Solution manual financial accounting 4e by wild appendix c

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Appendix C Investments and International Operations QUESTIONS To be classified as current assets, investments must be (i) capable of being converted into cash quickly and (ii) management must intend to sell the investments as a source of cash to satisfy the needs of current operations (within one year or the operating cycle, whichever is longer) Short-term investments in trading securities are reported on the balance sheet at the (fair) market value of the portfolio of trading securities 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 The three classes of noninfluential investments in securities are: a) debt and equity trading securities b) debt securities held-to-maturity c) debt and equity securities available-for-sale The two classes of influential investments in securities are: a) equity securities giving an investor a significant influence over an investee b) equity securities giving an investor control over an investee To be classified as current assets, investments must be capable of being converted into cash quickly and management must intend to sell the investments as a source of cash to satisfy the needs of current operations To be classified as long-term, investments must not meet the requirements for short-term investments—not marketable and not intended to be converted into cash Long-term investments also include funds earmarked for a special purpose, and other assets not used in company operations Unrealized lossEquity ## Market Adjustment—Available-for-Sale (LT) ## The portfolio for investments in available-for-sale securities should be reported on the balance sheet at (fair) market value—this is separated into short- and long-term The portfolio of long-term investments in debt securities is reported at cost adjusted for amortization of any difference between cost and maturity when the investments are classified as held-to-maturity debt securities ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 725 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 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 Best Buy reported $59 million in foreign currency adjustments This is an unrealized gain 16 Circuit City’s financial statements, including its balance sheet, are all labeled as being consolidated statements 17 Apple’s return on total assets as of September 25, 2004 is ($ millions): $276/ [($8,050 + $6,815)/2] = 3.7% 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.] Apr 18 Short-Term Investments—Trading (XLT) 12,850 Cash 12,850 Purchased 300 shares at $42 plus $250 fee May 30 Cash Dividend Revenue 300 300 Received dividend of $1 per share ©McGraw-Hill Companies, 2008 726 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study C-2 (10 minutes) 2008 Dec 31 Unrealized Loss—Equity Market Adjustment—Available-for-Sale (ST) 3,000 3,000 To reflect an unrealized loss in market value of the available-for-sale securities’ portfolio Both accounts in part (1) are reported on the balance sheet i The Unrealized Loss is reported as a reduction in the equity section (and in comprehensive income) ii The credit balance in the Market Adjustment—Available-for-Sale (ST) account is a contra asset account It reduces the (cost) balance in the Short-Term Investments—Available-for-Sale account to its market value 2009 Apr Cash Gain on Sale of Short-Term Investments Short-Term Investments—AFS 26,000 1,000 25,000 To record sale of one-half of the available-for-sale securities (Cost = $50,000 x 1/2) Quick Study C-3 (10 minutes) May Short-Term Investments—AFS (Kraft) 10,300 Cash 10,300 Purchased 200 shares at $50 plus $300 fee June Cash 11,050 Gain on Sale of Short-Term Investments Short-Term Investments—AFS (Kraft) 750 10,300 To record sale of available-for-sale securities 200 shares at $56 less $150 fee ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 727 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study C-4 (10 minutes) May Short-Term Investments—AFS (Higo) 5,150 Cash 5,150 Purchased 200 shares at $25 plus $150 fee June Cash* 2,710 Gain on Sale of Short-Term Investments Short-Term Investments—AFS (Higo) 135 2,575 To record sale of available-for-sale securities The original cost is $5,150 x 100/200 = $2,575 *($100 x $28) - $90 Dec 31 Unrealized Loss – Equity* Market Adjustment—Available-for-Sale (ST) 275 275 To reflect an unrealized loss in market value of available-for-sale securities 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* Quick Study C-5 (10 minutes) True: b, d, f, g Quick Study C-6 (10 minutes) Interest revenue (or interest earned) Equity method Market value (or fair value) Current (or short-term) Parent, subsidiary ©McGraw-Hill Companies, 2008 728 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study C-7 (10 minutes) July 31 Cash 1,200 Interest Revenue 1,200 Record interest earned ($40,000 x 6% x 6/12) Dec 31 Interest Receivable 1,000 Interest Revenue 1,000 Record interest earned ($1,200 x 5/6) Quick Study C-8 (10 minutes) Valuation Method: The (fair) market value method is used to account for this investment in long-term equity securities (AFS portfolio) 2008 May 20 Long-Term Investments—AFS (ORD) 1,000,000 Cash 1,000,000 Record purchase of securities 2009 Aug Cash 625,000 Long-Term Investments—AFS (ORD)* Gain on Sale of Long-Term Investment 500,000 125,000 Record sale of securities *(½ x $1,000,000) Quick Study C-9 (10 minutes) a Nov Cash 40,000 Long-Term Investment—ORD 40,000 Received cash dividends ($100,000 x 40%) b Dec 31 Long-Term Investments—ORD 280,000 Earnings from Investment (ORD) 280,000 Record equity in investee earnings ($700,000 x 40%) ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 729 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study C-10 (10 minutes) Dec 31 12,000 Unrealized LossEquity Market Adjustment—Available-for-Sale (LT) 12,000 Record change in value of securities 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 Quick Study C-11 (10 minutes) Return on total assets = Net income Average total assets This ratio provides information to evaluate a company's profitability (efficiency) in using its available assets Quick Study C-12 (10 minutes) Return on Total Assets = Profit margin Net income Average total assets = Net income Net sales x Total asset turnover x Net sales Average total assets Component analysis is useful as it allows the determination of whether the return on assets is achieved primarily due to profitability or efficiency of asset usage (or a balanced combination of both) Component analysis often is more useful when computed and examined over a period of several years and when comparisons are made with competitors ©McGraw-Hill Companies, 2008 730 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study C-13A (10 minutes) Date of Sale Accounts Receivable 14,500 Sales 14,500 Record credit sale in value of pounds (10,000 pounds x 1.45) Date of Payment Cash 13,500 Foreign Exchange Loss 1,000 Accounts Receivable 14,500 Cash received on account (£10,000 x 1.35) Quick Study C-14A (10 minutes) Mar Account Receivable—Hamac 9,076 Sales 9,076 Record credit sale in value of ringgits (20,000 ringgits x $0.4538) Mar 31 Cash 9,798 Foreign Exchange Gain Accounts Receivable—Hamac 722 9,076 Cash received on account (20,000 ringgits x $0.4899) ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 731 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES Exercise C-1 (25 minutes) a Feb 15 Short-Term Investments—HTM (RTF) 120,000 Cash 120,000 Purchased 90-day, 8% debt securities b Mar 22 Short-Term Investments—Trading (XIF) 19,400 Cash 19,400 Purchased 700 shares of stock for (700 x $27.50) + $150 brokerage fee c May 16 Cash 122,400 Short-Term Investments—HTM (RTF) Interest Revenue 120,000 2,400 Collected proceeds of debt securities with interest of $120,000 x 08 x 90/360 d Aug Short-Term Investments—AFS (Flash Co.) 80,000 Cash 80,000 Purchased 6-month, 10% debt securities e Sept Cash Dividend Revenue 700 700 Received dividend on stock (700 x $1.00) f Oct Cash* 11,760 Short-Term Investments—Trading (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 Received cash interest payment ($80,000 x 10 x 90/360) ©McGraw-Hill Companies, 2008 732 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise C-2 (20 minutes) 2008 Dec 31 Market Adjustment—Trading Unrealized Gain—Income 6,000 6,000 To reflect an unrealized gain in market values of trading securities The accounts in part (1) are reported on different financial statements i The $6,000 debit balance in the Market Adjustment—Trading account is an adjunct asset account in the balance sheet It increases the balance of the Short-Term Investment—Trading account to the securities’ market value of $72,000 ii The Unrealized Gain of $6,000 is reported in the Other Revenues and Gains section of the income statement 2009 Jan Cash 35,000 Gain on Sale of Short-Term Investments Short-Term Investments—Trading 2,000 33,000 To record sale of trading securities Exercise C-3 (15 minutes) Available-for-Sale Portfolio Cost Verrizano Corporation bonds payable $ 89,600 Preble Corporation notes payable 70,600 Lucerne Company common stock 86,500 $246,700 Market Unrealized Gain (Loss) $ 91,600 62,900 83,100 $237,600 $(9,100) Dec 31 Unrealized Loss—Equity 9,100 Market Adjustment—AFS (ST) 9,100 To reflect unrealized loss ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 733 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise C-4 (30 minutes) 2008 (a) Feb 15 Short-Term Investments—HTM (A.G.) 160,000 Cash 160,000 Purchased 90-day, 10% notes (b) Mar 22 Long-Term Investments—AFS (Fran) 35,850 Cash 35,850 Purchased 700 shares of Fran common stock ([700 x $51] + $150) (c) May 15 Cash 164,000 Short-Term Investments—HTM (A.G.) 160,000 Interest Revenue 4,000 Collected proceeds of 10% notes ($160,000 x 10% x 90/360) (d) July 30 Short-Term Investments—Trading (MP3) 100,000 Cash 100,000 Purchased 8% notes, due Jan 30, 2009 (e) Sept Cash 700 Dividend Revenue 700 Received dividend on Fran shares (700 x $1) (f) Oct Cash* 22,275 Long-Term Investments—AFS (Fran)** Gain on Sale of L-T Investments 17,925 4,350 Sold 350 shares of Fran stock *([350 x $64] - $125) **($35,850/2) (g) Oct 30 Cash 2,000 Interest Revenue 2,000 Received interest payment on 8% notes ($100,000 x 08 x 3/12) ©McGraw-Hill Companies, 2008 734 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem C-3B (Concluded) Part 12/31/2008 12/31/2009 12/31/2010 $92,580 $126,260 (2,873) 2,220 (6,260) Long-Term AFS Securities (market) $114,900 $94,800 $120,000 2009 2010 Long-Term AFS Securities (cost) $117,773 Market Adjustment Part 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) $ $(7,240) 665 $(6,575) $ (9,598) (7,450) 2,721 $(14,327) Unrealized gains (losses) at year-end $(2,873) $ 2,220 $ (6,260) ©McGraw-Hill Companies, 2008 762 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem C-4B (40 minutes) Part Available-for-sale securities on December 31, 2008 Security Cost Market Value 27,500 shares of Company R common stock .$559,125 $568,125 6,375 shares of Company S common stock 231,285 210,375 42,500 shares of Company V common stock 135,000 134,938 5,000 shares of Company X common stock 49,920 45,625 $975,330 $959,063 Disclosure The portfolio of available-for-sale securities would be reported on the December 31, 2008, balance sheet at its fair market value of $959,063 Part Dec 31 16,267 Unrealized LossEquity 29,313 Unrealized GainEquity Market Adjustment—AFS (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 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 ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 763 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem C-5B (50 minutes) Part 1 Journal entries (assuming significant influence) 2008 Jan Long-Term Investments—Bloch 200,500 Cash 200,500 Purchased Bloch shares Aug Cash 21,000 Long-Term Investments—Bloch 21,000 Received cash dividend (20,000 x $1.05) Dec 31 Long-Term Investments—Bloch 20,500 Earnings from Long-Term Investment 20,500 Record equity in investee’s earnings ($82,000 x 25%) 2009 Aug Dec 31 2010 Jan Cash 27,000 Long-Term Investments—Bloch 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 investee’s earnings ($78,000 x 25%) Cash 375,000 Long-Term Investments—Bloch* 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 ©McGraw-Hill Companies, 2008 764 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem C-5B (Continued) Carrying value per share (see computations in part 1) $192,500 / 20,000 shares = $9.63* * Rounded to the nearest cent Change in Brinkley’s equity Earnings from Bloch-2008 $ 20,500 Earnings from Bloch-2009 19,500 Gain on sale of investments 182,500 Net increase $222,500 Part Journal entries (assuming NO significant influence) 2008 Jan Long-Term Investments—AFS (Bloch) 200,500 Cash 200,500 Purchased Bloch shares Aug Cash 21,000 Dividend Revenue 21,000 Received cash dividend (20,000 x $1.05) Dec 31 Market Adjustment—AFS (LT)* 37,500 Unrealized Gain—Equity 37,500 Record market adjustment *20,000 x $11.90 = $238,000 $238,000 - $200,500 = $37,500 ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 765 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem C-5B (Concluded) 2009 Aug Cash 27,000 Dividend Revenue 27,000 Received cash dividends (20,000 x $1.35) Dec 31 Market Adjustment—AFS (LT)* 35,000 Unrealized Gain—Equity 35,000 Record market adjustment *20,000 x $13.65 = $273,000 $273,000 - $200,500 = $72,500 $72,500 - $37,500 = $35,000 2010 Jan Cash 375,000 Long-Term Investments—AFS (Bloch) 200,500 Gain on Sale of Investments 174,500 Sold Bloch shares Jan Unrealized Gain—Equity 72,500 Market Adjustment—AFS (LT)* 72,500 To remove market adjustment and related accounts *$37,500 + $35,000 = $72,500 Investment cost per share, January 7, 2010 $200,500 / 20,000 shares = $10.03* *rounded to the nearest cent Change in Brinkley's equity Dividend Revenue-2008 $ 21,000 Dividend Revenue-2009 27,000 Gain on sale of investments 174,500 Net increase $222,500 ©McGraw-Hill Companies, 2008 766 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem C-6BA (60 minutes) Part 2008 May 26 Accounts Receivable—Fuji 60,450 Sales 60,450 (6,500,000 x $0.0093) June Cash 64,800 Sales 64,800 July 25 Cash* 59,800 Foreign Exchange Loss 650 Accounts Receivable—Fuji 60,450 *(6,500,000 x $0.0092) Oct 15 Accounts Receivable—Martinez Brothers 38,556 Sales 38,556 (378,000 x $0.1020) Dec Accounts Receivable—Chi-Ying 35,975 Sales 35,975 (250,000 x $0.1439) Dec 31 Accounts Receivable Martinez Brothers 1,512 Foreign Exchange Gain* 1,512 *Original measure = (378,000 x $0.1020) = $38,556 Year-end measure = (378,000 x $0.1060) = 40,068 Gain for the period .…………… = $ 1,512 Dec 31 Accounts Receivable—Chi-Ying 275 Foreign Exchange Gain* 275 *Original measure = (250,000 x $0.1439) = $35,975 Year-end measure = (250,000 x $0.1450) = 36,250 Gain for the period .…………… = $ 275 2009 Jan Cash* 39,500 Accounts Receivable—Chi-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 Receivable—Martinez Bros** 40,068 * (378,000 x $0.1039) ** ($38,556 + $1,512) ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 767 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem C-6BA (Concluded) Part Foreign exchange gain reported on 2008 income statement July 25 $ (650) December 31 1,512 December 31 275 Total $1,137 Part 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 company’s opportunity for hedging This involves selling foreign currency futures to be delivered at the time the receivables from foreign customers will be collected ©McGraw-Hill Companies, 2008 768 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem — SP C Serial Problem, Success Systems (35 minutes) Part 2008 April 16 Short-Term Investments—Trading (J&J) 22,300 Cash 22,300 Purchased Johnson & Johnson shares [(400 x $55) + $300] 30 Short-Term Investments—Trading (Starbucks) 5,650 Cash 5,650 Purchased Starbucks shares [(200 x $27) + $250] Part Adjusting entry at June 30, 2008 June 30 Market Adjustment—Trading* Unrealized Gain—Income 850 850 To reflect an unrealized gain in market values of trading securities * Market adjustment computations Trading securities’ Share Price Market Unrealized portfolio Shares at 6/30/08 Value Cost Gain (Loss) J & J 400 $60 $24,000 $22,300 $1,700 Starbucks 200 $24 4,800 5,650 (850) Totals $28,800 $27,950 $ 850 ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 769 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN C-1 Yes, Best Buy’s financial statements are consolidated The statements are labeled as consolidated in all the financial statement headings Best Buy’s comprehensive income for the year ended February 26, 2005, is $1,047,000,000 The comprehensive income amount is reported on Best Buy’s consolidated statement of changes in shareholders’ equity Yes Its consolidated statement of changes in shareholders' equity includes a Foreign Currency Translation Adjustments amount The return on total assets for the year ended February 26, 2005, ($ millions) follows $984 / [($10,294 + $8,652) / 2] = 10.39% Answer depends on the annual report information obtained ©McGraw-Hill Companies, 2008 770 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis — BTN C-2 Best Buy’s return on total assets Current Year: $984 / [($10,294 + $8,652)/2] = 10.4% One Year Prior: $705 / [($8,652 + $7,694)/2] = 8.6% Circuit City’s return on total assets Current Year: $62 / [($3,789 +$3,731)/ 2] = 1.6% One Year Prior: $(89)/ [($3,731 + $3,841)/2)] = (2.4)% Return on total assets = Profit margin x Total asset turnover Best Buy’s component analysis of return on total assets* Current Year 10.4% = $984/$27,433 x $27,433/[($10,294 + $8,652)/2] 10.4% = 3.6% x 2.9 One Year Prior 8.7% = $705/$24,548 x $24,548/[($8,652 + $7,694)/2] 8.7% = 2.9% x 3.0 *(Some difference due to rounding) Circuit City’s component analysis of total return on assets* Current Year 1.6% = $62/$10,472 x $10,472/[($3,789 + $3,731)/2] 1.6% = 0.6% x 2.8 One Year Prior (2.3)%= $(89)/$9,857 x $9,857/[($3,731 + $3,841)/2] (2.3)%= (0.9)% x 2.6 *(Some difference due to rounding) 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 Buy’s 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 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethics Challenge — BTN C-3 Kendra’s 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 bonds—but 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) 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 The company’s auditors (internal and external) and/or its board of directors should serve as an effective check on Kendra’s accounting for the company’s long-term investments in securities ©McGraw-Hill Companies, 2008 772 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 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 (Blackhawk’s 2008 net income of $202,500 x 40%), which was debited to the Long-Term Investments—Blackhawk 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 $6,000 loss Please call me if you have any questions Taking It to the Net — BTN C-5 ($ millions for Parts through 4) At June 30, 2005 (cost-basis) $46,654 At June 30, 2004 (cost-basis) $71,275 Mutual funds; Commercial paper; Certificates of deposit; U.S government and agency securities; Foreign government bonds; Mortgage backed securities; Corporate notes and bonds; Municipal securities; Common stock and equivalents; and Preferred stock Unrealized gains = $2,359; and Unrealized losses = $(258) Market (recorded) value is greater Specifically: Market is $48,755; and cost-basis is $46,654 ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 773 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action — BTN C-6 There is no specific solution to this activity The instructor should serve as a facilitator during this learning reinforcement activity Business Week Activity — BTN C-7 Typically, accountants focus on and report historical data Investors usually desire future-oriented information about companies they are interested in evaluating ―Marking-to-market‖ means that the assets and liabilities are to be shown on a company’s financial statements at their current market values Each reporting period, asset and liabilities are to be adjusted from previously reported values to reflect the most current value Ideas to curb fraud and facilitate mark-to-market accounting include: a Marking can be performed by outsiders who not have a vested interest in making the numbers look good b The assumptions that went into estimating the values could be publicized and audited c A range of possible asset values could be published which would serve to highlight the uncertain nature of the data Economists argue that marking-to-market results in ―asymmetrical‖ balance sheets That is, financial assets on the balance sheet can fluctuate and show both increases and decreases in current values However, non-financial assets (such as inventories, plant assets, and goodwill) can be marked down in value but not increased in value should they appreciate Accountants believe that the non-mark-up in value rule is a good precaution in that it prevents unjustified markups of non-financial assets Accountants also argue that CEOs will be sure to alert investors if key assets have increased in value, even if such increases are not allowed to be explicitly reported on the balance sheet The best argument for mark-to-market accounting is that it helps society allocate capital more efficiently by improving financial understanding ©McGraw-Hill Companies, 2008 774 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision 2008 Jan Mar 31 June 30 Sept 30 Dec 31 — BTN C-8 Publishing rights 106,920 Accounts payable Agreed to pay for publishing rights 12,000,000 yen x $0.00891 Accounts payable* Loss from currency translation Cash Paid ¼ of total amount due *$106,920/4 **3,000,000 yen x $0.00893 26,730 60 Accounts payable Loss from currency translation Cash* Paid ¼ of total amount due *3,000,000 yen x 0.00901 26,730 300 Accounts payable Loss from currency translation Cash* Paid ¼ of total amount due *3,000,000 yen x 0.00902 26,730 330 Accounts payable Loss from currency translation Cash* Paid ¼ of total amount due *3,000,000 yen x 0.00897 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 company’s 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 ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 775 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Hitting the Road— BTN C-9 A Exchange rates can be found at businesses that specialize in foreign currency exchange Also, American Express offices abroad exchange currencies for cardholders and post foreign exchange rates Typically, railroad stations and airports also post foreign exchange rates and offer currency exchange services Global Decision— BTN C-10 Dixons Group (£ millions) Return on total assets = Net Income / Average Total Assets Current Year: £284/ [(£3,874 + £4,158)/2] = 7.1% Prior Year: £209/ [(£4,158 + £3,577)/2] = 5.4% Return on total assets = Profit margin x Total asset turnover Current Year 7.1% 7.1% = £284/£6,492 x £6,492/[(£3,874 + £4,158)/2] = 4.4% x 1.62 One Year Prior 5.4% 5.4% = £209/£5,758 x £5,758/[(£4,158 + £3,577)/2] = 3.6% x 1.49 Current Year Analysis: Best Buy has a higher return on total assets (10.4% vs Circuit City’s 7.1% and Dixons’ 1.6%), but Dixons has the higher profit margin (4.4% vs Best Buy’s 3.6% and Circuit City’s 0.6%) However, Best Buy has a higher total asset turnover (2.9 vs Circuit City’s 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 City’s (2.3)%], but Dixons has the higher profit margin [3.6% vs Best Buy’s 2.9% and Circuit City’s (0.9)%] Best Buy has the higher total asset turnover (3.0 vs Circuit City’s 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 Financial Accounting, 4th Edition ... 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... Received dividend of $1 per share ©McGraw-Hill Companies, 2008 726 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... securities 200 shares at $56 less $150 fee ©McGraw-Hill Companies, 2008 Solutions Manual, Appendix C 727 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com