Solution manual financial accounting 9th harrison ch08

Find more at www.downloadslide.com Chapter Long-Term Investments & the Time Value of Money Short Exercises (10-15 min.) S 8-1 Req Journal ACCOUNT TITLES AND EXPLANATION DATE 2012 Apr 10 Available-for-Sale Investment (600 × $17) Cash July Dec DEBIT CREDIT 10,200 10,200 22 Cash (600 × $1.24) Dividend Revenue 744 31 Unrealized Loss on Investments Allowance to Adjust Investment to Market ($10,200 − $5,500) 4,700 744 4,700 Req The income statement will report dividend revenue of $744 The statement of other comprehensive income will report an unrealized loss on available-for-sale investments of $4,700 Chapter Long-Term Investments and the Time Value of Money 8-1 Find more at www.downloadslide.com (continued) (10-15 min.) S 8-1 Req ASSETS Total current assets………………………………… $ XXX Long-term available-for-sale investments, at market value…………………………………… 5,500 STOCKHOLDERS‘ EQUITY Common stock…………………………………………… $ XXX Retained earnings………………………………………… XXX Accumulated other comprehensive income: Unrealized (loss) on investments…………………… (4,700) (5-10 min.) S 8-2 Req DATE 2013 May 21 Journal ACCOUNT TITLES AND EXPLANATION Cash (600 × $23) Allowance to Adjust Investment to Market Available-for-Sale Investment Unrealized Loss on Investment……… Gain on Sale of Investment DEBIT CREDIT 13,800 4,700 10,200 4,700 3,600 Req This gain on sale of investment is a realized gain The loss recorded at December 31, 2012, was unrealized because it resulted from a change in the investment‘s market value, not from the sale of the investment 8-2 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (10-15 min.) S 8-3 Req Equity method is appropriate because the investor (Western Motors) holds a 35% investment in the investee company (Phase Motors) Req Journal ACCOUNT TITLES AND EXPLANATION a Long-Term Investment Cash To purchase equity-method investment b Long-Term Investment ($40 × 35) Equity-Method Investment Revenue To record investment revenue DEBIT CREDIT Millions 380 380 14 14 c Cash ($20 × 35) Long-Term Investment To receive cash dividend on equity-method investment 7 Req Long-Term Investment (Amounts in millions) Purchase 380 Dividends received Net income Balance 14 387 Chapter Long-Term Investments and the Time Value of Money 8-3 Find more at www.downloadslide.com (5 min.) S 8-4 Millions Sale proceeds………………………………………… $ 130 − Carrying amount of the investment ($387 / 2)…… (194) = (Loss) on sale of investment………………………… $ (64) (10 min.) S 8-5 A parent company is a corporation that owns a controlling (more than 50%) interest in another company A subsidiary company is a company that is controlled by another corporation Consolidated financial statements combine the balance sheets, income statements, and cash-flow statements of a parent company with those of its subsidiaries as if the parent and its subsidiaries were one company The parent company’s name appears on the consolidated financial statements To consolidate, the parent company must own more than 50% of the subsidiary‘s stock 8-4 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (10 min.) S 8-6 Goodwill is an intangible asset Goodwill is the excess of the purchase price to acquire a subsidiary company over the sum of the market value of the subsidiary‘s net assets (assets minus liabilities) Only the parent company reports the goodwill Goodwill appears as an intangible asset on the consolidated balance sheet Goodwill must be written down when its value is deemed to be impaired Noncontrolling interest arises when a parent company owns less than 100% of a subsidiary‘s stock The noncontrolling interest represents the subsidiaries‘ stock that is owned by stockholders other than the parent company The parent company can report noncontrolling interest on its consolidated balance sheet among the stockholders‘ equity (10-15 min.) S 8-7 Paid $816,000 ($800,000 × 1.02); will collect $800,000 at maturity Annual cash interest = $56,000 ($800,000 × 07) Annual interest revenue will be less than the amount of cash interest received each year because the investor bought the bonds at a premium The investor will collect only the face amount of the bonds at maturity The difference between the purchase price paid and the face amount collected (the premium) is a reduction in interest revenue over the life of the bonds Cash interest received each year………………… $816,000 − $800,000 − Amortization years = Annual interest revenue………………………… Chapter $56,000 = (3,200) $52,800 Long-Term Investments and the Time Value of Money 8-5 Find more at www.downloadslide.com (10 min.) S 8-8 Journal ACCOUNT TITLES AND EXPLANATION DATE 2012 a June 30 Long-Term Investment in Bonds ($800,000 × 1.02) Cash To purchase bond investment b Dec 31 Cash ($800,000 × 07 × 6/12)…………… Interest Revenue…………………… To receive semiannual interest c 31 Interest Revenue………………………… Long-Term Investment in Bonds [($816,000 − $800,000) / × 6/12]… To amortize bond investment 2017 d June 30 Cash Long-Term Investment in Bonds… To receive face value at maturity DEBIT CREDIT 816,000 816,000 28,000 28,000 1,600 1,600 800,000 800,000 (5-10 min.) S 8-9 Req $10,000 x 681 (PV of $1, periods, 8%) = $6,810 Req $10,000 x 3.993 (PV of an annuity, periods, 8%) = $39,930 8-6 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (5-10 min.) S 8-10 Req $13,486.51 EXCEL formula = PV(1%,60,-300) Req $16,238.76 EXCEL formula = PV(1%,60,-300,-5,000) (5 min.) S 8-11 A Operating B Investing — Most closely related to this chapter C Financing Purchase of investment (or acquisition of other companies) Sale of investment (or sale of other companies) Chapter Long-Term Investments and the Time Value of Money 8-7 Find more at www.downloadslide.com (10 min.) S 8-12 DATE: Early in 2012 TO: The XYZ Company Stockholders FROM: Chief Executive Officer RE: Investing Activities During 2012 XYZ Company’s investing activities used more cash than the previous year principally due to the increase in purchases of property, plant, and equipment and acquisitions and investments The cash used for investing activities was partially offset by an increase in cash flow from the disposal of investments and from the disposal of property, plant, and equipment Investing activities for XYZ were financed mainly with cash provided by operating activities, which was significantly higher than the previous year As you can see, issuances of debt and stock were significantly lower than the previous year Because of the large increase from the previous year in net positive cash flow from operations, XYZ was able to invest in the additional assets and investments without additional borrowing Student responses may vary 8-8 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Exercises (10-15 min.) E 8-13A Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT a Available-for-Sale Investment (410 × $35) Cash 14,350 b Cash (410 × $1.80) Dividend Revenue 738 c Allowance to Adjust Investment to Market [410 × ($42 − $35)] Unrealized Gain on Investment d Cash (410 × $27) Loss on Sale of Investment Unrealized Gain on Sale of Investment … Available-for-Sale Investment………… Allowance to Adjust Investment to Market……………………………………… Chapter 14,350 738 2,870 2,870 11,070 3,280 2,870 Long-Term Investments and the Time Value of Money 14,350 2,870 8-9 Find more at www.downloadslide.com (15-25 min.) E 8-14A Req Stock Cost Fair Value German (4,000 × $40) = $160,000 Chile (680 × $47.75) = 32,470 Sweden (1,600 × $78.00) = 124,800 Total………………………………… $317,270 (4,000 × $30.125) = $120,500 (680 × $50.00) = 34,000 (1,600 × $70.00) = 112,000 ……………………… $266,500 Req Dec 31 Unrealized Loss on Investments ($317,270 - $266,500)………………… Allowance to Adjust Investments to Market………………………… 50,770 50,770 Req Statement of Other Comprehensive Income (partial): Other comprehensive income: Unrealized (loss) on investments……….…… $ (50,770) Balance Sheet (partial): ASSETS Long-term investments, at fair value…………… $266,500 STOCKHOLDERS‘ EQUITY Accumulated other comprehensive income: Unrealized (loss) on investments……………… $ (50,770) 8-10 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) P 8-58B Req Balance sheet at October 31, 2012: Current assets: Interest receivable……………………………… $ 76,667 Long-term investment in bonds ($2,622,000 − $40,250 − $26,833)……….… 2,554,917 Property, plant, and equipment, net…………… XXX,XXX Income statement for the year ended October 31, 2012: Other revenues: Interest revenue ($115,000 − $40,250 + $76,667 − $26,833) Chapter $124,584 Long-Term Investments and International Operations 47 Find more at www.downloadslide.com (15-20 min.) P 8-59B Req Investment Opportunity X Year Cash Flow x $15,000 x Factor 909 = = PV of Cash Flow $13,635 10,000 x 826 = 8,260 5,000 x 751 = 3,755 $30,000 $25,650 Investment Opportunity Y PV of cash flow = $10,000 x 2.487 = $24,870 Choose investment opportunity X because the present value of cash flows is higher than the present value of investment opportunity Y 8-48 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (20-25 min.) P 8-60B Req This situation will generate a positive translation adjustment, which is like a gain The gain occurs because the yen‘s current exchange rate, which is used to translate the subsidiary‘s net assets, is greater than the historical exchange rates at which Mattson invested in the Japanese subsidiary YEN EXCHANGE RATE DOLLARS Assets 375,000,000 $0.0103 $3,862,500 Liabilities 145,000,000 0.0103 $1,493,500 21,000,000 0.0088 184,800 209,000,000 0.0092 1,922,800 Stockholders‘ equity: Common stock Retained earnings Accumulated other comprehensive income: Foreign-currency translation adjustment 261,400 375,000,000 $3,862,500 Req The translation adjustment ―belongs‖ to Mattson, the parent company Therefore, the translation adjustment will be reported on Mattson‘s consolidated balance sheet Chapter Long-Term Investments and International Operations 49 Find more at www.downloadslide.com Challenge Exercises and Problem (15-20 min.) E 8-61 Req a Consolidation b Available-for-sale c Equity Req MyPlace‘s net income for 2012: a Increased by $141,750 (₤75,000 × $1.89) b Increased by $25,000 c Increased by $315,000 ($900,000 × 35) Req b c 8-50 Long-term investments, at fair value ($900,000 − $250,000)…………………………… $650,000 Long-term investment, at equity [$700,000 + 35 ($900,000 − $80,000)………… $987,000 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (20 min.) E 8-62 Req Two components of accumulated other comprehensive income are: Unrealized gains (losses) on available-for-sale investments Foreign-currency translation adjustments Req An unrealized gain (loss) on available-for-sale investments produces a positive (negative) balance A foreign-currency translation adjustment is positive when the assets of a foreign subsidiary are translated into more dollars than the equities (liabilities plus stockholders‘ equity) The foreign-currency translation adjustment is negative when the equities of a foreign subsidiary are translated into more dollars than the assets Req Millions Accumulated other comprehensive (loss) at December 31, 2012……………………………………… $(57) Foreign-currency translation adjustment……………… 25 Unrealized loss on available-for-sale investments…… (15) Accumulated other comprehensive (loss) at December 31, 2013……………………………………… Chapter $(47) Long-Term Investments and International Operations 51 Find more at www.downloadslide.com (20-25 min.) P 8-63 Req Amount of 5% Factor Present Value Cash Flow from Table of Cash Flow $ 20,000 x 952 = $ 19,040 25,000 x 907 = 22,675 30,000 x 864 = 25,920 25,000 x 823 = 20,575 20,000 x 784 = 15,680 $120,000 $103,890 You should choose the option with the payments over the five years rather than the one payment of $100,000 The present value of the payments, $103,890, is higher than the present value of the single payment, $100,000 Req Amount of 10% Factor Present Value Cash Flow from Table of Cash Flow $ 20,000 x 909 = $ 18,180 25,000 x 826 = 20,650 30,000 x 751 = 22,530 25,000 x 683 = 17,075 20,000 x 621 = 12,420 $120,000 $ 90,855 If the interest rate is 10%, you should choose the one payment of $100,000 rather than the five payments over five years The present value of the single payment, $100,000, is higher than the present value of the five payments, $90,855 8-52 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) P 8-63 Req Total through Yr Amt needed in Yr to bring PV to $100,000 ÷ PV factor for yrs _ Amount of 10% Factor Present Value Cash Flow from Table of Cash Flow $20,000 x 909 = $ 18,180 25,000 x 826 = 20,650 30,000 x 751 = 22,530 25,000 x 683 = 17,075 $100,000 x $34,726 ÷ $78,435 621 = $21,565* *$100,000 - $78,435 = $21,565 You would need a payment of $34,726 in Year to make the present value of the five payments equal to the present value of the single payment, $100,000 Chapter Long-Term Investments and International Operations 53 Find more at www.downloadslide.com Decision Cases (15-20 min.) Decision Case 1 The parentheses signify losses (similar to expenses) These items are contra elements of stockholders’ equity These items are not included in net income or in retained earnings For 2012, Infografix reported net income of $1.8 billion ($26.6 − $24.8) These items should probably not scare you away from investing in Infografix stock After all, the foreign-currency translation adjustment and the unrealized loss on investments haven‘t been realized yet There is still time for the unrealized losses to turn into gains Student responses will vary 8-54 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (20-30 min.) Decision Case The Ohio Office Systems investment cannot be used to generate the needed income because the appropriate way to account for this investment is the equity method Under the equity method, Barham records dividends received not as income, but as a decrease in the investment carrying amount The bond investment cannot be used to generate the needed income because a sale of the bonds would increase net income by only $6,200, computed as follows: Sale price of the bond investment………………… Less: $380,000 Commission to sell ($380,000 × 01)…… (3,800) Amortized carrying amount of the bond investment [$250,000 + ($400,000 − $250,000) × 8/10] Gain on sale of the bond investment……………… (370,000) $ 6,200 The Microsoft stock can be used to generate the needed income, as follows: Sale price of the investment in Microsoft stock (5,000 × $53)……………………………………… Less: $265,000 Cost of the Microsoft stock (5,000 × $37)……………………………………… 185,000 Gain on sale of the Microsoft stock……………… $ 80,000 Recommendation: Sell the Microsoft stock Chapter Long-Term Investments and International Operations 55 Find more at www.downloadslide.com Ethical Issue Req The issue: Should Cohen have used his power to influence Web Talk to pay a large cash dividend when they have to borrow to so? Req and Req The stakeholders are Cohen, other shareholders of Media One, Web Talk, its shareholders, The immediate economic consequences of the decision for Web Talk to pay a large dividend to Cohen are positive, to the detriment of Web Talk and its other shareholders There is apparently nothing illegal about this action Cohen is acting within his authority to influence Web Talk to pay large cash dividends The board of directors has the authority to declare and pay dividends The ethics of Cohen‘s actions are questionable As the president of Media One, Cohen is responsible for stewardship of company resources As a member of Web Talk‘s board of directors, Cohen is also responsible for the careful stewardship of Web Talk‘s resources It appears that Cohen is using his position to pad his own bonus, even if it hurts Web Talk His actions could also hurt Web Talk‘s creditors if Web Talk fails to pay its debts, especially because of the need to borrow in order to pay the dividend 8-56 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) Ethical Issue Req Student responses will vary on this Discuss the pros and cons Req Under the equity method, investor (Media One) income is increased when the investee company (Web Talk) earns income Receipts of dividends have no effect on investor income (revenue) under the equity method Under the market value method, receipts of dividends increase investor income (revenue) In this case, Cohen is manipulating Media One‘s income — and his own bonus — by having Web Talk pay high dividends to Media One Investment income under the equity method depends on the investee company‘s net income, which in turn depends on many factors beyond the investor‘s control Therefore, it is more difficult for the investor company to manipulate its income — and for Cohen to manipulate his bonus — under the equity method than under the market-value method Chapter Long-Term Investments and International Operations 57 Find more at www.downloadslide.com Focus on Financials: Amazon.com, Inc (15-20 min.) Req From the caption Investments in Note 1—Description of Business and Accounting Policies—Investments for which Amazon exercises significant influence but not control are accounted for using the equity method of accounting These investments are reported on the consolidated balance sheets as ‗Other Assets.‘ On the income statement, Amazon reports the share of the investee‘s earnings or losses, amortization of the related intangible assets, and related gains or losses, if any, as ‗Equity-method investment activity, net of tax‘ Req Other investments of Amazon include  Equity investments without readily determinable fair values and over which Amazon does not exercise significant control These investments are accounted for using the cost method and are adjusted only for other than temporary declines in fair value  Equity investments that have a readily determinable fair value are classified as available-for-sale and are recorded at fair value with unrealized gains and losses included in ―Accumulated other comprehensive loss.‖ Req As stated above, only equity investments that have a readily determinable fair value are adjusted to fair value In the Fair Value of Financial Instruments section, Amazon.com, Inc describes its fair-value 8-58 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) Amazon.com measurement methodologies as including Levels 1, 2, and measures of Fair Value  Level is used when the fair-value of the investment is observable (i.e quoted market prices)  Level is used when the inputs into the fair-value calculation are observable (i.e quoted market prices for similar assets)  Level is used when the inputs into the fair-value calculation are unobservable (i.e discounted cash-flow models) Req Amazon‘s financial statements include its own accounts, the accounts of wholly owned subsidiaries, and those in which Amazon has a variable interest and is the primary beneficiary Amazon.com, Inc.‘s principles of consolidation can be found in the Principles of Consolidation portion of Note Chapter Long-Term Investments and International Operations 59 Find more at www.downloadslide.com Focus on Analysis: RadioShack, Corp (30 min.) Req RadioShack, Corporation owns 100% of a foreign operation in Mexico which consists of 200 branded stores and 14 dealers throughout Mexico The acquisition of this subsidiary was accounted for using the purchase method where the excess of the purchase price over net tangible assets acquired was attributed to goodwill Req According to the Consolidated Statements of Stockholders‘ Equity and Comprehensive Income, RadioShack reported the following foreign currency translation adjustments: 2010 2009 2008 $2.4 million gain $1.1 million gain $2.5 million loss The foreign currency translation gain is positive The foreign currency translation loss is negative Req According to Note 12 to the Consolidated Financial Statements, derivatives not designated as hedging instruments are measured at fair value on a recurring basis These instruments are measured at level fair value This level of fair value means that the fair value is determined by using inputs that are observable in the market (i.e quoted market prices for similar assets) Managers must identify similar assets, determine the fair value of those similar assets, and then decide how the fair value of those similar assets relates to the assets being measured 8-60 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Group Project (2 – hours) Student responses will vary Chapter Long-Term Investments and International Operations 61 ... appears on the consolidated financial statements To consolidate, the parent company must own more than 50% of the subsidiary‘s stock 8-4 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com... change in the investment‘s market value, not from the sale of the investment 8-2 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (10-15 min.) S 8-3 Req Equity method... 8%) = $6,810 Req $10,000 x 3.993 (PV of an annuity, periods, 8%) = $39,930 8-6 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (5-10 min.) S 8-10 Req $13,486.51 EXCEL