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Appendix C Investments and International Operations QUESTIONS 1.

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).

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 $2,000 difference between the proceeds ($12,000) and the cost ($10,000) is credited to Gain on Sale of Short-Term Investments and reported in the income statement.

4.

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.

5.

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.

6. 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.) 7.

Unrealized lossEquity...................................................... Fair Value Adjustment—Available-for-Sale (LT)........

## ##

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Solutions Manual, Appendix C

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8. 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. 9. 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. 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. Apple reports $112 million in foreign currency adjustments for the year ended September 28, 2013. This reflects an unrealized loss. 16. Google reports $392 million of net unrealized losses for its AFS investments for the year ended December 31, 2013. 17. Samsung’s financial statements, including its income statement, are all labeled as being consolidated statements.

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Financial Accounting Fundamentals, 5th Edition


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QUICK STUDIES Quick Study C-1 (10 minutes) True statements: b, d, f, g Quick Study C-2 (10 minutes) a.

D

e.

D

i.

D

b.

E

f.

D

j.

E

c.

D

g.

E

k.

D

d.

D

h.

D

l.

E

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Solutions Manual, Appendix C

3


Quick Study C-3 (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.

Quick Study C-4 (10 minutes) May 7 Short-Term Investments—Trading (Kraft)............. 10,300 Cash....................................................................

10,300

Purchased 200 shares at $50 plus $300 fee.

June 6 Cash.......................................................................... 11,050 Gain on Sale of Short-Term Investments........ Short-Term Investments—Trading (Kraft).......

750 10,300

To record sale of trading securities. 200 shares at $56 less $150 fee

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Financial Accounting Fundamentals, 5th Edition


Quick Study C-5 (20 minutes) 2014 Dec. 31

Unrealized Loss—Income.............................................. Fair Value Adjustment—Trading (ST).....................

2 2

Record fair value of securities $35 fair value - $37 cost; thus, FVA—Trading = $2 Cr.

2015 Dec. 31

Fair Value Adjustment—Trading (ST)........................... Unrealized Gain—Income........................................

6 6

Record fair value of securities. $46 fair value - $42 cost; thus, FVA—Trading s/b $4 Dr. Note: Unadjusted FVA is $2 Cr; Ending bal. FVA s/b $4 Dr; thus, entry must $6 Dr FVA. Note: “s/b” is abbreviation for “should be.”

2016 Dec. 31

Fair Value Adjustment—Trading (ST)........................... Unrealized Gain—Income........................................

5 5

Record fair value of securities. $69 fair value - $60 cost; thus, FVA—Trading s/b $9 Dr. Note: Unadjusted FVA is $4 Dr; Ending bal. FVA s/b $9 Dr; thus, entry must $5 Dr FVA.

2017 Dec. 31

Unrealized Loss—Income.............................................. 10 Fair Value Adjustment—Trading (ST)*...................

10

Record fair value of securities. $55 fair value - $56 cost; thus, FVA—Trading s/b $1 Cr. Note: Unadjusted FVA is $9 Dr; Ending bal. FVA s/b $1 Cr; thus, entry must $10 Cr FVA.

We could also use T-accounts to determine the needed adjustment to fair value:

F.V. Adj— Trading Unadj . 6 4

12/31/2015—

Adj. End.

F.V. Adj— Trading 4

12/31/2016—

2

Unad j. Adj. End.

5 9

12/31/2017—

Unadj .

F.V. Adj—Trading 9 Adj. End.

10 1

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Solutions Manual, Appendix C

5


Quick Study C-6 (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-7 (10 minutes) 1. 2015 Dec. 31 Unrealized Loss—Equity........................................... Fair Value Adjustment—Available-for-Sale (ST)

3,000 3,000

To reflect an unrealized loss in fair value of the available-for-sale securities’ portfolio.

2. 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 Fair Value 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 fair value. 3. 2016 Apr. 6

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)

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Financial Accounting Fundamentals, 5th Edition


Quick Study C-8 (10 minutes) May 9 Short-Term Investments—AFS (Higo)....................... Cash...................................................................

5,150 5,150

Purchased 200 shares at $25 plus $150 fee.

June 2 Cash*........................................................................ Gain on Sale of Short-Term Investments....... Short-Term Investments—AFS (Higo)............

2,710 135 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*......................................... Fair Value Adjustment—Available-for-Sale (ST) ..

275 275

To reflect an unrealized loss in fair value of available-for-sale securities.

As of Dec. 31 Higo

Number of Shares

Cost per share

Total Cost

Fair Value per share

Total Fair Value

Unrealized Loss (Fair Value-Cost)

100

$25.75

$2,575

$23

$2,300

$275*

Quick Study C-9 (10 minutes) 1. Dec. 31

Unrealized LossEquity...............................................

12,00 0

Fair Value Adjustment—Available-for-Sale (LT).....

12,000

Record change in value of securities.

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 Fair Value 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 fair value.

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Solutions Manual, Appendix C

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Quick Study C-10 (10 minutes) Valuation Method: The fair value method is used to account for this investment in long-term equity securities (AFS portfolio).

2015 May 20

Long-Term Investments—AFS (ORD)........................... 1,000,000 Cash...........................................................................

1,000,000

Record purchase of securities.

2016 Aug. 5

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-11 (10 minutes) a. Nov. 1

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%).

Quick Study C-12 (10 minutes) 1. Equity securities giving an investor significant influence are accounted for using the equity method. 2. Available-for-sale debt securities are reported on the balance sheet at fair value. 3. Trading securities are classified as current (or short-term) assets. 4. Accrual of interest on bonds held as long-term investments requires a credit to interest revenue (or interest earned). 5. The controlling investor (more than 50% ownership) is called the parent, and the investee company is called the subsidiary.

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Financial Accounting Fundamentals, 5th Edition


Quick Study C-13 (10 minutes) 1. The controlling investor is called the parent, and the investee is called the subsidiary. 2. A long-term investment classified as equity securities with controlling influence implies that the investor can exert a controlling influence over the investee.

Quick Study C-14 (10 minutes) Net income Average total assets

1. Return on total assets =

2. This ratio provides information to evaluate a company's profitability (efficiency) in using its available assets. Quick Study C-15 (10 minutes) 1. Return on Total Assets Net income Average total assets

=

Profit margin

=

Net income Net sales

x Total asset turnover x

Net sales Average total assets

2. Component analysis is useful as it allows the determination of whether 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. Quick Study C-16A (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/pound).

Date of Payment Cash................................................................................. 13,500 Foreign Exchange Loss................................................. 1,000 Accounts Receivable...............................................

14,500

Cash received on account (£10,000 x $1.35/£). Š2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

9


Quick Study C-17A (10 minutes) Mar. 1

Account Receivable—Hamac........................................ 9,076 Sales..........................................................................

9,076

Record credit sale in value of ringgits (20,000 ringgits x $0.4538/ringgit).

Mar. 31

Cash................................................................................. 9,798 Foreign Exchange Gain........................................... Accounts Receivable—Hamac................................

722 9,076

Cash received on account (20,000 ringgits x $0.4899/ringgit).

Quick Study C-18 (10 minutes) For trading securities (and as explained in Carrefour’s description of its trading securities), these assets “are valued at their fair value with variations in value recognized in the income statement.” Thus, the entirety of the € 7 million unrealized gains and the € 26 million unrealized losses are reported in its income statement.

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Financial Accounting Fundamentals, 5th Edition


EXERCISES Exercise C-1 (10 minutes) 1. Debt securities reflect a creditor relationship such as investments in notes, bonds, and certificates of deposit. 2. Equity securities reflect an owner relationship such as shares of stock issued by companies. 3. Short-term investments are securities that (1) management intends to convert to cash within one year or the operating cycle, whichever is longer, and (2) are readily convertible to cash. 4. Long-term investments in securities are defined as those securities that are not readily convertible to cash or are not intended to be converted into cash in the short term. Exercise C-2 (15 minutes) a. Mar. 22 Short-Term Investments—Trading (RIP)............. 10,080 Cash..................................................................

10,080

Purchased 1,000 shares of stock for (1,000 x $10) + $80 brokerage fee.

b. Sept. 1 Cash........................................................................ Dividend Revenue...........................................

1,000 1,000

Received dividend on stock (1,000 x $1.00).

c. Oct. 8 Cash*...................................................................... Short-Term Investments—Trading (RIP)**..... Gain on Sale of Short-Term Investments............. Sold 500 shares of stock. * [(500 x $15) - $50] **($10,080/2)

7,450 5,040 2,410

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Solutions Manual, Appendix C

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Exercise C-3 (20 minutes) 1. 2015 Dec. 31 Fair Value Adjustment—Trading......................... Unrealized Gain—Income..............................

6,000 6,000

To reflect an unrealized gain in fair values of trading securities.

2. The accounts in part (1) are reported on different financial statements. i. The $6,000 debit balance in the Fair Value 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’ fair value of $72,000. ii. The Unrealized Gain of $6,000 is reported in the Other Revenues and Gains section of the income statement. 3. 2016 Jan. 3 Cash........................................................................ 35,000 Gain on Sale of Short-Term Investments...... Short-Term Investments—Trading.................

2,000 33,000

To record sale of trading securities.

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Financial Accounting Fundamentals, 5th Edition


Exercise C-4 (10 minutes) a. Jun. 15 Short-Term Investments—HTM (Remedy).............1,000,000 Cash.................................................................. 1,000,00 0 Purchased 90-day, 10% debt securities.

b. Sep. 16 Cash........................................................................1,025,000 Short-Term Investments—HTM (Remedy).... 1,000,00 0 Interest Revenue............................................. 25,000 Collected proceeds of debt securities with interest of $1,000,000 x .10 x 90/360.

Exercise C-5 (10 minutes) a. Aug. 1 Short-Term Investments—AFS (Houtte).............. 450,000 Cash..................................................................

450,000

Purchased 6-month, 10% debt securities.

b. Oct. 30 Cash................................................................................ 10,125 Interest Revenue...............................................

10,125

Received cash interest payment ($450,000 x .09 x 90/360).

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Solutions Manual, Appendix C

13


Exercise C-6 (30 minutes) 2015 (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, 2016.

(e) Sept. 1

Cash................................................................................. 700 Dividend Revenue....................................................

700

Received dividend on Fran shares (700 x $1).

(f) Oct.

8

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).

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Financial Accounting Fundamentals, 5th Edition


Exercise C-7 (15 minutes)

Available-for-Sale Portfolio

Cost

Verrizano Corporation bonds payable............... $ 89,600

Unrealized Fair Value Gain (Loss) $ 91,600

Preble Corporation notes payable......................

70,600

62,900

Lucerne Company common stock......................

86,500 $246,700

83,100 $237,600

$(9,100)

Dec. 31 Unrealized Loss—Equity............................................... 9,100 Fair Value Adjustment—AFS (ST)...................

9,100

To reflect unrealized loss.

Exercise C-8 (15 minutes) Computation of Fair Value Adjustment Cost

Fair Value

Unrealized Gain (Loss)

Nintendo Co. common stock......................................... $ $ 44,450 48,900 Atlantic bonds payable.................................................. 49,000 47,000 Kellogg Company notes payable.................................. 25,000 23,200 McDonald's Corp. common stock................................ 46,30 44,80 0 0 $164,75 $163,90 0 0

Dec. 31

$ (850)

Unrealized Loss—Equity............................................... 850 Fair Value Adjustment—AFS (ST)...........................

850

Record fair value adjustment for securities.

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Solutions Manual, Appendix C

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Exercise C-9 (15 minutes) Dec. 31

Fair Value Adjustment—AFS (LT)................................. 32,078 Unrealized Loss—Equity......................................... Unrealized Gain—Equity..........................................

1,927 30,15 1

Record fair value of AFS securities.

Computation of Fair Value Adjustment 12/31/2014

12/31/2015

Cost............................... $120,483

$60,120

Fair value....................... 118,556

90,271

Gain (loss)..................... $ (1,927)

$30,151

Adjustment = $1,927 + $30,151 = $32,078 (recovery of unrealized loss & recording of unrealized gain)

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Financial Accounting Fundamentals, 5th Edition


Exercise C-10 (30 minutes) 2013 Dec. 31

Unrealized Loss—Equity............................................... 11,140 Fair Value Adjustment—AFS (LT)...........................

11,140

Record fair value of securities ($372,000 - $360,860).

2014 Dec. 31

Fair Value Adjustment—AFS (LT)*................................ 38,440 Unrealized Loss—Equity......................................... Unrealized Gain—Equity..........................................

11,140 27,300

Record fair value of securities. * $428,500 - $455,800 = $27,300 net gain ($11,140 prior loss + $27,300 current period gain).

2015 Dec. 31

Fair Value Adjustment—AFS (LT)*................................ 73,000 Unrealized Gain—Equity..........................................

73,000

Record fair value of securities. * $600,200 - $700,500 = $100,300 net gain ($100,300 current period gain - $27,300 prior gain).

2016 Dec. 31

Unrealized Loss—Equity............................................... 96,700 Unrealized Gain—Equity................................................ 100,300 Fair Value Adjustment—AFS (LT)*......................... 197,000 Record fair value of securities. * $876,900 - $780,200 = $96,700 net loss ($100,300 prior gain + $96,700 current period loss).

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Solutions Manual, Appendix C

17


Exercise C-11 (15 minutes) 1. Classification of Investments in Securities a. The Brava Company bonds are a long-term investment in held-tomaturity debt securities. b. The Baybridge stock is a long-term investment in equity securities where the investor has a significant influence over the investee. c. The Buffa stock is a long-term investment in available-for-sale equity securities. d. The Newton stock is a long-term investment in available-for-sale equity securities. e. Since the Farmers stock is marketable and is held as an investment of cash available for operations, it is a current asset. 2. Fair Value Adjustment entry at December 31, 2015 Dec. 31 Fair Value Adjustment—AFS (LT)................................. 10,825 Unrealized GainEquity.........................................

10,825

Record fair value of securities ($255,800 - $266,625).

Long-term AFS securities

Cost

Fair Value

Buffa common stock.................................. $165,50 $178,000 0 Newton common stock.............................. 90,30 0

88,625

Totals........................................................... $255,80 $266,625 0

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18

Financial Accounting Fundamentals, 5th Edition


Exercise C-12 (30 minutes) 2015

Jan. 2

Long-Term Investments—Grecco*................................... 411,000 Cash...........................................................................

411,000

Record purchase of investment ($408,000 + $3,000). *Kodax’s investment equals 33 1/3% of Grecco’s stock (30,000/90,000). Kodax should use the equity method to account for its investment.

Sept. 1

Cash................................................................................. 45,000 Long-Term Investments—Grecco..............................

45,000

Record receipt of cash dividend (30,000 x $1.50).

Dec. 31

Long-Term Investments—Grecco.................................... 162,300 Earnings from Long-Term Investment................... 162,300 Record equity in investee earnings ($486,900/3).

2016

June 1

Cash................................................................................. 63,000 Long-Term Investments—Grecco..............................

63,000

Record receipt of cash dividend (30,000 x $2.10).

Dec. 31

Long-Term Investments—Grecco.................................... 234,250 Earnings from Long-Term Investment................... 234,250 Record equity in investee earnings ($702,750/3).

Dec. 31

Cash................................................................................. 320,000 Gain on Sale of Investments................................... 86,817 Long-Term Investments—Grecco*............................. 233,183 Record sale of investment. * Book value (Grecco stock) at 12/31/2016: Original cost..................................................................................... $411,000 Less 2015 dividends........................................................................ (45,000) Plus share of 2015 earnings............................................................ 162,300 Less 2016 dividends........................................................................ (63,000) Plus share of 2016 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† †

Rounded to nearest dollar.

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Solutions Manual, Appendix C

19


Exercise C-13 (10 minutes) 1. Consolidated financial statements show the financial position, results of operations, and cash flows of all entities under the parent’s control, including all subsidiaries. 2. The equity method with consolidation is used to account for long-term investments in equity securities with controlling influence.

Exercise C-14 (15 minutes) 2015 return on total assets $38,400 ($210,000 + $340,000)/2

2016 return on total assets = 14.0%

$60,300 ($340,000 + $770,000)/2 = 10.9%

Regae Industries appears to be less efficient in the use of its total assets in 2016 than in 2015 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 2015 and 2016. For example, Regae may have increased its investment in plant assets in 2016 in anticipation of increased production and sales in 2017. Or, its competitors’ returns may have fallen even more than that of Regae’s returns.

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20

Financial Accounting Fundamentals, 5th Edition


Exercise C-15A (25 minutes) 2015 Dec. 16

24,791 Accounts ReceivableBronson Ltd............................ Sales..........................................................................

24,791

Record credit sales (17,000 x $1.4583).

Dec. 31

Foreign Exchange Loss*............................................... 342 Accounts ReceivableBronson Ltd......................

342

Record year-end adjustment. *Original measure = (17,000 x $1.4583) Year-end measure = (17,000 x $1.4382) Loss for the period

2016 Jan. 15

= = =

$24,791 24,449 $ 342

Cash (17,000 x $1.4482)................................................. 24,619 Accounts ReceivableBronson Ltd...................... Foreign Exchange Gain*..........................................

24,449 170

Record cash receipt on account. *Year-end measure = (17,000 x $1.4382) Final measure = (17,000 x $1.4482) Gain for the period

= = =

$24,449 24,619 $ 170

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Solutions Manual, Appendix C

21


Exercise C-16A (25 minutes) Quarter ended June 30, 2015 May 8 recorded amount (800,000 x $0.1323)...................... June 30 balance sheet amount (800,000 x $0.1352)........... Foreign exchange gain.........................................................

$105,840 108,160 $ 2,320

Quarter ended September 30, 2015 June 30 balance sheet amount............................................ Sept. 30 balance sheet amount (800,000 x $0.1368).......... Foreign exchange gain.........................................................

$108,160 109,440 $ 1,280

Quarter ended December 31, 2015 Sept. 30 balance sheet amount............................................ Dec. 31 balance sheet amount (800,000 x $0.1335)........... Foreign exchange loss.........................................................

$109,440 106,800 $ 2,640

Quarter ended March 31, 2016 Dec. 31 balance sheet amount ............................................ Feb. 10, 2016, amount received (800,000 x $0.1386) ......... Foreign exchange gain.........................................................

$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).

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22

Financial Accounting Fundamentals, 5th Edition


Exercise C-17 (15 minutes) 1. Accounting for available-for-sale securities (and as explained in Carrefour’s description of these securities), implies that any “unrealized… gains or losses are recorded as shareholders’ equity until they are sold.” Thus, none of the € 18 million net unrealized losses are reported in Carrefour’s income statement.

2. The entirety of the € 18 million net unrealized losses on available-forsale securities are reported in Carrefour’s balance sheet as part of its shareholders’ equity—specifically, Carrefour included them within “consolidated reserves” (under U.S. GAAP, it would be titled “accumulated other comprehensive income”).

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Solutions Manual, Appendix C

23


PROBLEM SET A Problem C-1A (60 minutes) Part 1 2015 Jan. 20

Short-Term Investments—Trading (Ford).................. 20,925

Cash..................................................................

20,925

Purchased Ford Motor Co. shares [(800 x $26.00) + $125].

Feb. 9

Short-Term Investments—Trading (Lucent)........ 97,928 Cash..................................................................

97,928

Purchased Lucent shares [(2,200 x $44.25) + $578].

Oct. 12

Short-Term Investments—Trading (Z-Seven)........ Cash..................................................................

5,825 5,825

Purchased Z-Seven shares [(750 x $7.50) + $200].

Dec. 31

Fair Value Adjustment—Trading (ST).................. Unrealized Gain—Income...............................

5,322 5,322

Record fair value of securities. $130,000 fair value - $124,678 cost; thus, FVA—Trading s/b $5,322 Dr. Note: Unadjusted FVA is $0; Ending bal. FVA s/b $5,322 Dr; thus, entry must $5,322 Dr FVA.

We could also use a T-account to determine the needed adjustment to fair value: 12/31/2015—

Unadj . Adj. End.

F.V. Adj—Trading 0

5,322 5,322

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24

Financial Accounting Fundamentals, 5th Edition


Problem C-1A (Continued) 2016 Apr. 15

Cash...................................................................... Gain on Sale of Short-Term Investments..... Short-Term Investments—Trading (Ford)......

22,915 1,990 20,925

Sold Ford Motor shares [(800 x $29.00) - $285].

July 5

Cash...................................................................... Gain on Sale of Short-Term Investments..... Short-Term Investments—Trading (Z-Seven).....

7,585 1,760 5,825

Sold Z-Seven shares [(750 x $10.25) - $102.50].

July 22

Short-Term Investments—Trading (Hunt)............ Cash................................................................

48,444 48,444

Purchased Hunt shares [(1,600 x $30.00) + $444].

Aug. 19

Short-Term Investments—Trading (D.Karan)....... Cash................................................................

33,140 33,140

Purchased Donna Karan shares [(1,800 x $18.25) + $290].

Dec. 31

Unrealized Loss—Income................................... Fair Value Adjustment—Trading (ST).........

24,834 24,834

Record fair value of securities. $160,000 fair value - $179,512 cost*; thus, FVA—Trading s/b $19,512 Cr. Note: Unadjusted FVA is $5,322 Dr; Ending bal. FVA s/b $19,512 Cr; thus, entry must be $24,834 Cr FVA. *$124,678 - $20,925 - $5,825 + $48,444 + $33,140

We could also use a T-account to determine the needed adjustment to fair value:

F.V. Adj—Trading 5,322

12/31/2016—

Unadj .

Adj. End.

24,8 34 19,5 12

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Solutions Manual, Appendix C

25


Problem C-1A (Concluded) 2017 Feb. 27

Short-Term Investments—Trading (HCA)................. 116,020

Cash................................................................

116,020

Purchased HCA shares [(3,400 x $34.00) + $420].

Mar. 3

Cash...................................................................... Loss on Sale of Short-Term Investments................. Short-Term Investments—Trading (Hunt)......

39,750 8,694 48,444

Sold Hunt shares [(1,600 x $25.00) - $250].

June 21

Cash...................................................................... Loss on Sale of Short-Term Investments.......... Short-Term Investments—Trading (Lucent).....

91,980 5,948 97,928

Sold Lucent shares [(2,200 x $42.00) - $420].

June 30

Short-Term Investments—Trading (B&D)............ Cash................................................................

57,595 57,595

Purchased Black & Decker shares [(1,200 x $47.50) + $595].

Nov. 1

Cash...................................................................... Loss on Sale of Short-Term Investments.......... Short-Term Investments—Trading (D.Karan).....

32,541 599 33,140

Sold Donna Karan shares [(1,800 x $18.25) - $309].

Dec. 31

Fair Value Adjustment—Trading (ST)................. Unrealized Gain—Income..............................

25,897 25,897

Record fair value of securities. $180,000 fair value - $173,615 cost*; thus, FVA—Trading s/b $6,385 Dr. Note: Unadjusted FVA is $19,512 Cr; Ending bal. FVA s/b $6,385 Dr; thus, entry must $25,897 Dr FVA. *$179,512 +$116,020 - $48,444 - $97,928 +$57,595 -$33,140

We could also use a T-account to determine the needed adjustment to fair value:

F.V. Adj—Trading Unadj 19,5 . 12 25,89 7 6,385

12/31/2017—

Adj. End.

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26

Financial Accounting Fundamentals, 5th Edition


Problem C-2A (40 minutes) Part 1

2015 Apr. 16 Short-Term Investments—AFS (Gem).......................... 97,180 Cash.................................................................................

97,180

Purchased 4,000 shares of Gem [(4,000 x $24.25) + $180].

May. 1 Short-Term Investments—AFS (T-bills)....................... 100,000 Cash.........................................................................

100,000

Purchased U.S. Treasury bills.

July 7 Short-Term Investments—AFS (Pepsi)........................ 98,675 Cash.........................................................................

98,675

Purchased 2,000 shares of PepsiCo [(2,000 x $49.25) + $175].

20 Short-Term Investments—AFS (Xerox)........................ 16,955 Cash.........................................................................

16,955

Purchased 1,000 shares of Xerox [(1,000 x $16.75) + $205].

Aug. 3 Cash............................................................................... 101,500 Short-Term Investments—AFS (T-bills)................. Interest Revenue...........................................................

100,000 1,500

Proceeds of U.S. Treasury bills ($100,000 x .06 x 13/52).

15 Cash....................................................................................... 3,400 Dividend Revenue..................................................

3,400

Received dividends on Gem (4,000 x $0.85).

28 Cash*..................................................................................... 59,775 Short-Term Investments—AFS (Gem)**................. Gain on Sale of Short-Term Investments.............

48,590 11,185

Sold 2,000 shares of Gem. *(2,000 x $30) - $225 **($97,180 x 2,000/4,000)

Oct. 1 Cash................................................................................ 3,800 Dividend Revenue............................................

3,800

Received dividends on PepsiCo (2,000 x $1.90).

Dec. 15 Cash......................................................................... 2,100 Dividend Revenue............................................

2,100

Received dividends on Gem (2,000 x $1.05).

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Solutions Manual, Appendix C

27


31 Cash......................................................................... 2,600 Dividend Revenue............................................

2,600

Received dividends on PepsiCo (2,000 x $1.30).

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28

Financial Accounting Fundamentals, 5th Edition


Problem C-2A (Continued) Part 2 Comparison of Cost and Fair Values for AFS Portfolio

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

Unrealized Fair Value 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 2,000 shares: Entire $175 (none sold). Brokerage fee attached to remaining 1,000 shares: Entire $205 (none sold).

Part 3

Dec. 31 Unrealized LossEquity................................................. 4,470 Fair Value Adjustment—AFS (ST)......................

4,470

To reflect an unrealized loss in fair values of available-for-sale securities.

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 fair value adjustment. This yields $159,750 as the net fair value for these securities reported in the current assets section. An alternative presentation is to list these securities at the fair 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)

Equity section of Balance sheet (i) Subtraction from equity due to the Unrealized Loss, $4,470 (ii) Increase to equity from the $24,585 increase in income (iii) Net effect on equity is $20,115

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Solutions Manual, Appendix C

29


Problem C-3A (60 minutes) Part 1 2015 Jan. 20

Long-Term Investments—AFS (J&J).............................. 20,740 Cash...........................................................................

20,740

Purchased Johnson & Johnson shares [(1,000 x $20.50) + $240].

Feb.

9

Long-Term Investments—AFS (Sony)............................. 55,665 Cash...........................................................................

55,665

Purchased Sony shares [(1,200 x $46.20) + $225].

June 12

Long-Term Investments—AFS (Mattel)..................................... 40,695 Cash..................................................................................... 40,695 Purchased Mattel shares [(1,500 x $27.00) + $195].

Dec. 31

3,650 Unrealized LossEquity............................................... Fair Value Adjustment—AFS (LT)*...........................

3,650

Annual adjustment to fair values. *

Cost

J & J................... $ 20,740 Sony................... 55,665 Mattel................. 40,695 Total................... $117,100

Fair Value $ 21,500 45,600 46,350 $113,450

J & J: 1,000 x $21.50 = $21,500 Sony: 1,200 x $38.00 = $45,600 Mattel: 1,500 x $30.90 = $46,350

Fair Adj.: $117,100 - $113,450 = $3,650

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30

Financial Accounting Fundamentals, 5th Edition


Problem C-3A (Continued) 2016 Apr. 15

Cash........................................................................................... 22,975 Gain on Sale of Investments............................................. 2,235 Long-Term Investments—AFS (J&J).................................. 20,740 Sold Johnson & Johnson shares [(1,000 x $23.50) - $525].

July

5

Cash........................................................................................... 35,615 Loss on Sale of Investments................................................... 5,080 Long-Term Investments—AFS (Mattel)............................... 40,695 Sold Mattel shares [(1,500 x $23.90) - $235].

July 22

Long-Term Investments—AFS (Sara Lee).................................. 13,980 Cash..................................................................................... 13,980 Purchased Sara Lee shares [(600 x $22.50) + $480].

Aug. 19

Long-Term Investments—AFS (Eastman Kodak)........................ 15,498 Cash..................................................................................... 15,498 Purchased Eastman Kodak shares [(900 x $17.00) + $198].

Dec. 31

10,168 Unrealized LossEquity......................................................... Fair Value Adjustment—AFS (LT)*...................................... 10,168 Annual adjustment to fair values. *

Cost

Kodak................... Sara Lee............... Sony...................... Total......................

$15,498 13,980 55,665 $85,143

Fair Value $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 Fair Value Adjustment account: Required balance ..... $13,818 Cr. Unadjusted balance.. 3,650 Cr. Required change...… $10,168 Cr.

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Solutions Manual, Appendix C

31


Problem C-3A (Continued) 2017 Feb. 27

Long-Term Investments—AFS (Microsoft)................................. 161,325 Cash ....................................................................................161,325 Purchased Microsoft shares [(2,400 x $67.00) + $525].

June 21

Cash .......................................................................................... 56,720 Gain on Sale of Investments ............................................ 1,055 Long-Term Investments—AFS (Sony)................................ 55,665 Sold Sony shares [(1,200 x $48.00) - $880].

June 30 Long-Term Investments—AFS (Black & Decker)......................... 50,835 Cash .................................................................................... 50,835 Purchased Black & Decker shares [(1,400 x $36.00) + $435].

Aug. 3

Cash .......................................................................................... 9,315 Loss on Sale of Investments .................................................. 4,665 Long-Term Investments—AFS (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 Investments—AFS (E. Kodak)........................... 15,498 Sold Eastman Kodak shares [(900 x $22.75) - $625].

Dec. 31

Fair Value Adjustment—AFS (LT)*........................................... 21,858 Unrealized Loss—Equity................................................... 13,818 Unrealized Gain—Equity.................................................... 8,040 Annual adjustment to fair values. * Cost Black & Decker.................. Microsoft............................ Total....................................

$ 50,835 161,325 $212,160

Fair Value $ 54,600 165,600 $220,200

Black & Decker: 1,400 x $39.00 = $ 54,600 Microsoft: 2,400 x $69.00 = $165,600 $212,160 - $220,200 = $8,040 (fair value exceeds cost) Fair Value Adjustment account: Required balance............ $ 8,040 Dr. Unadjusted balance......... 13,818 Cr. ©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

32

Financial Accounting Fundamentals, 5th Edition


Required change............ $21,858 Dr.

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Solutions Manual, Appendix C

33


Problem C-3A (Concluded)

Part 2 12/31/201 12/31/2016 12/31/2017 5 Long-Term AFS Securities (cost).................... $117,100

$85,143

$212,160

Fair Value Adjustment................................

(3,650)

(13,818)

8,040

Long-Term AFS Securities (fair value)........... $113,450

$71,325

$220,200

Part 3 2015

2016

2017

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

Unrealized gains (losses) at year-end*.... $(3,650)

$ 2,235 (5,080) $(4,665) 1,055 4,352

_______ $ (2,845) $(13,818)

$

742 $ 8,040

* Equals the balance of the Fair Value Adjustment account.

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34

Financial Accounting Fundamentals, 5th Edition


Problem C-4A (30 minutes) Part 1 1. Journal entries (assuming significant influence) 2015 Jan. 5

Long-Term Investments—Kildaire.............................................. 1,560,000 Cash..................................................................................... 1,560,000 Purchased Kildaire shares.

Oct. 23

Cash........................................................................................... 192,000 Long-Term Investments—Kildaire........................................192,000 Received cash dividend (60,000 x $3.20).

Dec. 31

Long-Term Investments—Kildaire.............................................. 232,800 Earnings from Long-Term Investment.............................232,800 Record equity in investee earnings ($1,164,000 x 20%).

2016 Oct. 15

Cash........................................................................................... 156,000 Long-Term Investments—Kildaire........................................156,000 Record cash dividend (60,000 x $2.60).

Dec. 31

Long-Term Investments—Kildaire.............................................. 295,200 Earnings from Long-Term Investment.............................295,200 Record equity in investee earnings ($1,476,000 x 20%).

2017 Jan. 2

Cash........................................................................................... 1,894,000 Gain on Sale of Investments.............................................154,000 Long-Term Investments—Kildaire*...................................... 1,740,000 Sold Kildaire shares. * Investment carrying value, January 2, 2017 Original cost............................................. $1,560,000 Less 2015 dividends................................ (192,000) Plus 2015 earnings.................................. 232,800 Less 2016 dividends................................ (156,000) Plus 2016 earnings.................................. 295,200 Carrying value at date of sale................. $1,740,000

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Solutions Manual, Appendix C

35


Problem C-4A (Continued) 2. Carrying value per share, January 1, 2017 (see computations in part 1) $1,740,000 / 60,000 shares = $29 3. Change in Selk's equity due to stock investment Earnings from Kildaire (2015)....................................... $232,800 Earnings from Kildaire (2016)....................................... 295,200 Gain on sale of investments......................................... 154,000 Net increase.................................................................... $682,000

Part 2 1. Journal entries (assuming NO significant influence) 2015 Jan. 5

Long-Term Investments—AFS (Kildaire)................................... 1,560,000 Cash..................................................................................... 1,560,000 Purchased Kildaire shares.

Oct. 23

Cash........................................................................................... 192,000 Dividend Revenue.............................................................. 192,000 Received cash dividend (60,000 x $3.20).

Dec. 31

Fair Value Adjustment—AFS (LT)*.......................................... 240,000 Unrealized Gain—Equity.................................................... 240,000 Record fair value adjustment. *60,000 x $30.00 = $1,800,000 $1,800,000 - $1,560,000 = $240,000

2016 Oct. 15

Cash........................................................................................... 156,000 Dividend Revenue..............................................................156,000 Received cash dividends (60,000 x $2.60).

Dec. 31

Fair Value Adjustment—AFS (LT)*.......................................... 120,000 Unrealized Gain—Equity....................................................120,000 Record fair value adjustment. *60,000 x $32.00 = $1,920,000 $1,920,000 - $1,560,000 = $360,000 $360,000 - $240,000 = $120,000

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36

Financial Accounting Fundamentals, 5th Edition


Problem C-4A (Concluded) 2017 Jan. 2

Cash........................................................................................... 1,894,000 Long-Term Investments—AFS (Kildaire)............................. 1,560,000 Gain on Sale of Investments.............................................334,000 Sold Kildaire shares.

Jan. 2

Unrealized Gain—Equity.......................................................... 360,000 Fair Value Adjustment—AFS (LT)......................................... 360,000 To remove fair value adjustment and related accounts ($240,000 + $120,000 = $360,000).

2. Investment cost per share, January 1, 2017 $1,560,000 / 60,000 shares = $26

3. Change in Selk’s equity due to stock investment Dividend Revenue (2015)...............................

$192,000

Dividend Revenue (2016)...............................

156,000

Gain on sale of investments..........................

334,000

Net increase..................................................... $682,000

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Solutions Manual, Appendix C

37


Problem C-5A (40 minutes) Part 1 Available-for-sale securities on December 31, 2015 Security Cost 3,500 shares of Company B common stock.............. $ 79,690 17,500 shares of Company C common stock..............662,750 4,500 shares of Company X common stock..............128,312 8,500 shares of Company Z common stock..............270,350 $1,141,102

Fair 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, 2015, balance sheet at its fair value of $1,088,612. Part 2 Dec. 31

Fair Value Adjustment—AFS*................................................. 20,002 Unrealized Loss—Equity.................................................. 20,002 Adjustment to fair value for AFS securities..

* December 31, 2014, available-for-sale securities Cost _ Fair Value $ 535,300 $ 490,000 159,380 154,000 662,750 640,938 $1,357,430 $1,284,938 December 31, 2015, adjustment to the Fair Value Adjustment account: $1,357,430 - $1,284,938 = $ 72,492 Cr. balance on Dec. 31, 2014 $1,141,102 - $1,088,612 = 52,490 Cr. balance required on Dec. 31, 2015 $ 20,002 Dr. to adjust cost to fair value

Part 3 Only gains or losses realized on the sale of available-for-sale securities appear on the 2015 income statement. Unrealized gains or losses appear in the equity section of the balance sheet. Year 2015 realized gains (losses) Stock Sold Cost 3,500 shares of Company B stock............ $ 79,690 40,000 shares of Company A stock.......... 535,300

Sale Gain (Loss) $ 77,688 $ (2,002) 510,900 (24,400)

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Financial Accounting Fundamentals, 5th Edition


Realized gain (loss) ...................................

$(26,402)

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Solutions Manual, Appendix C

39


Problem C-6AA (60 minutes) Part 1 2015 Apr. 8 Cash........................................................................................... 5,938 Sales.................................................................................... July 21

5,938

14,100 Accounts ReceivableSumito............................................... Sales.................................................................................... 14,100 (1,500,000 yen x $0.0094/yen)

Oct. 14

27,675 Accounts ReceivableSmithers............................................ Sales.................................................................................... 27,675 (19,000£ x $1.4566/£)

Nov. 18

Cash........................................................................................... 13,800 Foreign Exchange Loss........................................................... 300 Accounts ReceivableSumito......................................... 14,100 (1,500,000 yen x $0.0092/yen)

Dec. 20

7,652 Accounts ReceivableHamid Albar...................................... Sales....................................................................................

7,652

(17,000 ringgits x $0.4501/ringgits)

Dec. 31

103 Accounts ReceivableSmithers............................................ Foreign Exchange Gain *...................................................

103

*Original measure = (19,000£ x $1.4566/£) = $27,675 Year-end measure = (19,000£ x $1.4620/£) = 27,778 Gain for the period ……………………... = $ 103

Dec. 31

Foreign Exchange Loss*......................................................... 77 Accounts ReceivableHamid Albar................................

77

*Original measure = (17,000 ringgits x $0.4501/ ringgits) = $7,652 Year-end measure = (17,000 ringgits x $0.4456/ ringgits) = 7,575 Loss for the period ............................................. = $ 77

2016 Jan. 12

Jan. 19

Cash*......................................................................................... 27,928 Accounts ReceivableSmithers**................................... 27,778 Foreign Exchange Gain..................................................... 150 *(19,000£ x $1.4699/£) **($27,675 + $103) Cash*......................................................................................... 7,514 Foreign Exchange Loss........................................................... 61 Accounts ReceivableHamid Albar**..............................

7,575

*(17,000 ringgits x $0.4420/ ringgits) **($7,652 - $77)

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40

Financial Accounting Fundamentals, 5th Edition


Problem C-6AA (Continued) Part 2 Foreign exchange loss reported on the 2015 income statement November 18........................................

$(300)

December 31........................................

103

December 31........................................

(77)

Total.......................................................

$(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.

Š2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

41


PROBLEM SET B Problem C-1B (60 minutes) Part 1

2015 Mar. 10

Short-Term Investments—Trading (AOL)....................143,50

5 Cash...................................................................

143,505

Purchased AOL shares [(2,400 x $59.15) + $1,545].

May 7

Short-Term Investments—Trading (MTV)...............184,10 5 Cash................................................................... 184,105 Purchased MTV shares [(5,000 x $36.25) + $2,855].

Sept. 1

Short-Term Investments—Trading (UPS)...............69,950 Cash...................................................................

69,950

Purchased UPS shares [(1,200 x $57.25) + $1,250].

Dec. 31

Unrealized Loss—Income......................................17,560 Fair Value Adjustment—Trading (ST).............

17,560

Record fair value of securities. $380,000 fair value - $397,560 cost*; thus, FVA—Trading s/b $17,560 Cr. Note: Unadjusted FVA is $0; Ending bal. FVA s/b $17,560 Cr; thus, entry must $17,560 Cr FVA. *$397,560 = $143,505 + $184,105 + $69,950

We could also use a T-account to determine the needed adjustment to fair value: 12/31/2015—

Unadj .

F.V. Adj—Trading 0 Adj. End.

17,5 60 17,5 60

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42

Financial Accounting Fundamentals, 5th Edition


Problem C-1B (Continued) 2016 Apr. 26

Cash........................................................................ 170,450 Loss on Sale of Short-Term Investments............ 13,655 Short-Term Investments—Trading (MTV)........ 184,105 Sold MTV shares [(5,000 x $34.50) - $2,050].

Apr. 27

Cash........................................................................ 70,812 Gain on Sale of Short-Term Investments...... Short-Term Investments—Trading (UPS)........

862 69,950

Sold UPS shares [(1,200 x $60.50) - $1,788].

June 2

Short-Term Investments—Trading (SPW).................. 622,450

Cash..................................................................

622,450

Purchased SPW shares [(3,600 x $172.00) + $3,250].

June 14

Short-Term Investments—Trading (W-M).............. 46,307 Cash..................................................................

46,307

Purchased Wal-Mart shares [(900 x $50.25) + $1,082].

Dec. 31

Fair Value Adjustment—Trading (ST).................. 33,298 Unrealized Gain—Income...............................

33,298

Record fair value of securities. $828,000 fair value - $812,262 cost*; thus, FVA—Trading s/b $15,738 Dr. Note: Unadjusted FVA is $17,560 Cr; Ending bal. FVA s/b $15,738 Dr; thus, entry must $33,298 Dr FVA. *$812,262 = $397,560 -$184,105 -$69,950 +622,450 + $46,307

We could also use a T-account to determine the needed adjustment to fair value:

F.V. Adj—Trading Unadj 17,5 . 60 33,29 8 15,73 8

12/31/2016—

Adj. End.

©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

43


Problem C-1B (Concluded) 2017 Jan. 28

Short-Term Investments—Trading (Pepsi)............. 88,890 Cash...................................................................

88,890

Purchased PepsiCo shares [(2,000 x $43.00) + $2,890].

Jan. 31

Cash......................................................................... 602,760 Loss on Sale of Short-Term Investments............. 19,690 Short-Term Investments—Trading (SPW)........... 622,450 Sold SPW shares [(3,600 x $168) - $2,040].

Aug. 22

Cash......................................................................... 133,720 Loss on Sale of S-T Investments.......................... 9,785 Short-Term Investments—Trading (AOL)........... 143,505 Sold AOL shares [(2,400 x $56.75) - $2,480].

Sept. 3

Short-Term Investments—Trading (Voda).............. 62,430 Cash...................................................................

62,430

Purchased Vodaphone shares [(1,500 x $40.50) + $1,680].

Oct. 9

Cash......................................................................... 47,155 Gain on Sale of Short-Term Investments............. Short-Term Investments—Trading (W-M).............

848 46,307

Sold Wal-Mart shares [(900 x $53.75) - $1,220].

Dec. 31

Unrealized Loss—Income...................................... 27,058 Fair Value Adjustment—Trading (ST).............

27,058

Record fair value of securities. $140,000 fair value - $151,320 cost*; thus, FVA—Trading s/b $11,320 Cr. Note: Unadjusted FVA is $15,738 Dr; Ending bal. FVA s/b $11,320 Cr; thus, entry must $27,058 Cr FVA. *$812,262 +$88,890 -$622,450 -$143,505 +$62,430 -$46,307

We could also use a T-account to determine the needed adjustment to fair value:

F.V. Adj—Trading 15,73 8 Adj. 27,0 58 End. 11,32 0

12/31/2017—

Unadj .

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44

Financial Accounting Fundamentals, 5th Edition


Problem C-2B (40 minutes) Part 1

Feb. 6 Short-Term Investments—AFS (Nokia)............ 143,250 Cash.............................................................

143,250

Purchased 3,400 shares of Nokia [(3,400 x $41.25) + $3,000].

15 Short-Term Investments—AFS (T-bills)........... Cash.............................................................

20,000 20,000

Purchased U.S. Treasury bills.

Apr. 7 Short-Term Investments—AFS (Dell)............... Cash.............................................................

48,655 48,655

Purchased 1,200 shares of Dell [(1,200 x $39.50) + $1,255].

June 2 Short-Term Investments—AFS (Merck)........... 184,140 Cash.............................................................

184,140

Purchased 2,500 shares of Merck [(2,500 x $72.50) + $2,890].

30 Cash................................................................... Dividend Revenue.........................................

646 646

Received dividends on Nokia stock (3,400 x $0.19).

Aug. 11 Cash*................................................................. Gain on Sale of Short-Term Investments.... Short-Term Investments—AFS (Nokia)**....

38,050 2,237 35,813

Sold 850 shares of Nokia. (rounded) * [(850 x $46.00) - $1,050] **($143,250 x 850/3,400)

16 Cash................................................................... Short-Term Investments—AFS (T-bills)......... Interest Revenue*..........................................

20,600 20,000 600

Proceeds of U.S. Treasury bills. *($20,000 x .06 x 6/12)

24 Cash................................................................... Dividend Revenue.........................................

120 120

Received dividends on Dell stock (1,200 x $0.10).

Nov. 9 Cash................................................................... Dividend Revenue.........................................

510 510

Received dividends on Nokia stock (2,550 x $0.20). ©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

45


Dec. 18 Cash................................................................... Dividend Revenue.........................................

180 180

Received dividends on Dell stock (1,200 x $0.15).

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46

Financial Accounting Fundamentals, 5th Edition


Problem C-2B (Concluded) Part 2 Comparison of Cost and Fair Values of AFS Portfolio

(2,550 x $41.25) + $2,250a.......... 2,550 x $40.25 (rounded)......... (1,200 x $39.50) + $1,255b......... 1,200 x $40.50.......................... (2,500 x $72.50) + $2,890c.......... 2,500 x $59.00...........................

Nokia Dell Merck

Cost $107,437

$102,638 48,655 48,600 184,140 $340,232

a

b c

Unrealized Fair Value 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

Dec. 31 Unrealized Loss—Equity............................................. Fair Value Adjustment—AFS (ST)...................

41,494 41,494

To reflect an unrealized loss in fair values of available-for-sale securities.

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 fair value adjustment. This yields $298,738 as the net fair value for these securities reported in the current assets section. An alternative presentation is to list these securities at the fair 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)

Equity section of Balance sheet (i) Subtraction from equity of Unrealized Loss—Equity, $41,494 (ii) Increase to equity from the $4,293 increase in income (iii) Net effect on equity is a decrease of $37,201

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Solutions Manual, Appendix C

47


Problem C-3B (60 minutes) Part 1 2015 Mar. 10

Long-Term Investments—AFS (Apple).................................... 31,400 Cash..................................................................................... 31,400 Purchased Apple shares [(1,200 x $25.50) + $800].

April 7

Long-Term Investments—AFS (Ford)...................................... 57,283 Cash..................................................................................... 57,283 Purchased Ford shares [(2,500 x $22.50) + $1,033].

Sept. 1

Long-Term Investments—AFS (Polaroid)................................ 29,090 Cash..................................................................................... 29,090 Purchased Polaroid shares [(600 x $47.00) + $890].

Dec. 31

Unrealized Loss—Equity......................................................... 2,873 Fair Value Adjustment—AFS (LT)*.............................................. Annual adjustment to fair values. *

Cost _

Apple...................... $ 31,400 Ford........................57,283 Polaroid.................29,090 Total........................ $117,773

2,873

Fair Value $ 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

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48

Financial Accounting Fundamentals, 5th Edition


Problem C-3B (Continued) 2016 Apr. 26

Cash........................................................................................... 50,043 Loss on Sale of Investments................................................... 7,240 Long-Term Investments—AFS (Ford)................................ 57,283 Sold Ford shares [(2,500 x $20.50) - $1,207].

June 2

Long-Term Investments—AFS (Duracell)................................. 35,700 Cash..................................................................................... 35,700 Purchased Duracell shares [(1,800 x $19.25) + $1,050].

June 14

Long-Term Investments—AFS (Sears)..................................... 25,480 Cash .................................................................................... 25,480 Purchased Sears shares [(1,200 x $21.00) + $280].

Nov. 27

Cash .......................................................................................... 29,755 Gain on Sale of Investments............................................. 665 Long-Term Investments—AFS (Polaroid)............................ 29,090 Sold Polaroid shares [600 x $51.00) - $845].

Dec. 31

Fair Value Adjustment—AFS (LT)*......................................................... 5,093 Unrealized Loss—Equity.................................................... Unrealized Gain—Equity.................................................... Annual adjustment to fair values. * Cost _ Fair Value Apple........... $31,400 $34,800 Duracell....... 35,700 32,400 Sears........... 25,480 27,600 Total............. $92,580 $94,800

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 Fair Value Adjustment account: Required balance ..... $2,220 Dr. Unadjusted balance.. 2,873 Cr. Required change ...... $5,093 Dr. ©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

49


Problem C-3B (Continued) 2017 Jan. 28 Long-Term Investments—AFS (Coca-Cola)............................. 41,480 Cash .................................................................................... 41,480 Purchased Coca-Cola shares [(1,000 x $40.00) + $1,480].

Aug. 22

Cash .......................................................................................... 23,950 Loss on Sale of Investments................................................... 7,450 Long-Term Investments—AFS (Apple).............................. 31,400 Sold Apple shares [(1,200 x $21.50) - $1,850].

Sept. 3

Long-Term Investments—AFS (Motorola)................................ 84,780 Cash..................................................................................... 84,780 Purchased Motorola shares [(3,000 x $28) + $780].

Oct.

9

Cash .......................................................................................... 28,201 Gain on Sale of Investments ............................................ 2,721 Long-Term Investments—AFS (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 Investments—AFS (Duracell)........................... 35,700 Sold Duracell shares [(1,800 x $15.00) - $898].

Dec. 31

2,220 Unrealized GainEquity......................................................... 6,260 Unrealized LossEquity......................................................... Fair Value Adjustment—AFS (LT)*......................................

8,480

Annual adjustment to fair values.

* Cost _ Coca-Cola......................... $ 41,480 Motorola............................ 84,780 Total................................... $126,260 Coca-Cola: Motorola:

Fair Value $ 48,000 72,000 $120,000

1,000 x $48.00 = $48,000 3,000 x $24.00 = $72,000

$126,260 - $120,000 = $6,260 Fair Value Adjustment account: Required balance...... $6,260 Cr. Unadjusted balance. . 2,220 Dr. Required change....... $8,480 Cr. ©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

50

Financial Accounting Fundamentals, 5th Edition


Problem C-3B (Concluded) Part 2 12/31/2015

12/31/2016

12/31/2017

$92,580

$126,260

(2,873)

2,220

(6,260)

Long-Term AFS Securities (fair value)....... $114,900

$94,800

$120,000

2016

2017

Long-Term AFS Securities (cost)................ $117,773

Fair Value Adjustment............................

Part 3 2015 Realized gains (losses) Sale of Ford shares............................... Sale of Polaroid shares......................... Sale of Duracell shares......................... Sale of Apple shares.............................. Sale of Sears shares.............................. ______

$(7,240) 665

______

$ (9,598) (7,450) 2,721

0

$(6,575)

$(14,327)

Unrealized gains (losses) at year-end. . . $(2,873)

$ 2,220

$ (6,260)

Total realized gain (loss)......................... $

Š2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

51


Problem C-4B (50 minutes) Part 1 1. Journal entries (assuming significant influence) 2015 Jan. 5

Long-Term Investments—Bloch............................................. 200,500 Cash.....................................................................................200,500 Purchased Bloch shares.

Aug. 1

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%).

2016 Aug. 1

Cash........................................................................................... 27,000 Long-Term Investments—Bloch....................................... 27,000 Record cash dividend (20,000 x $1.35).

Dec. 31

Long-Term Investments (Bloch)............................................. 19,500 Earnings from Long-Term Investment............................. 19,500 Record equity in investee’s earnings ($78,000 x 25%).

2017 Jan. 8

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, 2017 Original cost...........................................$200,500 Less 2015 dividends.............................. (21,000) Plus 2015 earnings................................ 20,500 Less 2016 dividends.............................. (27,000) Plus 2016 earnings................................ 19,500 Carrying value at date of sale..............$192,500

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52

Financial Accounting Fundamentals, 5th Edition


Problem C-4B (Continued) 2. Carrying value per share (see computations in part 1) $192,500 / 20,000 shares = $9.63* * Rounded to the nearest cent

3. Change in Brinkley’s equity Earnings from Bloch (for 2015)...........................$ 20,500 Earnings from Bloch (for 2016)........................... 19,500 Gain on sale of investments................................ 182,500 Net increase..........................................................$222,500

Part 2 1. Journal entries (assuming NO significant influence) 2015 Jan. 5

Long-Term Investments—AFS (Bloch)................................... 200,500 Cash.....................................................................................200,500 Purchased Bloch shares.

Aug. 1

Cash........................................................................................... 21,000 Dividend Revenue.............................................................. 21,000 Received cash dividend (20,000 x $1.05).

Dec. 31

Fair Value Adjustment—AFS (LT)*.......................................... 37,500 Unrealized Gain—Equity.................................................... 37,500 Record fair value adjustment. *20,000 x $11.90 = $238,000 $238,000 - $200,500 = $37,500

©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

53


Problem C-4B (Concluded) 2016 Aug. 1

Cash........................................................................................... 27,000 Dividend Revenue.............................................................. 27,000 Received cash dividends (20,000 x $1.35).

Dec. 31

Fair Value Adjustment—AFS (LT)*.......................................... 35,000 Unrealized Gain—Equity.................................................... 35,000 Record fair value adjustment. *20,000 x $13.65 = $273,000 $273,000 - $200,500 = $72,500 $72,500 - $37,500 = $35,000

2017 Jan. 8

Cash........................................................................................... 375,000 Long-Term Investments—AFS (Bloch).............................200,500 Gain on Sale of Investments.............................................174,500 Sold Bloch shares.

Jan. 8

Unrealized Gain—Equity.......................................................... 72,500 Fair Value Adjustment—AFS (LT)*.................................... 72,500 To remove fair value adjustment and related accounts. *$37,500 + $35,000 = $72,500

2. Investment cost per share, January 7, 2017 $200,500 / 20,000 shares = $10.03* *rounded to the nearest cent

3. Change in Brinkley's equity Dividend Revenue (for 2015)...............................$ 21,000 Dividend Revenue (for 2016)............................... 27,000 Gain on sale of investments............................... 174,500 Net increase..........................................................$222,500

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54

Financial Accounting Fundamentals, 5th Edition


Problem C-5B (40 minutes) Part 1 Available-for-sale securities on December 31, 2015 Security Cost 27,500 shares of Company R common stock.............$559,125 6,375 shares of Company S common stock............. 231,285 42,500 shares of Company V common stock............. 135,000 5,000 shares of Company X common stock............. 49,920 $975,330

Fair Value $568,125 210,375 134,938 45,625 $959,063

Disclosure The portfolio of available-for-sale securities would be reported on the December 31, 2015, balance sheet at its fair fair value of $959,063. Part 2 Dec. 31

16,267 Unrealized LossEquity......................................................... 29,313 Unrealized GainEquity......................................................... Fair Value Adjustment—AFS (LT)*...................................... 45,580 *December 31, 2014, available-for-sale securities: Cost Fair Value $ 559,125 $ 599,063 308,380 293,250 147,295 151,800 $1,014,800 $1,044,113 December 31, 2015, adjustment to the Fair Value Adjustment account: $1,014,800 - $1,044,113 =$29,313 Dr. balance on Dec. 31, 2014 $ 975,330 - $ 959,063 = 16,267 Cr. balance required on Dec. 31, 2015 $45,580 Cr. to adjust cost to fair value

Part 3 Only gains or losses realized on the sale of available-for-sale securities appear on the 2015 income statement. Unrealized gains or losses appear in the equity section of the balance sheet. Year 2015 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

©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

55


Problem C-6BA (60 minutes) Part 1 2015 May 26

Accounts Receivable—Fuji..................................................... 60,450 Sales.................................................................................... 60,450 (6,500,000 yen x $0.0093/yen)

June 1

Cash........................................................................................... 64,800 Sales.................................................................................... 64,800

July 25

Cash*......................................................................................... 59,800 Foreign Exchange Loss........................................................... 650 Accounts Receivable—Fuji............................................... 60,450 *(6,500,000 yen x $0.0092/yen)

Oct. 15

Accounts Receivable—Martinez Brothers............................. 38,556 Sales.................................................................................... 38,556 (378,000 pesos x $0.1020/peso)

Dec. 6

Accounts Receivable—Chi-Ying............................................. 35,975 Sales.................................................................................... 35,975 (250,000 yuans x $0.1439/yuan)

Dec. 31

Accounts Receivable--Martinez Brothers.............................. 1,512 Foreign Exchange Gain*.................................................... *Original measure = (378,000 pesos x $0.1020/peso) Year-end measure = (378,000 pesos x $0.1060/peso) Gain for the period ...............……………. = $ 1,512

Dec. 31

1,512

= $38,556 = 40,068

Accounts Receivable—Chi-Ying............................................. 275 Foreign Exchange Gain*.................................................... *Original measure = (250,000 yuans x $0.1439/yuan) Year-end measure = (250,000 yuans x $0.1450/yuan) Gain for the period .............……………... = $ 275

275

= $35,975 = 36,250

2016 Jan.

5

Cash*......................................................................................... 39,500 Accounts Receivable—Chi-Ying**.................................... 36,250 Foreign Exchange Gain..................................................... 3,250 *(250,000 yuans x $0.1580/yuan) **($35,975 + $275)

Jan. 13

Cash*......................................................................................... 39,274 Foreign Exchange Loss........................................................... 794

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56

Financial Accounting Fundamentals, 5th Edition


Accounts Receivable—Martinez Bros**............................. 40,068 * (378,000 pesos x $0.1039/peso) ** ($38,556 + $1,512)

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Solutions Manual, Appendix C

57


Problem C-6BA (Concluded) Part 2 Foreign exchange gain reported on 2015 income statement July 25.................................................... $ (650) December 31..........................................

1,512

December 31..........................................

275

Total........................................................

$1,137

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 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.

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58

Financial Accounting Fundamentals, 5th Edition


Serial Problem — SP C Serial Problem, Business Solutions (35 minutes) Part 1 2016 April 16 Short-Term Investments—Trading (J&J)...................20,300 Cash..................................................................

20,300

Purchased Johnson & Johnson shares [(400 x $50) + $300].

30 Short-Term Investments—Trading (Starbucks)........ 4,650 Cash..................................................................

4,650

Purchased Starbucks shares [(200 x $22) + $250].

Part 2

Adjusting entry at June 30, 2016

June 30 Fair Value Adjustment—Trading*......................... Unrealized Gain—Income...............................

850 850

To reflect an unrealized gain in fair values of trading securities. * Fair Value Adjustment computations Trading securities’ Share Price portfolio Shares at 6/30/2016

Fair Value

Cost

J & J......................

400

$55

$22,00 0

$20,30 0

Starbucks...............

200

$19

3,80 0

4,65 0

$25,80 0

$24,95 0

Totals.....................

Unrealized Gain (Loss) $1,700 (850) $ 850

©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

59


Reporting in Action

— BTN C-1

1. Yes, Apple’s financial statements are consolidated. The statements are labeled as “consolidated” in each of the financial statement headings. 2. Apple’s comprehensive income for the year ended September 28, 2013, is $36,067 million. This comprehensive income amount is reported on Apple’s consolidated statement of comprehensive income—a summary follows. Net income............................................................................................ $37,037 Change in foreign currency translation, net of tax effects of $35...............

(112)

Total change in unrecognized gains/losses on derivative instruments, net of tax......................................................................................................

64

Total change in unrealized gains/losses on marketable securities, net of tax............................................................................................................

(922)

Total comprehensive income................................................................ $36,067

3. Yes. Its consolidated statement of comprehensive income does include a Foreign Currency Translation Adjustments amount. (See above for amount.) 4. The return on total assets for the year ended September 28, 2013, ($ millions) follows: $37,037 / [($207,000 + $176,064) / 2] = 19.3%

5. Answer depends on the annual report information obtained.

©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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Comparative Analysis

— BTN C-2

1. Apple’s return on total assets Current Year:

$37,037 / [($207,000 + $176,064) / 2] = 19.3%

One Year Prior: $41,733 / [($176,064 + $116,371) / 2] = 28.5% Google’s return on total assets Current Year:

$12,920 / [($110,920 + $93,798) / 2]

= 12.6%

One Year Prior: $10,737 / [($93,798 + $72,574) / 2)] =

12.9%

2. Return on total assets = Profit margin x Total asset turnover —— Returns in part 2 can differ from those in part 1 due to rounding ——

Apple’s component analysis of return on total assets* Current Year 19.3% = $37,037/$170,910 x $170,910/[($207,000 + $176,064)/ 2] 19.3% = 21.7% x 0.89 One Year Prior 28.6% = $41,733/$156,508 x $156,508 / [($176,064 + $116,371)/2] 28.6% = 26.7% x 1.07 Google’s component analysis of return on total assets* Current Year 12.5% = $12,920/$59,825 x $59,825 / [($110,920 + $93,798)/ 2] 12.5% = 21.6% x 0.58 One Year Prior 12.8% = $10,737/$50,175 x $50,175/ [($93,798+ $72,574)/2)] 12.8% = 21.4% x 0.60 *Figures are rounded.

©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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61


Comparative Analysis (Concluded)

3. Current Year Analysis: Apple has the higher return on total assets (19.3%) compared to Google (12.6%), the higher profit margin (21.7% vs. 21.6% for Google) and the higher total asset turnover (0.89 vs. 0.58 for Google). Of the two companies, Apple’s return on total assets is substantially higher than the industry average, and Google’s is slightly higher the industry average. One Year Prior Analysis: Apple has the higher return on total assets (28.5%) compared to Google (12.9%), the higher profit margin (26.7% vs. 21.4% for Google) and the higher total asset turnover (1.07 vs. 0.60 for Google). Of the two companies, Apple’s return on total assets is substantially higher than the industry average, and Google’s is slightly higher the industry average. This comparative analysis shows that Google could improve on all three measures for both years vis-à-vis Apple (one of its major competitors).

©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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Ethics Challenge

— BTN C-3

1. Kasey’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 fair value over the past year in net income (and neither in equity). 2. Generally, Kasey must classify its debt securities as either short or long term and as available-for-sale or held-to-maturity. Since the bonds are 5-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 five years the correct classification is available-forsale. So, if management does not intend to sell within the current year or operating cycle the correct classification is: long-term available-forsale debt securities. 3. The company’s auditors (internal and external) and/or its board of directors should serve as an effective check on Kasey’s accounting for the company’s long-term investments in securities.

©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

63


Communicating in Practice

— BTN C-4

TO: Mary Jolee FROM: (Your Name) SUBJECT: Sale of Kemper Common Stock The $6,000 loss on the sale of Kemper common stock is correctly stated. Jolee 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 2014, the income statement showed earnings from all investments of $126,000. This amount included $81,000 from the investment in Kemper (Kemper’s 2014 net income of $202,500 x 40%), which was debited to the Long-Term Investments—Kemper 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 1 through 4)

1. At June 30, 2013 (total cost-basis).....................................................$85,077 At June 30, 2012 (total cost-basis).....................................................$70,584 2. 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 and preferred stock. 3. Unrealized gains = $3,249; and Unrealized losses = $(460). 4. Fair value (titled “recorded basis”) is greater. Specifically: Fair value (recorded basis) is $87,866; and the cost basis is $85,077. ©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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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.

Entrepreneurial Decision 1. 2015 Jan. 1

— BTN C-7

Internet Rights................................................... 106,920 Accounts Payable........................................

106,920

Agreed to pay for Internet rights 12,000,000 yen x $0.00891/yen

2. Mar. 31

Accounts Payable*............................................ Loss from Currency Translation...................... Cash...............................................................

26,730 60 26,790

Paid ¼ of total amount due *$106,920/4 **3,000,000 yen x $0.00893/yen

June 30

Accounts Payable.............................................. Loss from Currency Translation...................... Cash*..............................................................

26,730 300 27,030

Paid ¼ of total amount due *3,000,000 yen x $0.00901/yen

Sept. 30

Accounts Payable.............................................. Loss from Currency Translation...................... Cash*..............................................................

26,730 330 27,060

Paid ¼ of total amount due *3,000,000 yen x $0.00902/yen

Dec. 31

Accounts Payable.............................................. Loss from Currency Translation...................... Cash*..............................................................

26,730 180 26,910

Paid ¼ of total amount due *3,000,000 yen x $0.00897/yen

3. Since all of the company’s payments are to be in yen, the company can buy yen in advance to “lock in” the payment amount. NOTE: A few students might 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. ©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

65


Hitting the Road— BTN

C-8A

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-9

1. Samsung (₩ in millions) Return on total assets = Net Income / Average Total Assets Current Year: 30,474,764 / [(214,075,018 + 181,071,570)/2] = 15.4% Prior Year:

23,845,285 / [(181,071,570 + 155,800,263)/2] = 14.2%

Return on total assets = Profit margin x Total asset turnover Current Year 15.4% = 30,474,764/228,692,667 x 228,692,667/[(214,075,018 + 181,071,570)/2] 15.4% = 13.3% x 1.16 One Year Prior 14.2% = 23,845,285/201,103,613 x 201,103,613/[(181,071,570 + 155,800,263)/2] 14.2% = 11.9% x 1.19 2. (a) Current Year Analysis: Samsung vs Apple vs Google Return on total assets = Profit margin x Total asset turnover Company Apple Google Samsung

Return on total assets* 19.3% 12.6 15.4

Profit margin 21.7% 21.6 13.3

Total asset turnover 0.89 0.58 1.16

In the current year, Apple has the highest return on total assets followed by Samsung, and then Google. Apple also has the highest profit margin ©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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Financial Accounting Fundamentals, 5th Edition


of the three companies, with Google a close second, followed by Samsung. However, Samsung has the highest total asset turnover of the three companies, about twice that of Google. Apple has a lower total asset turnover than Samsung, but it is higher than Google.

Š2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Appendix C

67


Global Decision (Concluded) 2. (b) Prior Year Analysis: Samsung vs Apple vs Google Return on total assets = Profit margin x Total asset turnover Company

Return on total assets*

Profit margin

Total asset turnover

Apple

28.6%

26.7%

1.07

Google

12.9

21.4

0.60

Samsung

14.2

11.9

1.19

In the prior year, Apple has the highest return on total assets followed by Samsung, and then Google. Apple also has the highest profit margin of the three companies, with Google a close second, followed by Samsung. However, Samsung has the highest total asset turnover of the three companies, about twice that of Google. Apple has a lower total asset turnover than Samsung, but it is higher than Google.

Š2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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Financial Accounting Fundamentals, 5th Edition

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