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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.
4.
5.
6.
##
7.
8.
725
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.
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.
Best Buy reported $59 million in foreign currency adjustments. This is an unrealized
gain.
16.
Circuit Citys financial statements, including its balance sheet, are all labeled as
being consolidated statements.
17.
QUICK STUDIES
Quick Study C-1 (10 minutes)
[Note: This actively managed (for profit) short-term investment in equity securities would
be classified as Trading Securities.]
12,850
300
300
3,000
3,000
Cash ...........................................................................
Gain on Sale of Short-Term Investments ........
Short-Term InvestmentsAFS ........................
26,000
1,000
25,000
10,300
750
10,300
727
5,150
135
2,575
275
275
As of
Dec. 31
Number
of
Shares
Cost
per
share
Total
Cost
Market
Value per
share
Higo
100
$25.75
$2,575
$23
Total
Unrealized
Market
Loss
Value (Market-Cost)
$2,300
$275*
Cash ................................................................................
1,200
Interest Revenue ......................................................
1,200
Dec. 31
1,000
2008
May 20
1,000,000
2009
Aug. 5
Cash ................................................................................
625,000
Long-Term InvestmentsAFS (ORD)* ..................
Gain on Sale of Long-Term Investment.................
500,000
125,000
Cash ...............................................................................
40,000
Long-Term InvestmentORD ................................
40,000
b.
Dec. 31
280,000
729
12,000
Unrealized LossEquity ..............................................
Market AdjustmentAvailable-for-Sale (LT) .........
12,000
2. Each of the accounts used in the entry for (1) would be reported on the
balance sheet. The unrealized loss of $12,000 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
14,500
Date of Payment
Cash ................................................................................
13,500
Foreign Exchange Loss ................................................
1,000
Accounts Receivable ..............................................
14,500
9,076
Mar. 31
Cash ................................................................................
9,798
Foreign Exchange Gain ..........................................
Accounts ReceivableHamac ...............................
722
9,076
731
EXERCISES
Exercise C-1 (25 minutes)
a.
Feb. 15 Short-Term InvestmentsHTM (RTF) ...................... 120,000
Cash ..................................................................
120,000
b.
Mar. 22 Short-Term InvestmentsTrading (XIF) ............. 19,400
Cash ..................................................................
19,400
c.
May 16 Cash ........................................................................ 122,400
Short-Term InvestmentsHTM (RTF) ...........
Interest Revenue .............................................
120,000
2,400
d.
Aug. 1 Short-Term InvestmentsAFS (Flash Co.)......... 80,000
Cash ..................................................................
80,000
e.
Sept. 1 Cash ........................................................................
Dividend Revenue ...........................................
700
700
f.
Oct. 8 Cash* ...................................................................... 11,760
Short-Term InvestmentsTrading (XIF)** ......
Gain on Sale of Short-Term Investments ............
Sold 350 shares of stock.
* [(350 x $34) - $140] **($19,400/2)
g.
Oct. 30 Cash .............................................................................. 2,000
Interest Revenue ..............................................
9,700
2,060
2,000
6,000
6,000
2,000
33,000
Cost
Market
Unrealized
Gain (Loss)
$ 91,600
62,900
83,100
$237,600
$(9,100)
9,100
733
(b) Mar. 22
35,850
(c) May 15
Cash ................................................................................
164,000
Short-Term InvestmentsHTM (A.G.) ........................ 160,000
Interest Revenue ......................................................
4,000
Collected proceeds of 10% notes
($160,000 x 10% x 90/360).
(d) July 30
(e) Sept. 1
Cash ................................................................................
700
Dividend Revenue ...................................................
700
(f) Oct.
Cash*...............................................................................
22,275
Long-Term InvestmentsAFS (Fran)** ......................
Gain on Sale of L-T Investments ............................
17,925
4,350
(g) Oct. 30
Cash ................................................................................
2,000
Interest Revenue ......................................................
2,000
Market
Value
Unrealized
Gain (Loss)
$ (850)
850
7,562
1,000
735
11,140
2007
Dec. 31
11,140
27,300
2008
Dec. 31
73,000
2009
Dec. 31
10,825
737
Jan. 2
Sept. 1
Cash ................................................................................
45,000
Long-Term InvestmentsGoreten ............................
45,000
Dec. 31
2009
June 1
Cash ................................................................................
63,000
Long-Term InvestmentsGoreten ............................
63,000
Dec. 31
Dec. 31
Cash ................................................................................
320,000
Gain on Sale of Investments ..................................
86,817
Long-Term InvestmentsGoreten* ...........................
233,183
Record sale of investment.
* Book value (Goreten stock) at 12/31/2009:
Original cost ....................................................................................
$411,000
Less 2008 dividends .......................................................................
(45,000)
Plus share of 2008 earnings ...........................................................
162,300
Less 2009 dividends .......................................................................
(63,000)
Plus share of 2009 earnings ...........................................................
234,250
Book value at date of sale ..............................................................
$699,550
Book value of shares sold ($699,550 x [10,000/30,000]) ..................
$233,183
$60,300
= 10.9%
($340,000 + $770,000)/2
Regae Industries appears to be less efficient in the use of its total assets in
2009 than in 2008 as suggested by the decline in return on total assets
from 14.0% to 10.9%. However, without additional information, it is not
possible to determine whether Regae is within the normal range as
compared to similar companies. In addition, conditions may exist that
explain the apparent decline in efficiency between 2008 and 2009. For
example, Regae may have increased its investment in plant assets in 2009
in anticipation of increased production and sales in 2010.
Or, its
competitors returns may have fallen even more than that of Regaes
returns.
Exercise C-11A (25 minutes)
2008
Dec. 16
24,791
Accounts ReceivableBronson Ltd. ..........................
Sales .........................................................................
24,791
Dec. 31
342
2009
Jan. 15
=
=
=
$24,791
24,449
$ 342
24,449
170
=
=
=
$24,449
24,619
$ 170
739
$105,840
108,160
$ 2,320
$108,160
109,440
$ 1,280
$109,440
106,800
$ 2,640
$106,800
110,880
$ 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 ($110,880) and the initial measure of the account receivable ($105,840).
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 ($0.1323) and the ending rate ($0.1386).
PROBLEM SET A
Problem C-1A (60 minutes)
Part 1
2008
Jan. 20 Short-Term InvestmentsTrading (Ford) ................
Cash ................................................................
20,925
20,925
97,928
97,928
5,825
5,825
2009
Apr. 15 Cash ......................................................................
Gain on Sale of Short-Term Investments ....
Short-Term InvestmentsTrading (Ford) .....
22,915
1,990
20,925
7,585
1,760
5,825
48,444
48,444
33,140
33,140
741
116,020
39,750
8,694
48,444
91,980
5,948
97,928
57,595
57,595
32,541
599
33,140
985
985
2008
Apr. 16 Short-Term InvestmentsAFS (Gem) .........................
97,180
Cash ...............................................................................
97,180
100,000
98,675
16,955
100,000
1,500
15 Cash .....................................................................................
3,400
Dividend Revenue ..................................................
3,400
28 Cash*....................................................................................
59,775
Short-Term InvestmentsAFS (Gem)** .................
Gain on Sale of Short-Term Investments .............
48,590
11,185
3,800
2,100
2,600
743
Gem Co.
PepsiCo
Xerox
a
b
c
Cost
a
(2,000 x $24.25) + 90 ............... $ 48,590
2,000 x $26.50 .........................
(2,000 x $49.25) + 175b.............
98,675
2,000 x $46.50 .........................
(1,000 x $16.75) + 205c .............
16,955
1,000 x $13.75 .........................
$164,220
Market
Unrealized
Gain (Loss)
$ 53,000
93,000
13,750
$159,750
$(4,470)
Brokerage fee attached to remaining 2,000 shares: $180 x (4,000 sh 2,000 sh.)/ 4,000 sh.= $90.
Brokerage fee attached to remaining 4,000 shares: Entire $175 (none sold).
Brokerage fee attached to remaining 2,000 shares: Entire $205 (none sold).
Part 3
4,470
Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $164,220 and show a subtraction of $4,470
for the market adjustment. This yields $159,750 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 $159,750 with
a note disclosure of the cost.
Part 5
(a)
Income statement
(i) Interest Revenue, $1,500
(ii) Dividend Revenue, $11,900 [$3,400 + $3,800 + $2,100 + $2,600]
(iii) Gain on Sale of Short-Term Investments, $11,185
(iv) Net effect on income is $24,585
(b)
20,740
Feb.
55,665
June 12
Dec. 31
3,650
Market
$ 21,500
45,600
46,350
$113,450
745
Cash ..........................................................................................
22,975
Gain on Sale of Investments ............................................ 2,235
Long-Term InvestmentsAFS (J&J) ................................. 20,740
Sold Johnson & Johnson shares
[(1,000 x $23.50) - $525].
July
Cash ..........................................................................................
35,615
Loss on Sale of Investments ..................................................
5,080
Long-Term InvestmentsAFS (Mattel) .............................. 40,695
Sold Mattel shares [(1,500 x $23.90) - $235].
July 22
Aug. 19
Dec. 31
10,168
Unrealized LossEquity ........................................................
Market AdjustmentAFS (LT)* ........................................... 10,168
Annual adjustment to market values.
*
Cost
Kodak ................... $15,498
Sara Lee ............... 13,980
Sony ..................... 55,665
Total ..................... $85,143
Market
$17,325
12,000
42,000
$71,325
Kodak:
900 x $19.25 = $17,325
Sara Lee:
600 x $20.00 = $12,000
Sony:
1,200 x $35.00 = $42,000
$85,143 - $71,325 = $13,818
Market Adjustment account:
Required balance ..... $13,818 Cr.
Unadjusted balance.. 3,650 Cr.
Required change... $10,168 Cr.
June 21
Cash .........................................................................................
56,720
Gain on Sale of Investments ............................................ 1,055
Long-Term InvestmentsAFS (Sony) ............................... 55,665
Sold Sony shares [(1,200 x $48.00) - $880].
June 30
Aug. 3
Cash .........................................................................................
9,315
Loss on Sale of Investments .................................................
4,665
Long-Term InvestmentsAFS (Sara Lee)........................... 13,980
Sold Sara Lee shares
[(600 x $16.25) - $435].
Nov. 1
Cash .........................................................................................
19,850
Gain on Sale of Investments ........................................... 4,352
Long-Term InvestmentsAFS (E. Kodak) .......................... 15,498
Sold Eastman Kodak shares
[(900 x $22.75) - $625].
Dec. 31
Market
$ 54,600
165,600
$220,200
747
$85,143
$212,160
(3,650)
(13,818)
8,040
$71,325
$220,200
Part 3
2008
2009
2010
$ 2,235
(5,080)
_______
$ (2,845)
$(4,665)
1,055
4,352
$ 742
$(13,818)
$ 8,040
Market Value
$ 81,375
610,312
118,125
278,800
$1,088,612
Disclosure
The portfolio of available-for-sale securities would be reported on the
December 31, 2008, balance sheet at its market value of $1,088,612.
Part 2
Dec. 31
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2008 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2008 realized gains (losses)
Stock Sold
Cost
3,500 shares of Company B stock ............ $ 79,690
40,000 shares of Company A stock .......... 535,300
Realized gain (loss) ...................................
Sale
Gain (Loss)
$ 77,688 $ (2,002)
510,900
(24,400)
$(26,402)
McGraw-Hill Companies, 2008
749
Oct. 23
Cash ..........................................................................................
192,000
Long-Term InvestmentsKildaire ....................................... 192,000
Received cash dividend (60,000 x $3.20).
Dec. 31
2009
Oct. 15
Cash ..........................................................................................
156,000
Long-Term InvestmentsKildaire ....................................... 156,000
Record cash dividend (60,000 x $2.60).
Dec. 31
2010
Jan. 2
Cash ..........................................................................................
1,894,000
Gain on Sale of Investments ............................................. 154,000
Long-Term InvestmentsKildaire* .....................................
1,740,000
Sold Kildaire shares.
* Investment carrying value, January 2, 2010
Original cost ............................................ $1,560,000
Less 2008 dividends ...............................
(192,000)
Plus 2008 earnings ..................................
232,800
Less 2009 dividends ...............................
(156,000)
Plus 2009 earnings ..................................
295,200
Carrying value at date of sale ................. $1,740,000
Part 2
1. Journal entries (assuming NO significant influence)
2008
Jan. 5
Oct. 23
Cash ..........................................................................................
192,000
Dividend Revenue ............................................................. 192,000
Received cash dividend (60,000 x $3.20).
Dec. 31
2009
Oct. 15
Cash ..........................................................................................
156,000
Dividend Revenue ............................................................. 156,000
Received cash dividends (60,000 x $2.60).
Dec. 31
751
Cash ..........................................................................................
1,894,000
Long-Term InvestmentsAFS (Kildaire) ............................
1,560,000
Gain on Sale of Investments ............................................ 334,000
Sold Kildaire shares.
Jan. 2
$192,000
156,000
334,000
$682,000
5,938
July 21
14,100
Accounts ReceivableSumito ...............................................
Sales ................................................................................... 14,100
(1,500,000 x $0.0094)
Oct. 14
27,675
Accounts ReceivableSmithers ...........................................
Sales ................................................................................... 27,675
(19,000 x $1.4566)
Nov. 18
Cash ..........................................................................................
13,800
Foreign Exchange Loss ..........................................................
300
Accounts ReceivableSumito ......................................... 14,100
(1,500,000 x $0.0092)
Dec. 20
7,652
Accounts ReceivableHamid Albar......................................
Sales ...................................................................................
(17,000 x $0.4501)
Dec. 31
103
Accounts ReceivableSmithers. ..........................................
Foreign Exchange Gain * ..................................................
*Original measure = (19,000 x $1.4566)
Year-end measure = (19,000 x $1.4620)
Gain for the period ...
Dec. 31
2009
Jan. 12
Jan. 19
103
= $27,675
= 27,778
= $ 103
7,652
77
= $7,652
= 7,575
=$
77
Cash*.........................................................................................
27,928
Accounts ReceivableSmithers**................................... 27,778
Foreign Exchange Gain ....................................................
150
*(19,000 x $1.4699) **($27,675 + $103)
Cash*.........................................................................................
7,514
Foreign Exchange Loss ..........................................................
61
Accounts ReceivableHamid Albar** .............................
*(17,000 x $0.4420) **($7,652 - $77)
7,575
753
$(300)
103
(77)
$(274)
Part 3
To reduce the risk of foreign exchange gain or loss, Doering could attempt
to negotiate foreign customer sales that are denominated in U.S. dollars.
To accomplish this, Doering 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 Doering 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 Doering'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 C-1B (60 minutes)
Part 1
2008
Mar. 10 Short-Term InvestmentsTrading (AOL) ............. 143,505
Cash .............................................................
143,505
184,105
69,950
69,950
2009
Apr. 26 Cash ................................................................... 170,450
Loss on Sale of Short-Term Investments ....... 13,655
Short-Term InvestmentsTrading (MTV) ...
184,105
27 Cash ...................................................................
Gain on Sale of Short-Term Investments .
Short-Term InvestmentsTrading (UPS) ...
70,812
862
69,950
622,450
46,307
46,307
755
88,890
622,450
143,505
62,430
Oct.
848
46,307
13,820
13,820
Market
Value
$ 82,000
55,500
$137,500
Cost
$ 88,890
62,430
$151,320
Unrealized
Gain (Loss)
$ (6,890)
(6,930)
$(13,820)
143,250
20,000
20,000
48,655
48,655
184,140
30 Cash ...................................................................
Dividend Revenue .........................................
646
646
38,050
2,237
35,813
16 Cash ..................................................................
Short-Term InvestmentsAFS (T-bills) ........
Interest Revenue*..........................................
20,600
20,000
600
24 Cash ..................................................................
Dividend Revenue .........................................
120
120
510
510
180
180
757
Nokia
Dell
Merck
Cost
$107,437
$102,638
48,655
48,600
184,140
$340,232
a
b
c
Market
Unrealized
Gain (Loss)
147,500
$298,738
$41,494
Brokerage fee attached to remaining 2,550 shares: $3,000 x (3,400 sh. 850 sh.)/ 3,400 sh. = $2,250.
Brokerage fee attached to remaining 1,200 shares: Entire $1,255 (none sold).
Brokerage fee attached to remaining 2,500 shares: Entire $2,890 (none sold).
Part 3
41,494
41,494
Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $340,232 and show a subtraction of $41,494
for the market adjustment. This yields $298,738 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 $298,738 with
a note disclosure of the cost.
Part 5
(a)
Income statement
(i) Interest Revenue, $600
(ii) Dividend Revenue, $1,456 [$646 + $120 + $510 + $180]
(iii) Gain on Sale of Short-Term Investments, $2,237
(iv) Net effect on income is $4,293
(b)
April 7
Sept. 1
Dec. 31
Unrealized LossEquity.........................................................
2,873
Market AdjustmentAFS (LT)* .....................................................
Annual adjustment to fair values.
*
Cost
Apple .....................
$ 31,400
Ford .......................57,283
Polaroid .................29,090
Total.......................
$117,773
2,873
Market
$ 33,000
52,500
29,400
$114,900
Apple:
1,200 x $27.50 = $33,000
Ford:
2,500 x $21.00 = 52,500
Polaroid: 600 x $49.00 = 29,400
$117,773 - $114,900 = $2,873
759
June 2
June 14
Nov. 27
Cash .........................................................................................
29,755
Gain on Sale of Investments ............................................
665
Long-Term InvestmentsAFS (Polaroid) ........................... 29,090
Sold Polaroid shares
[600 x $51.00) - $845].
Dec. 31
2,873
2,220
Apple:
1,200 x $29.00 = $34,800
Duracell: 1,800 x $18.00 = $32,400
Sears:
1,200 x $23.00 = $27,600
$92,580 - $94,800 = $2,220
Market Adjustment account:
Required balance ..... $2,220 Dr.
Unadjusted balance.. 2,873 Cr.
Required change ...... $5,093 Dr.
Aug. 22
Cash .........................................................................................
23,950
Loss on Sale of Investments ..................................................
7,450
Long-Term InvestmentsAFS (Apple) ............................. 31,400
Sold Apple shares [(1,200 x $21.50) - $1,850].
Sept. 3
Oct.
Cash .........................................................................................
28,201
Gain on Sale of Investments ........................................... 2,721
Long-Term InvestmentsAFS (Sears) .............................. 25,480
Sold Sears shares [(1,200 x $24.00) - $599].
Oct. 31
Cash .........................................................................................
26,102
Loss on Sale of Investments .................................................
9,598
Long-Term InvestmentsAFS (Duracell).......................... 35,700
Sold Duracell shares [(1,800 x $15.00) - $898].
Dec. 31
2,220
Unrealized GainEquity .........................................................
6,260
Unrealized LossEquity ........................................................
Market AdjustmentAFS (LT)* ...........................................
8,480
Market
$ 48,000
72,000
$120,000
761
12/31/2009
12/31/2010
$92,580
$126,260
(2,873)
2,220
(6,260)
$94,800
$120,000
2009
2010
Part 3
2008
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) ........................ $
0
$(7,240)
665
______
$(6,575)
$ (9,598)
(7,450)
2,721
$(14,327)
$ 2,220
$ (6,260)
16,267
Unrealized LossEquity ........................................................
29,313
Unrealized GainEquity .........................................................
Market AdjustmentAFS (LT)* ........................................... 45,580
*December 31, 2007, available-for-sale securities:
Cost
Market Value
$ 559,125
$ 599,063
308,380
293,250
147,295
151,800
$1,014,800
$1,044,113
December 31, 2008, adjustment to the Market Adjustment account:
$1,014,800 - $1,044,113 = $29,313 Dr. balance on Dec. 31, 2007
$ 975,330 - $ 959,063 = 16,267 Cr. balance required on Dec. 31, 2008
$45,580 Cr. to adjust cost to market value
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2008 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2008 realized gain (loss)
Stock Sold
Cost
2,125 shares of Company S stock ........ $ 77,095
11,000 shares of Company T stock ........ 147,295
Realized gain (loss) ..................................
Sale
$ 71,055
154,050
Gain (Loss)
$(6,040)
6,755
$ 715
763
Cash ..........................................................................................
21,000
Long-Term InvestmentsBloch............................................... 21,000
Received cash dividend (20,000 x $1.05).
Dec. 31
2009
Aug. 1
Dec. 31
2010
Jan. 8
Cash ..........................................................................................
27,000
Long-Term InvestmentsBloch ...................................... 27,000
Record cash dividend (20,000 x $1.35).
Long-Term Investments (Bloch) ............................................
19,500
Earnings from Long-Term Investment ............................ 19,500
Record equity in investees earnings
($78,000 x 25%).
Cash ..........................................................................................
375,000
Long-Term InvestmentsBloch* ..................................... 192,500
Gain on Sale of Investments ............................................ 182,500
Sold Bloch shares.
*Investment carrying value at Jan. 7, 2008
Original cost ..........................................$200,500
Less 2008 dividends ............................. (21,000)
Plus 2008 earnings ............................... 20,500
Less 2009 dividends ............................. (27,000)
Plus 2009 earnings ............................... 19,500
Carrying value at date of sale ..............$192,500
Part 2
1. Journal entries (assuming NO significant influence)
2008
Jan. 5
Aug. 1
Cash ..........................................................................................
21,000
Dividend Revenue ............................................................. 21,000
Received cash dividend (20,000 x $1.05).
Dec. 31
765
Dec. 31
2010
Jan. 8
Cash ..........................................................................................
375,000
Long-Term InvestmentsAFS (Bloch)............................ 200,500
Gain on Sale of Investments ............................................ 174,500
Sold Bloch shares.
Jan. 8
June 1
Cash ..........................................................................................
64,800
Sales ................................................................................... 64,800
July 25
Cash*.........................................................................................
59,800
Foreign Exchange Loss ..........................................................
650
Accounts ReceivableFuji .............................................. 60,450
*(6,500,000 x $0.0092)
Oct. 15
Dec. 6
Dec. 31
1,512
Dec. 31
275
2009
Jan. 5
Cash*.........................................................................................
39,500
Accounts ReceivableChi-Ying** ................................... 36,250
Foreign Exchange Gain .................................................... 3,250
*(250,000 x $0.1580) **($35,975 + $275)
Jan. 13
Cash*.........................................................................................
39,274
Foreign Exchange Loss ..........................................................
794
Accounts ReceivableMartinez Bros** ............................ 40,068
* (378,000 x $0.1039) ** ($38,556 + $1,512)
767
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 SP C
Serial Problem, Success Systems (35 minutes)
Part 1
2008
April 16 Short-Term InvestmentsTrading (J&J) .................. 22,300
Cash .................................................................
22,300
5,650
Part 2
850
850
769
Reporting in Action
BTN C-1
Comparative Analysis
BTN C-2
3. Current Year Analysis: Best Buy has a higher return on total assets
versus Circuit City (10.4% vs. 1.6%), a higher profit margin (3.6% vs.
0.6%), and a higher total asset turnover (2.9 vs. 2.8). In addition, Best
Buys return on total assets is higher than the industry average.
One Year Prior Analysis: Best Buy has a higher return on total assets
versus Circuit City [8.6% vs. (2.4)%], a higher profit margin (2.9% vs.
(0.9)%), and a higher total asset turnover (3.0 vs. 2.6).
This comparative analysis shows that Circuit City must improve on
both components; but it especially must increase its profit margin.
McGraw-Hill Companies, 2008
Solutions Manual, Appendix C
771
Ethics Challenge
BTN C-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 C-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 2008, the income statement showed earnings from all
investments of $126,000.
This amount included $81,000 from the
investment in Blackhawk (Blackhawks 2008 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 C-5
773
Teamwork in Action
BTN C-6
BTN C-7
Entrepreneurial Decision
1.
2008
Jan. 1
2.
Mar. 31
June 30
Sept. 30
Dec. 31
3.
BTN C-8
26,730
60
26,730
300
26,730
330
26,730
180
106,920
26,790
27,030
27,060
26,910
Since all of his payments are to be in yen, Stu can buy yen in advance
to lock in his payment amount.
NOTE: A few students may also understand the companys opportunity for
hedging. For example, this can involve selling foreign currency futures to be
delivered at the time that receivables from foreign customers will be
collected.
775
C-9
C-10
2. Current Year Analysis: Best Buy has a higher return on total assets
(10.4% vs. Circuit Citys 7.1% and Dixons 1.6%), but Dixons has the
higher profit margin (4.4% vs. Best Buys 3.6% and Circuit Citys 0.6%).
However, Best Buy has a higher total asset turnover (2.9 vs. Circuit
Citys 2.8 and Dixons 1.62).
One Year Prior Analysis: Best Buy has a higher return on total assets
[8.7% vs. Dixons 5.4% and Circuit Citys (2.3)%], but Dixons has the
higher profit margin [3.6% vs. Best Buys 2.9% and Circuit Citys
(0.9)%]. Best Buy has the higher total asset turnover (3.0 vs. Circuit
Citys 2.6 and Dixons 1.49).
Overall, Best Buy is the superior performer. While Dixons profit
margins and turnover are acceptable, Circuit City should focus on
improving a lower than normal profit margin and asset turnover.
McGraw-Hill Companies, 2008
776