Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
15-1
CHAPTER 15
INVESTMENTS IN 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
15-1, 15-2
15-1, 15-11
15-5, 15-6
C2. Describe how to report equity
securities with controlling
influence.
13, 14, 18
15-12, 15-13
15-13
15-5,
GL 15-2
15-6
C3. Explain foreign exchange rates
and record transactions listed in
a foreign currency. (Appendix
15-A online only)
12, 17, 15
15-16, 15-17,
15-18
15-15, 15-16
15-6
15-1, 15-8
Analytical objectives:
A1. Compute and analyze the
components of return on total
assets.
15-14
15-14
15-1, 15-2,
15-9
Procedural objectives:
15-5, 15-16
15-6, 15-8
P2. Account for held-to-maturity
securities.
5, 9
15-6
15-4, 15-6,
15-11
15-3, 15-6
P3. Account for available-for-sale
securities.
3, 4, 6, 7, 8,
15
15-7, 15-8,
15-9, 15-10,
15-5, 15-6,
15-7, 15-8,
15-11, 15-17
15-2, 15-3,
15-4, 15-5,
GL 15-2
15-3, 15-6
P4. Account for securities with
significant influence.
4, 10, 11
15-11
15-11, 15-12
15-4, 15-5
GL 15-2
15-4, 15-6,
15-7
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
GL refers to the General Ledger Problems
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
15-2
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
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
Synopsis of Chapter Revisions
NEW opener—Echoing Green and entrepreneurial assignment.
Updated data in Exhibit 15.1.
Continued 3-step process for fair value adjustment.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
15-3
Chapter Outline
Notes
I. Basics of Investments
A. Purpose of Investments—three reasons:
2. Some entities, such as mutual funds and pension funds, are set
up to produce income from investments.
3. Strategic reasons. Examples: investments in competitors,
suppliers or customers.
B. Short-Term Investments
1. Cash equivalents are investments that are both readily
2. Short-term investments (temporary investments or marketable
securities) -current assets that must meet these 2 requirements:
a. Intended to be converted into cash within one year or the
current operating cycle, whichever is longer.
b. Readily convertible to cash.
C. Long-Term Investments
2. Can also include funds designated for special purpose funds or
investments in land or other assets not used in business
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.
E. Classifications of investments and reporting approach:
1. Trading securities (always short-term)—reported at fair value.
3. Available-for-sale (debt and non-influential equity
securities)—reported at fair value.
5. Controlling influence (equity securities)—reported in
consolidated statements.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
15-4
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).
b. Dividends received are recorded as dividend revenue and
reported on income statement.
c. At sale, proceeds are compared to cost and any gain or
loss is recorded.
II. Trading Securities
A. Trading Securities (debt and equity –less than 20% of voting
stock)—intended to be actively managed and traded for profit.
2. Fair value adjustment from cost results in unrealized gain (or
loss) which is reported on the income statement.
3. Upon sales of individual securities, the difference between
their cost and net proceeds is recognized as gain or loss.
Subsequent fair value adjustments will exclude the sold
securities.
B. Held-to-Maturity Securities (HTM)—Debt securities a company
intends and is able to hold until maturity.
2. Record interest revenue when earned.
3. Amortize the difference between cost and maturity value over
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
15-5
Chapter Outline
Notes
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.
3. Unrealized gains or losses are not reported on income
statement. It is reported in equity section of the balance sheet
and is part of comprehensive income.
III. Equity Method Investments
A. Investment in Securities with Significant Influence.—Implies
investor can exert significant influence over the investee.
1. An investor who owns between 20% and 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).
2. The controlling investor is called the parent company and the
investee company is called the subsidiary.
3. Investor also reports consolidated financial statements
(subject for advanced course) to the public when owning such
securities.
C. Summary of Accounting for Investments in Securities
See Exhibit 15.8.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
15-6
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
(new FASB guidelines):
a. on a separate statement of comprehensive income that
immediately follows the income statement
IV. Decision Analysis - Components of Return on Total Assets
A. Assesses financial performance and can be separated into two
components:
1. Profit margin (net income divided by net sales) reflects the
percentage of net income in each dollar of net sales.
B. Calculated as:
Net Income
Average total assets
Net Income
Net Sales xNet Sales
Average total assets
=
V. Investments in International Operations—Appendix 15-A
A. Exchange Rates Between Currencies
2. These rates fluctuate due to changing economic and political
conditions (include the supply and demand for currencies and
expectations about future events).
B. Sales and Purchases Listed in a Foreign Currency
1. Companies making sales (or purchases) for which they receive
using exchange rates on the date of the event.
2. Prior to statements, and/or at point of collection/payment,
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
15-7
Chapter 15 Alternate Demonstration Problem
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).
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
15-8
Chapter 15 Solution: Alternate Demonstration Problem
Part 1
2017
Jan
1
Long-Term Investment--Investee Stock ..
150,000
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
15-9
Chapter 15 Solution: Alternate Demonstration Problem
Part 2
