Investments and International Operations pptx

Investments and
International
Operations
Chapter 16

Stock Price Information for McDonald’s Corporation:
52 weeks
High Low Stock Symbol Dividend Volume 100s Close
49
56
29
81
MCD .20 2067670 29
88
The financial community quotes
stock prices in dollars and cents.
Stock Prices

Trading investments are investments
to be sold in the very near future with the
intent of generating profits on price changes.
Available-for-sale investments are investments
other than trading securities in which the investor
cannot exercise significant influence over the investee.
Trading and Available-For-Sale
Investments

Objective 1
Account for Trading
Investments.

Accounting for
Trading Investments Example
•
Assume that on October 23, Des Moines,
Inc., had purchased 600 shares of Bowie
Corp. stock for $30,000.
•
Des Moines' management team hopes to
sell this stock within three months.
•
What is the entry?

Accounting for
Trading Investments Example
Bowie pays a cash dividend of
$1.40 per share on November 14.
October 23
Short-Term Investment 30,000
Cash 30,000
Purchased investment

Accounting for
Trading Investments Example
November 14
Cash 840
Dividend Revenue 840
Received cash dividend
What is Des Moines’ entry
to receive this cash dividend?

Reporting Trading Investments
•
Trading investments are reported on the
balance sheet at current market value.
•
Assume that Bowie’s stock has decreased
in value.
•
On December 31, Des Moines' investment
in Bowie is worth $25,000 ($5,000 less
than the purchase price).

Reporting Trading Investments
December 31
Loss on Trading Investment 5,000
Short-term Investment 5,000
Adjusted trading investment to market value
What is the adjusting entry that
Des Moines would make at year end?

Reporting Trading Investments
Balance Sheet (partial):
ASSETS
Current assets:
Short-term investments, at market value $25,000
Income Statement (partial):
Other gains and losses:
Gain (loss) on trading investment $(5,000)

Reporting Trading Investments
•
When a company sells a trading
investment, the gain or loss on the sale is
the difference between the sale proceeds
and the last carrying amount of the
investment.
•
Suppose Des Moines sells the Bowie stock
for $23,000 on January 10.
•
How would Des Moines record the sale?

Reporting Trading Investments
January 10
Cash 23,000
Loss on Sale of Investment 2,000
Short-Term Investment 25,000
Sold investment

Objective 2
Account for Available-for-
sale
Investments.

Available-for-Sale Investments
…are stock investments other than trading
securities.
•
The market value method is used to account for

these investments.
•
Assume that the market value of Bowie’s
investment in Gomez’s common stock is $37,400
on December 31, 2005.
•
Bowie paid $36,000 for the stock on May 1.

December 31, 2005
Allowance to Adjust Investment
to Market 1,400
Unrealized Gain on Available-for-Sale
Investment 1,400
Adjusted investment to market value
What is the adjusting entry?
Reporting Available-for-Sale
Investments

ASSETS
Long-term available-for-sale
investments–at market value $37,400
STOCKHOLDERS’ EQUITY
Common stock………
Retained earnings……
Unrealized gain on
available-for-sale investment $ 1,400
Reporting Available-for-Sale
Investments

Selling an Available-for-Sale

Investment
•
Selling the investment can result in a
realized gain or loss.
•
Realized gains and losses measure the
difference between the amount received
from the sale and the cost of the
investment.
•
Suppose that Bowie sells its investment for
$38,000 on January 15.

Selling an Available-for-Sale
Investment
January 15, 2003
Cash 38,000
Gain on Sale of Investment 2,000
Long-Term Available-for-Sale
Investment (cost) 36,000
Sold investment

Objective 3
Use the Equity
Method
for Investments.

Equity Method
•
Where the investor can exert significant

influence over the investee, the equity
method of accounting is used.
•
Accountants believe that some measure of
the investee’s success and failure should be
included in accounting for the investment.

Equity Method
January 10
Long-Term Equity-Method
Investment 500,000
Cash 500,000
Purchased equity-method investment
Des Moines, Inc., purchases 30%
of the voting stock of Bowie Corp.
for $500,000 on January 10.

Equity Method
•
The initial investment is recorded at cost.
•
Adjustments are made to the investment
account for the investor’s prorata share of
income or loss.
•
Suppose Bowie Corp. reported a $200,000
net loss for year two.

Equity Method
December 31, Year 2

Equity-Method Investment Loss 60,000
Long-Term Equity-Method Investment 60,000
Recorded investment loss
What journal entry would Des Moines make?

Equity Method
•
If Bowie Corp. pays a $100,000 dividend
on January 15 of year three, Des Moines
would debit Cash for $30,000 and credit
the Long-Term Equity-Method Investment.
•
Dividends decrease the investee’s owners’
equity and so it also reduces the investor’s
investment.

Recording the Sale of an
Equity-Method Investment
•
Suppose that on February 8, Des Moines
sells one-tenth of Bowie Corp. common
stock for $33,000.
•
What is the carrying amount of the
investment?
•
$500,000 – $60,000 – $30,000 = $410,000