C-1, SP C

C-6

P2. Account for held-to–maturity

securities.

5, 9

C-6

C-4, C-6,

C-3, C-6

securities.

15

C-9, C-10

C-7, C-8,

C-4, C-5,

significant influence.

John J. Wild, Financial Accounting: Information for Decisions, 8th Edition

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Additional Information on Related Assignment Material

Connect

Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises and

Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and Problems. It allows

instructors to monitor, promote, and assess student learning. It can be used in practice, homework, or exam mode.

Connect Insight

The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed

The Serial Problem for Success Systems continues in this chapter.

General Ledger

Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post

from the general journal all the way through the financial statements. Critical thinking and analysis components are

added to each GL problem to ensure understanding of the entire process. GL problems are auto-graded and provide

instant feedback to the student.

Excel Simulations

Synopsis of Chapter Revisions

• New three-step process for fair value adjustment.

John J. Wild, Financial Accounting: Information for Decisions, 8th Edition

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Chapter Outline

Notes

I. Basics of Investments

A. Motivation for Investments—three reasons:

3. Strategic reasons. Examples: investments in competitors,

suppliers or customers.

1. Companies transfer excess cash to investments to produce

higher income.

B. Short-Term Investments

1. Cash equivalents are investments that are both readily

converted to known amounts of cash and mature within three

months.

2. Short-term investments (temporary investments or marketable

securities) -current assets that must meet these 2 requirements:

C. Long-Term Investments

1. Are not readily convertible to cash and not intended to be

converted to cash in short-term.

operations.

D. Investments in securities can include both debt and equity

securities.

1. Debt securities reflect a creditor relationship.

2. Equity securities reflect an owner relationship.

E. Classification and Reporting of Investments—accounting for

investments in securities depends on three factors:

2. Holding intention—either short term or long term.

3. Percentage of ownership.

1. Security type—either debt or equity.

E. Classifications of investments and reporting approach:

1. Trading securities (always short-term)—reported at fair value.

John J. Wild, Financial Accounting: Information for Decisions, 8th Edition

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Chapter Outline

Notes

F. Accounting Basics for Investments

1. Debt Securities

a. Acquisition is recorded at cost (including any fees).

2. Equity Securities.

a. Acquisition is recorded at cost (including any fees).

reported on income statement.

loss is recorded.

II. Reporting of Noninfluential Investments—most must be reported at

fair value. Exact reporting depends on classification. The accounting

for each classification is as follows:

A. Trading Securities (debt and equity –less than 20% of voting

stock)—intended to be actively managed and traded for profit.

1. Entire portfolio is reported at fair value.

2. Fair value adjustment from cost results in unrealized gain (or

B. Held-to–Maturity Securities (HTM)—Debt securities a company

intends and is able to hold until maturity.

1. Classify as long-term investment when maturity date extends

beyond one year or the operating cycle, whichever is longer.

John J. Wild, Financial Accounting: Information for Decisions, 8th Edition

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Chapter Outline

Notes

2. Entire portfolio is reported at fair value.

C. Available-for-Sale Securities (AFS)—debt and equity (less than

20% of voting stock) securities that are not intended to be held to

maturity. Intent is to sell them in future.

1. Long vs. short-term classification depends on when they are

intended to be sold.

III. Reporting of Influential Investments

A. Investment in Securities with Significant Influence.—Implies

investor can exert significant influence over the investee.

1. An investor who owns more than 20% (but not more than

50%) is presumed to have a significant influence over the

investee.

2. Equity method is used. Under this method the investor

a. records its share of the investee’s earnings as increase to

its investment and on its income statement.

b. reduces investment by share of losses and also reports

them on the income statement.

B. Investment in Securities with Controlling Influence—Investor is

able to exert a controlling influence over the investee (generally

owns more than 50% of a company’s voting stock).

1. The equity method with consolidation (subject for advanced

course) is used.

2. The controlling investor is called the parent company and the

C. Summary of Accounting for Investments in Securities

See Exhibit C.8.

John J. Wild, Financial Accounting: Information for Decisions, 8th Edition

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Chapter Outline

Notes

D. Comprehensive Income—is defined as all changes in equity for a

period except those due to owner investments and dividends.

2. Can be reported in financial statements in one of two ways

1. Includes: Unrealized gains and losses on AFS securities,

foreign currency adjustments and certain pension adjustments.

IV. Global View—Compares U.S. GAAP to IFRS

A. Accounting for Noninfluential Securities—both systems are

broadly similar. Differences in terminology exist.

similar. Differences in terminology exist.

V. Decision Analysis—Components of Return on Total Assets

A. Assesses financial performance and can be separated into two

components:

B. Calculated as:

1. Profit margin (net income divided by net sales) reflects the

percentage of net income in each dollar of net sales.

VI. Investments in International Operations—Appendix C-A

A. Exchange Rates Between Currencies

1. Price of one currency stated in terms of another currency is

called a foreign exchange rate.

B. Sales and Purchases Listed in a Foreign Currency

1. Companies making sales (or purchases) for which they receive

(or pay) foreign currency must translate the transaction

amounts into domestic currency. The transaction is recorded

John J. Wild, Financial Accounting: Information for Decisions, 8th Edition

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Alternate Demonstration Problem

Appendix C

2017

Jan

1

Investor Corporation purchased 8,000 shares (20%) of Investee

Company’s outstanding stock at a cost of $150,000.

May

31

Investee Company declared and paid a cash dividend of $1.50 per

share.

Dec

31

Investee Company announced that its net income for the year was

$100,000.

2018

Oct

1

Investee Company declared and paid a cash dividend of $1.00 per

share.

Dec

31

Investee Company announced that its net income for the year was

$80,000.

2019

Jan

1

Investor Corporation sold all of its shares of Investee Company

for $178,000 cash.

Required:

1. Prepare journal entries on Investor Corporation’s books using the

equity method, which assumes that Investor has significant influence

over Investee Company.

2. Prepare journal entries on Investor Corporation’s books using the cost

method, which assumes that even though Investor owns 20% of

Investee’s stock, Investor does not have significant influence over

Investee (for example, another corporation owns 70% of Investee

Company’s stock).

John J. Wild, Financial Accounting: Information for Decisions, 8th Edition

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Solution: Alternate Demonstration Problem

Appendix C

Part 1

2017

Jan

1

Long-Term Investment—Investee Stock ..

150,000

Cash ………………………………………………

150,000

May

Cash ……………………………………………………

Long-Term Investment—Investee Stock

Dec

Long-Term Investment—Investee Stock ..

2018

Oct

1

Cash ……………………………………………………

8,000

Long-Term Investment—Investee Stock

8,000

Dec

Long-Term Investment—Investee Stock ..

2019

Jan

1

Cash ……………………………………………………

178,000

Long-Term Investment—Investee Stock

166,000

Gain on Sale of Investments …………..

John J. Wild, Financial Accounting: Information for Decisions, 8th Edition

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Solution: Alternate Demonstration Problem

Appendix C

Part 2

2017

Jan

1

Long-Term Investment—Investee Stock ..

150,000

Cash ………………………………………………

150,000

May

Cash ……………………………………………………

Dividends Earned …………………………..

Dec

2018

Oct

1

Cash ……………………………………………………

8,000

Dividends Earned …………………………..

8,000

Dec

2019

Jan

Cash …………………………………………………….

Long-term Investment—Investee Stock

150,000

Gain on Sale of Investments ……………

Note that the total income statement effect is the same under both

methods:

Part 1:

$20,000

earnings in 2017

earnings in 2018

Part 2:

$12,000

$48,000