Chapter 13

Intercorporate Investments
and Accounting for
International Operations

Slide 13.1
 Chapter 13 Learning
Objectives
Discuss the principal motives for intercorporate
investments.
Define the key information needs of decision makers
regarding intercorporate investments.
Account for each of the five types of intercorporate
investments.
Identify important control issues related to
intercorporate investments.
Discuss how intercorporate investments affect decision
makers’ analysis of financial statement data.
Discuss the challenges that multinational business
operations pose for the accounting profession.
Account for realized and unrealized foreign currency
transaction gains and losses.

Slide 13.2
 Motives for Intercorporate
Investments

To make more effective (profitable)

use of excess cash.
To earn “trading profits” on short-term
fluctuations in securities prices.
To earn a reasonable rate of return over
an extended period.
To influence another firm’s
operations.
To control another firm’s
operations.

Slide 13.3
Intercorporate Investments:
Key Information Needs of
Decision Makers

Nature of
intercorporate
investments
Market value information
Related revenues and expenses

Slide 13.4
 Types of Intercorporate
Investments

Trading securities
Available-for-sale securities
Held-to-maturity securities
Influential but noncontrolling
investments
Controlling investments

Slide 13.5
 Accounting for Trading
Securities

Purchase of trading securities: debited to

Investment in Trading Securities
Receipts of interest and dividends: credited to
Interest Revenue and Dividend Revenue
Two types of year-end adjusting entries:
accrual of interest revenue and restatement
to fair value

Slide 13.6
 Year-End Restatement of Trading
Securities to their Fair Value

Fair value: generally, a security’s closing

price on a securities exchange

Facts: Cost of trading securities $25,000

Year-end fair value 21,200

Year-end adjusting entry:

Unrealized Loss on Trading Securities 3,800
Market Adjustment--Trading Securities 3,800

Unrealized Gain/Loss on Trading Securities:

reported on the income statement
Market Adjustment--Trading Securities: a
balance sheet valuation account comparable to
the Allowance for Doubtful Accounts

Slide 13.7
 Accounting for Available-for-
Sale Securities

Purchase: debited to Investment in Available-

for-Sale Securities*
Receipts of interest and dividends: credited to
Interest Revenue and Dividend Revenue
Two types of year-end adjusting entries:
accrual of interest revenue and restatement
to fair value

*These investments
are classified as
current assets if
management intends
to sell them in the
coming year.

Slide 13.8
 Year-end Restatement of Available-
for-Sale Securities to their Fair
Value

Facts: Cost $25,000

Year-end fair value 21,200

Year-end adjusting entry:

Unrealized Loss on Available-for-Sale Securities 3,800
Market Adjustment--Available-for-Sale Securities 3,800

Unrealized Gain/Loss on Available-for-Sale

Securities: reported on the balance sheet as a
component of stockholders’ equity
Market Adjustment--Available-for-Sale
Securities: a balance sheet valuation account
comparable to the Allowance for Doubtful
Accounts

Slide 13.9
 Accounting for Held-to-
Maturity Securities

Purchase: debited to Investment in Held-to-

Maturity Securities
Only debt securities qualify as held-
to-maturity securities
Two qualifying criteria: the positive intent
and ability to hold these
securities until their
maturity date.

Slide 13.10
 Amortized Cost Method . . . of
accounting for held-to-maturity
securities
Similar to accounting treatment applied
to bonds payable
Any discount or premium on these
securities is amortized over their
remaining term when purchased
Balance sheet treatment: reported at
historical cost adjusted for amortized
premium or discount
Two amortization methods: straight-
line and effective-interest*

*We consider only the

straight-line method.

Slide 13.11
 Applying the Amortized Cost
Method

Purchase date: April 1, Year 1

Cost: $14,400
Face value: $15,000
Stated interest rate: 10%
Interest payment dates: April 1 & October 1
Maturity date: April 1, Year 4

October 1, Year 1 entry:

Cash 750
Investment in Held-to-Maturity Securities 100
Interest Revenue 850

Slide 13.12
 Accounting for Influential but
Noncontrolling Investments

Include ownership interests by an

investor corporation of 20-50% of an
investee corporation’s common stock.

Under the equity method of accounting for

these investments, the investor:

1. records its investment in the investee at cost,

2. adjusts book value of the investment
for its proportionate interest in the
investee’s earnings,
3. adjusts (reduces) book value of the
investment for dividends received
from investee.

Slide 13.13
 Applying the Equity Method . . . to
influential but noncontrolling investments

Example: Purchase of 40% of CheckTec’s

common stock by BancTec

Purchase date: January 1, Year 1

Cost: $300,000
CheckTec’s Year 1 net income: $50,000
CheckTec’s Year 1 dividends: $25,000

Investment in CheckTec Common Stock 300,000

Cash 300,000

Investment in CheckTec Common Stock 20,000

Investment Revenue 20,000

Cash 10,000
Investment in CheckTec Common Stock 10,000

Slide 13.14
 Accounting for Controlling
Investments

Controlling investment: 50% or more ownership

interest in one company by another

Parent vs. Subsidiary

Wholly-owned vs. Majority-
owned subsidiaries
Minority interest: the
stockholders’ equity
of a subsidiary
not controlled
by the parent.

Slide 13.15
 A Parent Company and Its
Subsidiaries Prepare . . . .
consolidated financial statements

A consolidation work sheet is used to merge a

parent and subsidiary’s financial statement
data
Intercompany account balances cannot be
included in consolidated financial
statements
Elimination entries are used to cancel out
intercompany account balances on a
consolidation work sheet
Goodwill* is often reported on consolidated
balance sheets

Goodwill: the amount by which the

cost of a group of assets exceeded the
sum of their individual market values
when acquired

Slide 13.16
Intercorporate Investments . . .
Other Issues

Control activities are important

for these assets . . . . . . and vary
depending upon their
size and type
These assets make it
more difficult to analyze a company’s
financial statement data . . .
. . . many
conglomerates must
disclose “segment” data

Slide 13.17
 Accounting for International
Operations
Recent years have seen a
significant increase in
multinational business
operations

Multinational business operations pose

several challenges for accountants . . .

absence of uniform international

accounting standards
denomination of business transactions in
two or more currencies
need to consolidate foreign subsidiaries’
financial statements with those of U.S.
parent company

Slide 13.18
Accounting for Realized Gains &
Losses on Currency Exchange

U.S. firms must translate transactions

denominated in foreign
currencies into U.S. dollars
before recording them
Changes in exchange rates before the
completion of foreign transactions may
result in foreign currency transaction gains
and losses

Exchange rate: the value of one

currency expressed in terms of another

Slide 13.19
 Booking a Realized Foreign
Currency Transaction Gain/Loss

Scenario: On June 1, a U.S. firm

sells goods on credit to a French
firm for 20,000 francs.

Payment date: June 30

Exchange rate, June 1: $.25 per franc
Exchange rate, June 30: $.20 per franc

Recording of sale:
Accounts Receivable 5,000
Sales 5,000

Recording receipt of payment:

Cash 4,000
Foreign Currency Transaction Loss 1,000
Accounts Receivable 5,000

Slide 13.20
Accounting for Unrealized Foreign
Currency Gains/Losses

These gains & losses result

from credit transactions
denominated in
foreign currencies that
have not been completed
by the end of an accounting
period
These gains & losses are booked in
period-ending adjusting entries

Slide 13.21
 Booking an Unrealized Foreign
Currency Transaction Gain/Loss

Scenario: On December 11, a U.S.

firm purchases goods from a
Japanese supplier at a cost of
132,000 yen.

Payment date: January 10

U.S. firm’s fiscal year-end: December 31
Exchange rate, December 11: $.011 per yen
Exchange rate, December 31: $.01 yen

Recording of purchase:
Inventory 1,452
Accounts Payable 1,452

Year-end adjusting entry:

Accounts Payable 132
Foreign Currency Transaction Gain 132

Slide 13.22
Financial Statement Disclosures
for Foreign Operations

Such disclosures are

required if . . .

Revenues generated by
foreign operations account
for 10% or more of consolidated
revenues, or . . .
Identifiable assets of foreign
operations account for 10% or
more of consolidated assets.

Slide 13.23