Beruflich Dokumente
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2.
Short-term investments in trading securities are reported on the balance sheet at the
(fair) market value of the portfolio of trading securities.
3.
The $720 difference between the proceeds ($7,500) and the cost ($6,780) is credited
to Gain on Sale of Short-Term Investments and reported in the income statement.
##
123
9. Unrealized holding gains and losses are not reported on the standard income
statement for available-for-sale securities. Unrealized gains and losses for these
securities are reported in the stockholders equity section of the balance sheet.
(They can also be reported either in a separate comprehensive income statement or
in a combined statement of comprehensive income.)
10. The equity method is used when the investor has a significant influence over the
investee corporation; i.e., generally when the investor owns 20% or more of the
investee's voting stock. The equity method with consolidation is used when the
investor has a controlling influence over the investee.
11. A company prepares consolidated statements if the company has control over a
subsidiary as a result of owning more than 50% of the subsidiary's voting stock.
12A. Two major challenges in accounting for international operations include (1)
accounting for sales and purchases that are denominated in a foreign currency, and
(2) preparing consolidated financial statements with a foreign subsidiary.
13A. If the foreign exchange rate falls from $1.40 to $1.30 during the time the U.S.
company holds a receivable that is denominated in the foreign currency, the U.S.
company will incur an exchange loss. The foreign currency unit is worth $1.40 at the
time of sale but is worth only $1.30 at the time it is paid to the U.S. company; hence,
a loss of $0.10 is incurred for each foreign currency unit owed to the U.S. company.
14A. No. If a sales agreement requires a foreign customer to pay U.S. dollars to the United
States seller, the U.S. company is not exposed to the risk of exchange losses or
gains.
15. Krispy Kreme reports Accumulated other comprehensive income for February 2,
2003, which is a comprehensive loss of $1,486,000. On February 3, 2002, Krispy
Kreme had comprehensive income of $456,000.
16. Tastykakes financial statements, including its balance sheet, are all labeled as being
consolidated statements.
. Harley-Davidsons return on total assets as of December 31, 2002, is ($ thousands):
$580,217/ [($3,861,217 +3,118,495)/2] = 16.6%
QUICK STUDIES
Quick Study 15-1 (10 minutes)
[Note: This actively managed (for profit) short-term investment in equity securities would
be classified as Trading Securities.]
22,650
May 30 Cash......................................................................
Dividend Revenue .........................................
500
500
6,000
6,000
Cash ...........................................................................
Gain on Sale of Short-Term Investments ........
Short-Term InvestmentsAFS ........................
52,000
2,000
50,000
2,700
2,700
June 6 Cash......................................................................
Gain on Sale of Short-Term Investments....
Short-Term InvestmentsAFS (Lov) ..........
2,725
25
2,700
125
20,400
820
10,200
1,000
1,000
As of
Dec. 31
Number
of
Shares
Cost
per
share
Total
Cost
Market
Value per
share
Total
Market
Value
Unrealized
Loss
(Market-Cost)
X&O
200
$51
$10,200
$46
$9,200
$1,000*
Cash ...................................................................
Interest Revenue.........................................
900
900
Dec. 31
Interest Receivable...........................................
Interest Revenue.........................................
750
750
2005
May 20
750,000
750,000
2006
Aug. 5
Cash ...................................................................
Long-Term InvestmentsAFS (TKR)*......
Gain on Sale of Long-Term Investment....
475,000
375,000
100,000
Cash ..................................................................
Long-Term InvestmentTKR....................
50,000
50,000
Dec. 31
Long-Term InvestmentsTKR........................
Earnings from Investment (TKR) ..............
220,000
220,000
127
6,000
6,000
2. Each of the accounts used in the entry for (1) would be reported on the
balance sheet. The unrealized loss of $6,000 is a reduction in equity.
When the Market Adjustment account contains a credit balance as
shown here, it serves as a contra asset account. This results in the
reporting of the asset (long-term investment) at its market value.
Net income
Average total assets
Profit margin
Net income
Average total assets
Net income
Net sales
Net sales
Average total assets
16,000
16,000
Date of Payment
Cash ................................................................
Foreign Exchange Loss ................................
Accounts Receivable ..............................
15,000
1,000
16,000
13,622
13,622
Mar. 31
Cash ................................................................
Foreign Exchange Gain ..........................
Accounts ReceivableHamac ...............
13,970
348
13,622
129
EXERCISES
Exercise 15-1 (25 minutes)
a.
Feb. 15 Short-Term InvestmentsHTM (FTR) .................... 100,000
Cash................................................................
100,000
b.
Mar. 22 Short-Term InvestmentsTrading (FIX) ...........
Cash................................................................
21,150
21,150
c.
May 16 Cash...................................................................... 102,000
Short-Term InvestmentsHTM (FTR) .........
Interest Revenue ...........................................
100,000
2,000
d.
Aug. 1 Short-Term InvestmentsAFS (Better Buy) ....
Cash................................................................
60,000
60,000
e.
Sept. 1 Cash......................................................................
Dividend Revenue .........................................
700
700
f.
Oct. 8 Cash* ....................................................................
Short-Term InvestmentsTrading (FIX)** ....
13,860
10,575
3,285
g.
Oct. 30 Cash ...........................................................................
Interest Revenue ...........................................
1,500
1,500
10,000
10,000
30,000
2,000
28,000
Cost
Market
Unrealized
Gain (Loss)
$ 90,600
52,900
82,100
$225,600
$ (100)
100
100
131
(b) Mar. 22
17,750
(c) June15
(d) July 30
50,000
(e) Sept. 1
Cash ...................................................................
Dividend Revenue ......................................
350
350
(f) Oct.
Cash*.................................................................. 11,025
Long-Term InvestmentsAFS (Fran)** .........
Gain on Sale of L-T Investments...............
8,875
2,150
(g) Oct. 30
Cash ...................................................................
Interest Revenue.........................................
1,000
1,000
Market
Unrealized
Value
Gain (Loss)
$ 75,300
22,800
47,200
86,600
$231,900 $ (2,900)
2,900
2,900
12,078
6,927
5,151
133
11,440
2004
Dec. 31
11,440
26,300
2005
Dec. 31
79,450
2006
Dec. 31
11,575
Market Value
$183,000
93,625
$276,625
135
Jan. 2
Sept. 1
93,000
Dec. 31
2006
June 1
Dec. 31
Dec. 31
$58,300
= 10.9%
($320,000 + $750,000)/2
Wright Industries appears to be less efficient in the use of its total assets in
2006 than in 2005 as suggested by the decline in return on total assets
from 14.3% to 10.9%. However, without additional information, it is not
possible to determine whether Wright is within the normal range as
compared to similar companies. In addition, conditions may exist that
explain the apparent decline in efficiency between 2005 and 2006. For
example, Wright may have increased its investment in plant assets in 2006
in anticipation of increased production and sales in 2007. Or, its
competitors returns may have fallen even more than that of Wrights
returns.
Exercise 15-11A (25 minutes)
2005
Dec. 16
Dec. 31
25,905
422
2006
Jan. 15
25,905
422
=
=
=
$25,905
25,483
$ 422
25,765
24,483
282
=
=
=
$25,483
25,765
$ 282
137
$158,720
161,040
$ 2,320
$161,040
162,320
$ 1,280
$162,320
159,680
$ 2,640
$159,680
163,760
$ 4,080
Note The combined net gain for all four quarters equals:
$5,040 ($2,320 + $1,280 - $2,640 + $4,080).
This amount also equals the difference between the number of dollars finally
received ($163,760) and the initial measure of the account receivable ($158,720).
In addition, this amount equals the number of pesos (800,000) owed by the
customer times the change in the exchange rate ($0.0063) between the beginning
rate ($0.1984) and the ending rate ($0.2047).
PROBLEM SET A
Problem 15-1A (60 minutes)
Part 1
2005
Jan. 20 Short-Term InvestmentsTrading (Ford)..............
Cash..............................................................
32,525
32,525
44,200
44,200
4,100
4,100
2006
Apr. 15 Cash....................................................................
Gain on Sale of Short-Term Investments..
Short-Term InvestmentsTrading (Ford) ...
34,915
2,390
32,525
July 5 Cash....................................................................
Gain on Sale of Short-Term Investments..
Short-Term InvestmentsTrading (Z-Seven) .
5,025
925
4,100
24,225
24,225
12,100
12,100
139
75,020
75,020
Mar. 3 Cash....................................................................
Loss on Sale of Short-Term Investments ..............
Short-Term InvestmentsTrading (Hunt) ...
Sold Hunt shares [(800 x $25.00) - $125].
June 21 Cash....................................................................
Loss on Sale of Short-Term Investments .......
Short-Term InvestmentsTrading (Lucent) ..
19,875
4,350
24,225
35,020
9,180
44,200
47,695
47,695
Nov. 1 Cash....................................................................
Gain on Sale of Short-Term Investments..
Short-Term InvestmentsTrading (D.Karan) ..
21,792
9,692
12,100
2,385
2,385
2005
Apr. 16 Short-Term InvestmentsAFS (Gem) ................ 194,360
Cash .....................................................................
194,360
200,000
197,350
33,910
33,910
200,000
3,000
15 Cash ...........................................................................
Dividend Revenue .........................................
6,800
6,800
28 Cash*.......................................................................... 119,550
Short-Term InvestmentsAFS (Gem)** ........
Gain on Sale of Short-Term Investments....
97,180
22,370
7,600
7,600
Dec. 15 Cash......................................................................
Dividend Revenue .........................................
4,200
4,200
31 Cash......................................................................
Dividend Revenue .........................................
5,200
5,200
141
Gem Co.
PepsiCo
Xerox
a
b
c
Cost
a
(4,000 x $24.25) + 180 ............. $ 97,180
4,000 x $26.50 .........................
(4,000 x $49.25) + 350b............. 197,350
4,000 x $46.50 .........................
(2,000 x $16.75) + 410c .............
33,910
2,000 x $13.75 .........................
$328,440
Market
Unrealized
Gain (Loss)
$106,000
186,000
27,500
$319,500
$8,940
Brokerage fee attached to remaining 4,000 shares: $360 x (8,000 sh 4,000 sh.)/ 8,000 sh.= $180.
Brokerage fee attached to remaining 4,000 shares: Entire $350 (none sold).
Brokerage fee attached to remaining 2,000 shares: Entire $410 (none sold).
Part 3
8,940
Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $328,440 and show a subtraction of $8,940
for the market adjustment. This yields $319,500 as the net market value for
these securities reported in the current assets section. An alternative
presentation is to list these securities at the market value of $319,500 with
a note disclosure of the cost.
Part 5
(a)
Income statement
(i) Interest Revenue, $3,000
(ii) Dividend Revenue, $23,800 [$6,800 + $7,600 + $4,200 + $5,200]
(iii) Gain on Sale of Short-Term Investments, $22,370
(iv) Net effect on income is $49,170
(b)
17,465
17,465
Feb.
June 12
28,582
28,582
Dec. 31
18,994
18,994
Cost
$ 17,465
105,714
28,582
$151,761
Market
$ 18,342
85,800
28,625
$132,767
143
1,425
17,465
July
28,582
July 22
59,740
Aug. 19
51,660
Dec. 31
12,670
Market
$ 57,150
48,000
80,300
$185,450
Kodak:
1,800 x $31.75 = $57,150
Sara Lee: 1,600 x $30.00 = $48,000
Sony:
2,200 x $36.50 = $80,300
$217,115 - $185,450 = $31,664
Market Adjustment account:
Required balance ..... $31,664 Cr.
Unadjusted balance.. 18,994 Cr.
Required change... $12,670 Cr.
81,948
June 21
June 30
58,995
Aug. 3
59,740
Nov. 1
22,981
51,660
Dec. 31
31,664
22,057
Market
$ 67,800
95,200
$163,000
145
$217,114
$140,943
(18,994)
(31,664)
22,057
$185,450
$163,000
2006
2007
Part 3
2005
Realized gains (losses)
Sale of Johnson & Johnson shares ......
Sale of Mattel shares...............................
Sale of Sara Lee shares ..........................
Sale of Sony shares ................................
Sale of Eastman Kodak shares .............. _______
Total realized gain (loss) .......................... $
0
$ 1,425
(4,508)
_______
$( 3,083)
$(11,490)
(20,354)
22,981
$ (8,863)
$(31,664)
$ 22,057
Market Value
$ 162,750
1,220,625
236,250
557,600
$2,177,225
Disclosure
The portfolio of available-for-sale securities would be reported on the
December 31, 2005, balance sheet at its market value of $2,177,225.
Part 2
Dec. 31
40,000
40,000
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2005 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2005 realized gains (losses)
Stock Sold
Cost
Sale
Gain (Loss)
7,000 shares of Company B stock .......... $ 159,375 $ 155,275 $ ( 4,100)
80,000 shares of Company A stock ........ 1,070,600 1,025,900
(44,700)
Realized gain (loss) .................................
$(48,800)
McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 15
147
780,000
780,000
Oct. 23
Cash ..................................................................
Long-Term InvestmentsKildaire ...............
48,000
48,000
Dec. 31
116,400
116,400
2006
Oct. 15
Cash ..................................................................
Long-Term InvestmentsKildaire ...............
39,000
39,000
Dec. 31
147,600
147,600
2007
Jan. 2
Cash ..................................................................
Loss on Sale of Investments .........................
Long-Term InvestmentsKildaire* .............
947,000
10,000
957,000
Part 2
1. Journal entries (assuming NO significant influence)
2005
Jan. 5
780,000
780,000
Oct. 23
Cash ..................................................................
Dividend Revenue .....................................
48,000
48,000
Dec. 31
52,500
52,500
2006
Oct. 15
Cash ..................................................................
Dividend Revenue .....................................
39,000
39,000
Dec. 31
81,000
81,000
149
Cash ..................................................................
Long-Term InvestmentsAFS (Kildaire) ....
Gain on Sale of Investments ....................
947,000
780,000
167,000
Jan. 2
Unrealized GainEquity.................................
Market AdjustmentAFS (LT)......................
133,500
133,500
$ 48,000
39,000
167,000
$254,000
Oct. 14
Nov. 18
Dec. 20
Dec. 31
14,400
28,844
Cash ....................................................................
Foreign Exchange Loss ....................................
Accounts ReceivableSumito...................
(1,500,000 x $0.0091)
13,650
750
11,648
103
Jan. 19
14,400
28,844
14,400
11,648
103
= $28,844
= 28,947
= $ 103
2006
Jan. 12
7,938
Accounts ReceivableSumito.........................
Sales .............................................................
(1,500,000 x $0.0096)
Dec. 31
7,938
76
76
= $11,648
= 11,572
=$
76
Cash*...................................................................
Accounts ReceivableSmithers**.............
Foreign Exchange Gain ..............................
*(19,000 x $1.5314) **($28,844 + $103)
29,097
Cash*...................................................................
Foreign Exchange Loss ....................................
Accounts ReceivableHamid Albar**.......
*(17,000 x $0.6771) **($11,648 - $76)
11,511
61
28,947
150
11,572
151
$(750)
103
(76)
$(723)
Part 3
To reduce the risk of foreign exchange gain or loss, Roundtree could
attempt to negotiate foreign customer sales that are denominated in U.S.
dollars. To accomplish this, Roundtree might be willing to offer favorable
terms, such as price discounts or longer credit terms. Another possibility
that may be of limited potential is for Roundtree to make credit purchases
denominated in foreign currencies, planning the purchases so that the
payables in foreign currencies match the foreign currency receivables in
time and amount.
NOTE: A few students may also understand Roundtree's opportunity for
hedging. This involves selling foreign currency futures to be delivered at
the time the receivables from foreign customers will be collected.
PROBLEM SET B
Problem 15-1B (60 minutes)
Part 1
2005
Mar. 10 Short-Term InvestmentsTrading (AOL).............
Cash .............................................................
71,753
71,753
92,053
92,053
34,975
34,975
2006
Apr. 26 Cash ...................................................................
Loss on Sale of Short-Term Investments .......
Short-Term InvestmentsTrading (MTV) ...
85,225
6,828
92,053
27 Cash ...................................................................
Gain on Sale of Short-Term Investments .
Short-Term InvestmentsTrading (UPS) ...
35,406
431
34,975
311,225
23,154
23,154
153
44,445
44,445
31 Cash .................................................................
Loss on Sale of Short-Term Investments .....
Short-Term InvestmentsTrading (SPW) ...
301,380
9,845
311,225
66,860
4,893
71,753
31,215
31,215
23,577
423
23,154
6,910
6,910
Market
Value
Cost
$41,000 $44,445
27,750 31,215
$68,750 $75,660
Unrealized
Gain (Loss)
$(3,445)
(3,465)
$(6,910)
71,625
71,625
10,000
10,000
24,327
24,327
92,570
92,570
30 Cash ..................................................................
Dividend Revenue ........................................
323
323
19,025
1,119
17,906
16 Cash .................................................................
Short-Term InvestmentsAFS (T-bills) .......
Interest Revenue*.........................................
10,300
10,000
300
24 Cash .................................................................
Dividend Revenue ........................................
60
60
255
255
90
90
155
Nokia
Dell
Merck
Cost
$ 53,719
$ 51,319
24,327
24,600
92,570
$170,616
a
b
c
Market
Unrealized
Gain (Loss)
73,750
$149,669
$20,947
Brokerage fee attached to remaining 1,275 shares: $1,500 x (1,700 sh. 425 sh.)/ 1,700 sh. = $1,125.
Brokerage fee attached to remaining 600 shares: Entire $627 (none sold).
Brokerage fee attached to remaining 1,250 shares: Entire $1,945 (none sold).
Part 3
20,947
20,947
Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $ 170,616 and show a subtraction of $20,947
for the market adjustment. This yields $149,669 as the net market value for
these securities reported in the current assets section. An alternative
presentation is to list these securities at the market value of $149,669 with
a note disclosure of the cost.
Part 5
(a)
Income statement
(i) Interest Revenue, $300
(ii) Dividend Revenue, $728 [$323 + $60 + $255 + $90]
(iii) Gain on Sale of Short-Term Investments, $1,119
(iv) Net effect on income is $2,147
(b)
May 7
Sept. 1
Dec. 31
81,795
90,125
59,976
404
*
Apple ..........
Ford ............
Polaroid......
Total............
Cost
$ 81,795
90,125
59,976
$231,896
81,795
90,125
59,976
404
Market
$ 85,200
85,000
62,100
$232,300
Apple:
2,400 x $35.50 = $85,200
Ford:
5,000 x $17.00 = 85,000
Polaroid: 1,200 x $51.75 = 62,100
$232,300 - $231,896 = $404
157
June 14
Nov. 27
Dec. 31
79,663
10,462
90,125
70,280
22,591
Cash .................................................................
Gain on Sale of Investments ....................
Long-Term InvestmentsAFS (Polaroid) ...
Sold Polaroid shares
[1,200 x $52.00) - $1,672].
60,728
1,670
*
Apple...........
Duracell.......
Sears ...........
Total ............
Cost
$ 81,795
70,280
22,591
$174,666
70,280
22,591
752
59,976
1,670
Market
$ 85,200
64,800
23,400
$ 173,400
Apple:
2,400 x $35.50 = $85,200
Duracell: 3,600 x $18.00 = $64,800
Sears:
900 x $26.00 = $23,400
$174,666 - $173,400 = $1,266
Market Adjustment account:
Required balance ..... $1,266 Cr.
Unadjusted balance..
404 Dr.
Required change ...... $1,670 Cr.
Cash ....................................................................
Loss on Sale of Investments .............................
Long-Term InvestmentsAFS (Apple) ........
85,280
85,280
69,061
12,734
81,795
Sept. 3
Oct.
Oct. 31
Dec. 31
44,370
Cash ....................................................................
Gain on Sale of Investments ......................
Long-Term InvestmentsAFS (Sears).........
Sold Sears shares [(900 x $27.50) - $619].
24,131
Cash ....................................................................
Loss on Sale of Investments ............................
Long-Term InvestmentsAFS (Duracell).....
Sold Duracell shares
[(3,600 x $16.00) - $1,496].
56,104
14,176
3,384
*
Coca-Cola .......................
Motorola ..........................
Total.................................
Coca-Cola:
Motorola:
Cost
$ 85,280
44,370
$129,650
44,370
1,540
22,591
70,280
3,384
Market
$ 92,000
33,000
$125,000
159
12/31/2006
12/31/2007
$174,666
$129,650
$231,896
404
$232,300
$173,400
$125,000
2005
2006
2007
(1,266)
(4,650)
Part 3
Realized gains (losses)
Sale of Ford shares ..............................
Sale of Polaroid shares........................
Sale of Duracell shares........................
Sale of Apple shares ............................
Sale of Sears shares ............................
Total realized gain (loss) .......................
$(10,462)
752
____
$ 0
_______
$ (9,710)
$(14,176)
(12,734)
1,540
$(25,370)
$404
$ (1,266)
$ (4,650)
34,785
58,745
93,530
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2005 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2005 realized gain (loss)
Stock Sold
Cost
4,250 shares of Company S stock ...... $154,190
22,000 shares of Company T stock ...... 294,470
Realized gain (loss) ...............................
Sale
$142,110
308,100
Gain (Loss)
$(12,080)
13,630
$ 1,550
161
Dec. 31
2006
Aug. 1
Dec. 31
2007
Jan. 8
187,500
187,500
Cash ..................................................................
Long-Term InvestmentsBloch....................
Received cash dividend (15,000 x $0.95).
14,250
23,000
Cash ..................................................................
Long-Term InvestmentsBloch ..............
Record cash dividend (15,000 x $1.25).
18,750
19,000
Cash ..................................................................
Long-Term InvestmentsBloch*.............
Gain on Sale of Investments ....................
Sold Bloch shares.
204,750
14,250
23,000
18,750
19,000
196,500
8,250
$23,000
19,000
8,250
$50,250
Part 2
1. Journal entries (assuming NO significant influence)
2005
Jan. 5
Aug. 1
Dec. 31
187,500
Cash ..................................................................
Dividend Revenue .....................................
Received cash dividend (15,000 x $0.95).
14,250
6,000
187,500
14,250
6,000
163
18,750
18,750
9,750
9,750
2007
Jan. 8
Jan. 8
Cash ..................................................................
Long-Term InvestmentsAFS (Bloch)....
Gain on Sale of Investments ....................
Sold Bloch shares.
204,750
Unrealized GainEquity.................................
Market AdjustmentAFS (LT)* .................
To remove market adjustment and
related accounts.
15,750
187,500
17,250
15,750
$14,250
18,750
17,250
$50,250
61,100
61,100
(6,500,000 x $0.0094)
June 1
July 25
Cash ..................................................................
Sales ...........................................................
72,613
Cash*.................................................................
Foreign Exchange Loss ..................................
Accounts ReceivableFuji ......................
58,500
2,600
72,613
61,100
*(6,500,000 x $0.0090)
Oct. 15
49,982
49,982
(373,000 x $0.1340)
Dec. 6
47,795
47,795
(242,000 x $0.1975)
Dec. 31
8,206
8,206
Dec. 31
605
605
2006
Jan. 5
Cash*.................................................................
Accounts ReceivableChi-Ying** ...........
Foreign Exchange Gain ............................
49,852
48,400
1,452
Jan. 13 Cash*.................................................................
Foreign Exchange Loss ..................................
Accounts ReceivableMartinez Bros** ....
52,966
5,222
58,188
165
$(2,600)
8,206
605
$ 6,211
Part 3
To reduce the risk of foreign exchange gain or loss, Datamix could attempt
to negotiate foreign customer sales that are denominated in U.S. dollars.
To accomplish this, Datamix may be willing to offer favorable terms, such
as price discounts or longer credit terms. Another possibility that may be
of limited potential is for Datamix to make credit purchases denominated in
foreign currencies, planning the purchases so that the payables in foreign
currency match the foreign currency receivables in time and amount.
NOTE: A few students may also understand the companys opportunity for
hedging. This involves selling foreign currency futures to be delivered at
the time the receivables from foreign customers will be collected.
Serial Problem
Serial Problem, Success Systems (35 minutes)
Part 1
2005
April 16 Short-Term InvestmentsTrading (J&J)..............
Cash .............................................................
11,240
11,240
2,520
2,520
Part 2
340
340
Market
Unrealized
Value
Cost
Gain (Loss)
$12,000 $11,240
$ 760
2,100
2,520
(420)
$14,100 $13,760
$ 340
167
Reporting in Action
BTN 15-1
Comparative Analysis
BTN 15-2
169
Ethics Challenge
BTN 15-3
1. Kendras bonus is not contingent on the classification of available-forsale versus held-to-maturity. Designation of the bonds as available-forsale debt securities will require that an entry be made to recognize the
unrealized holding loss on the bondsbut it will affect equity and not
net income. Also, if the bonds are designated as held-to-maturity debt
securities then there will be no recognition of their loss in market value
over the past year in net income (and neither in equity).
2. Generally, Kendra must classify its debt securities as either short or
long term and as available-for-sale or held-to-maturity. Since the bonds
are 10-year bonds they should be classified as long-term investments
unless management intends to sell them within the current year or
operating cycle. Since the problem states that management probably
will not hold the bonds for the full ten years the correct classification is
available-for-sale. So, if management does not intend to sell within the
current year or operating cycle the correct classification is: long term
available-for-sale debt securities.
3. The companys auditors (internal and external) and/or its board of
directors should serve as an effective check on Kendras accounting for
the companys long-term investments in securities.
Communicating in Practice
BTN 15-4
TO:
Abel Terrio
FROM:
(Your Name)
SUBJECT: Sale of Blackhawk Common Stock
The $6,000 loss on the sale of Blackhawk common stock is correctly
stated. Jackson Company owned 40% of the outstanding shares, and
therefore accounts for the investment according to the equity method.
Under the equity method, investments are reported at the investor's cost
plus its share in the undistributed earnings accumulated by the investee
since the stock was purchased. At sale, the book value of the investment is
compared to the net proceeds to determine gain or loss.
During year 2005, the income statement showed earnings from all
investments of $126,000. This amount included $81,000 from the
investment in Blackhawk (Blackhawks 2005 net income of $202,500 x 40%),
which was debited to the Long-Term InvestmentsBlackhawk account.
This increased the book value of the investment to $581,000. When sold,
the net proceeds of $575,000 was compared to the book value of $581,000
and the result was the $6,000 loss.
Please call me if you have any questions.
BTN 15-5
171
Teamwork in Action
BTN 15-6
BTN 15-7
Entrepreneurial Decision
BTN 15-8
1.
Email Composition
To:
From:
Re:
Andy Iglesias
Ralph Cruzs assistant
Understanding realized and unrealized gains and losses
A realized gain or loss occurs when a security is actually sold for more or
less than what it had cost to purchase it. An unrealized gain or loss occurs
when a securitys market value differs from what it had cost to purchase it
unrealized implies that the security is not yet sold and, thus, any realized gain
or loss might be substantially different. Unrealized gains or losses are often
referred to as paper losses as one is just comparing what the shares are
currently valued at in the market compared to the cost at which they were
originally purchased.
To:
From:
Re:
Gloria Perez
Ralph Cruzs assistant
Comparing long-term stock investments to CDs
173
15-9A
15-10