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Long-Term Investments and International Operations

Long-Term Investments and International Operations. Chapter 10. 52-week Hi Lo. Stock Symbol. Dividend. Volume 100s. Close. Net Change. $21.80 $12.60. OCX. $ .11. 2,355. $14.98. +$.21. Share Prices, Investors, and Investees. Common Share Information for Onex Corporation:.

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Long-Term Investments and International Operations

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  1. Long-Term Investments and International Operations Chapter 10

  2. 52-week Hi Lo Stock Symbol Dividend Volume 100s Close Net Change $21.80 $12.60 OCX $ .11 2,355 $14.98 +$.21 Share Prices, Investors,and Investees Common Share Information for Onex Corporation:

  3. Reporting Investmentson the Balance Sheet Current Assets: $X Cash X Short-term investments X Accounts receivable X Inventories X Prepaid expenses X Total current assets $X Long-term investments (Investments) X Property, plant, and equipment X Intangible assets X Other assets X

  4. Short-Term and Long-Term Investments Short-term investments are investments that a company plans to hold for one year or less. Also called temporary investments or marketable securities. Long-term investments are any investments that the investor expects to hold longer than a year or that is not readily marketable.

  5. Learning Objective 1 Account for portfolio investments

  6. Portfolio Investments The investor usually holds less than 20% of the voting shares and would normally play no important role in the investee’s operations. Portfolio investments are accounted for using the cost method.

  7. Accounting forPortfolio Investments Suppose that on July 10, 2003, Onex purchases 1,000 common shares of TransAlta Corporation for $19.50/share. Onex intends to hold these shares for longer than one year.

  8. Accounting forPortfolio Investments 2003 July 10 Long-term Investment 19,500 Cash 19,500 Purchased investment (1,000 × $19.50)

  9. Accounting forPortfolio Investments Assume that Onex receives a $0.25 per share cash dividend on this investment. 2003 Sept. 30 Cash 250 Dividend Revenue 250 Received cash dividend (1,000 × $0.25)

  10. Value of an Investment Assume Rennie Holdings Ltd. has 10,000 shares of Blue Sky Products Ltd. that cost $95,000 and the current market price is $6.00 per share. 2004 July 26 Loss on Portfolio Investments 35,000 Portfolio Investments 35,000 Wrote down investment to market value

  11. Selling a Portfolio Investment Suppose Onex sells its investment in TransAlta shares for $21,000 during 2005. 2005 May 19 Cash 21,000 Gain on Sale of Investment 1,500 Long-Term Investment 19,500 Sold investment

  12. Learning Objective 2 Use the equity method for investments.

  13. Equity Method Investments The equity method is used to account for investments in which the investor owns 20 to 50% of the investee’s voting shares and can significantly influence the decisions of the investee. Investments accounted for by the equity method are recorded initially at cost.

  14. Equity Method Investments TransCanada Pipelines Ltd. pays $400 million for 33.3% of the common shares of Portland Natural Gas Corporation. January 6 Long-Term Investment 66 Cash 66 To purchase equity investment

  15. Investor’s Percentageof Investee Income Portland Natural Gas Corporation reports net income of $20 million for the year. TransCanada records 33.3% of this amount as: December 31 (in millions) Long-term Investment 7 Equity-Method Investment Revenue 7 To record investment revenue ($20 × 0.333=$6.7)

  16. Receiving DividendsUnder the Equity Method Portland declares and pays a cash dividend of $10 million. TransCanada records 33.3% of this amount as: December 31 (in millions) Cash 3 Long-Term Investment 3 To receive cash dividend on equity-method investment ($10 × 0.333)

  17. Long-Term Investment Jan. 6 Purchases 66 Dec. 31 Net income 7 Dec. 31 Balance 70 Dec. 31 Dividends 3 Investment Account After the preceding entries are posted, TransCanada’s Investment account reflects its equity in the net assets of Portland (in millions): TransCanada

  18. Learning Objective 3 Understand consolidated financial statements.

  19. 100% ownership 85% ownership Subsidiary A Subsidiary B Consolidated Subsidiaries Parent Company

  20. Consolidated Subsidiaries Parent Financial Statements _____ _____ _____ _____ _____ _____ _____ _____ Subsidiary Financial Statements _____ _____ _____ _____ _____ _____ Consolidated Financial Statements _____ _____ _____ _____ _____ _____

  21. Accounting Methods forShare Investment The percentage of ownership determines the accounting method to be used. 20%–50% Equity Method 50% or more Consolidation Method Less than 20% Cost Method

  22. Consolidation Accounting It is a method of combining the financial statements of two or more companies that are controlled by the same owners. The assets, liabilities, revenues, and expenses of each subsidiary are added to the parent company’s accounts.

  23. Parent Subsidiary Eliminations Debit Credit Consolidated Amounts Assets Cash Note rec. from Sub. Inventory Investment in Sub. Other assets Total Liabilities and Shareholders’ Equity Accounts payable Notes payable Common shares Retained earnings Total 12,000 80,000 104,000 150,000 218,000 564,000 43,000 190,000 176,000 155,000 564,000 18,000 — 91,000 — 138,000 247,000 17,000 80,000 100,000 50,000 247,000 (b) 80,000 (a) 100,000 (a) 50,000 230,000 (b) 80,000 (a) 150,000 230,000 30,000 — 195,000 — 356,000 581,000 60,000 190,000 176,000 155,000 581,000 Work Sheet forConsolidated Balance Sheet

  24. Goodwill and Minority Interest Goodwill is the intangible asset that represents the parent company’s excess payment to acquire the subsidiary. Minority interest arises when a parent company purchases less than 100% of the shares of a subsidiary company.

  25. Net Income (Net loss) of Each Company Parent’s Ownership of Each Company Parent’s Consolidated Net Income (Net Loss) Parent Company Subsidiary S-1 Subsidiary S-2 Consolidated net income $330,000 150,000 (100,000) x x x 100% 100% 60% = = = $330,000 150,000 (60,000) $420,000 Income of a Consolidated Entity

  26. Learning Objective 4 Account for long-term investments in bonds.

  27. Long-Term Investmentsin Bonds and Notes Investor (Bondholder) Investment in bonds Interest revenue Issuing Corporation Bonds payable Interest expense

  28. Long-Term Investmentsin Bonds and Notes Suppose an investor purchases $10,000 of 6% Province of Saskatchewan bonds at a price of 95.2 on April 1, 2005. The investor intends to hold the bonds as a long-term investment until their maturity. Interest dates are April 1 and October 1. Following are the entries for this long-term investment using straight-line amortization.

  29. Long-Term Investmentsin Bonds and Notes April 1 Long-Term Investment in Bonds 9,520 Cash 9,520 To purchase bond investment ($10,000 × 0.952) October 1 Cash 300 Interest Revenue 300 To receive semiannual interest ($10,000 × 0.06 ×6/12)

  30. Long-Term Investmentsin Bonds and Notes October 1 Long-Term Investment in Bonds 60 Interest Revenue 60 To amortize bond investment [($10,000 – $9,520) ÷ 48] × 6

  31. Long-Term Investmentsin Bonds and Notes December 31 Interest Receivable ($10,000 × 0.06 ×3/12) 150 Interest Revenue 150 To accrue interest revenue December 31 Long-Term Investment in Bonds [($10,000 – $9,520) ÷ 48] × 3 30 Interest Revenue 30 To amortize bond investment

  32. Long-Term Investmentsin Bonds and Notes Long-Term Investment in Bonds 1/4 9,520 1/10 60 31/12 30 9,610

  33. Learning Objective 5 Account for international operations.

  34. Company Percent of International Sales Bombardier Inc. 92% IntraWest Corporation 59% Magna International Inc. 70% Extent of International Business Accounting for business activities across national boundaries is called international accounting.

  35. $ € ¥ £ Foreign Currenciesand Exchange Rates The measure of one currency against another is called the foreign-currency exchange rate. Using an exchange rate to convert the cost of an item given in one currency to its cost in a second currency is called a translation.

  36. Foreign Currenciesand Exchange Rates Country Monetary Unit Canadian Dollar Value Real (R) Euro (€) Euro (€) Euro (€) Yen (¥) Peso (P) Pound (£) Dollar ($) 0.4677 1.5475 1.5475 1.5475 0.0113 0.1295 2.2532 1.3539 Brazil France Germany Italy Japan Mexico United Kingdom United States

  37. Foreign Currenciesand Exchange Rates Two main factors determine the supply and demand for a particular currency: 1. The ratio of a country’s imports to its exports 2. The rate of return available in the country’s capital market

  38. Managing Cash inInternational Transactions Skyjack Inc. sells goods to All England Construction Ltd. for a price of £7100 on June 28. On that date, a pound was worth $2.2535. On August 28, when the pound is worth only $2.2250, Skyjack receives £7100 from All England, but the dollar value of Skyjack’s cash receipt is $202 less than expected.

  39. Managing Cash inInternational Transactions June 28 Accounts Receivable – All England 16,000 Sales Revenue 16,000 Sale on account (£7100 X $2.2535) August 28 Cash 15,798 Foreign Currency Transaction Loss 202 Accounts Receivable – All England 16,000 Collection on account (£7100 X $2.2250)

  40. Managing Cash inInternational Transactions Assume Linmar buys a milling machine from Gesellschaft Ltd., a Swiss company. They decide on a price of 20,000 Swiss francs. On September 15, when Linmar receives the goods, the Swiss franc is quoted at $1.005. When Linmar pays on September 29, the Swiss franc has decreased in value to $0.980.

  41. Managing Cash inInternational Transactions September 15 Inventory 20,100 Accounts Payable – Gesellschaft Ltd. 20,100 Purchase on account (20,000 Swiss francs × $1.005) September 29 Accounts Payable – Gesellschaft Ltd. 20,100 Cash 19,600 Foreign-Currency Transaction Gain 500 Payment on account (20,000 Swiss francs × $0.980)

  42. Managing Cash inInternational Transactions The company reports the net amount of foreign currency transaction gains and losses on the income statement as “Other Revenues and Gains” or “Other Expenses and Losses.” Linmar Foreign-currency transaction loss (202) Foreign-currency transaction gain 500 Foreign-currency transaction gain, net 298

  43. Managing Cash inInternational Transactions Hedging means to protect oneself from losing money in one transaction by engaging in counterbalancing transactions. Losses on the receipt of one currency may be offset by gains of the payment on another currency.

  44. Consolidation of Foreign Subsidiaries Special Challenges Accountants must first bring the subsidiary’s statements into conformity with Canadian GAAP. When the subsidiary statements are expressed in foreign currency, they must be translated into dollars.

  45. Consolidation of Foreign Subsidiaries The foreign-currency translation adjustment is the balancing amount that brings the dollar amount of the total liabilities and shareholders’ equity of a foreign subsidiary into agreement with the dollar amount of its total assets.

  46. Italian Imports Inc. Amounts Euros Exchange Rate Dollars Assets Liabilities Shareholders’ equity Common shares Retained earnings Foreign-currency translation adjustment 800,000 500,000 100,000 200,000 800,000 $1.48 1.48 1.54 1.50 $1,184,000 $ 740,000 154,000 300,000 (10,000) $1,184,000 Translation of Foreign-Currency Balance Sheet Into Dollars

  47. International Accounting Standards A company that sells its shares through a foreign stock exchange must follow the accounting principles of the foreign country. The primary organization working to achieve worldwide harmony of accounting standards is the International Accounting Standards Committee (IASC).

  48. Learning Objective 6 Report investing transactions on the cash flow statement.

  49. Using the Cash Flow Statement Onex Corporation Cash Flow Statement For the Year Ended December 31, 2002 (In Millions) Cash flows from investing activities: Acquisition of operating companies, net of cash in acquired companies of $201 $(480) Purchase of property and equipment (518) Proceeds from sale of operating companies 26 Net decrease in investments and other investing activities 224 Cash used for investing activities $(748)

  50. End of Chapter 10

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