Академический Документы
Профессиональный Документы
Культура Документы
2.
Short-term investments in trading securities are reported on the balance sheet at the
(fair) market value of the portfolio of trading securities.
3.
The $720 difference between the proceeds ($7,500) and the cost ($6,780) is credited
to Gain on Sale of Short-Term Investments and reported in the income statement.
4.
##
123
9. Unrealized holding gains and losses are not reported on the standard income
statement for available-for-sale securities. Unrealized gains and losses for these
securities are reported in the stockholders equity section of the balance sheet.
(They can also be reported either in a separate comprehensive income statement or
in a combined statement of comprehensive income.)
10. The equity method is used when the investor has a significant influence over the
investee corporation; i.e., generally when the investor owns 20% or more of the
investee's voting stock. The equity method with consolidation is used when the
investor has a controlling influence over the investee.
11. A company prepares consolidated statements if the company has control over a
subsidiary as a result of owning more than 50% of the subsidiary's voting stock.
12A. Two major challenges in accounting for international operations include (1)
accounting for sales and purchases that are denominated in a foreign currency, and
(2) preparing consolidated financial statements with a foreign subsidiary.
13A. If the foreign exchange rate falls from $1.40 to $1.30 during the time the U.S.
company holds a receivable that is denominated in the foreign currency, the U.S.
company will incur an exchange loss. The foreign currency unit is worth $1.40 at the
time of sale but is worth only $1.30 at the time it is paid to the U.S. company; hence,
a loss of $0.10 is incurred for each foreign currency unit owed to the U.S. company.
14A. No. If a sales agreement requires a foreign customer to pay U.S. dollars to the United
States seller, the U.S. company is not exposed to the risk of exchange losses or
gains.
15. Krispy Kreme reports Accumulated other comprehensive income for February 2,
2003, which is a comprehensive loss of $1,486,000. On February 3, 2002, Krispy
Kreme had comprehensive income of $456,000.
16. Tastykakes financial statements, including its balance sheet, are all labeled as being
consolidated statements.
17. Harley-Davidsons return on total assets as of December 31, 2002, is ($ thousands):
$580,217/ [($3,861,217 +3,118,495)/2] = 16.6%
QUICK STUDIES
Quick Study 15-1 (10 minutes)
[Note: This actively managed (for profit) short-term investment in equity securities would
be classified as Trading Securities.]
22,650
May 30 Cash.........................................................................
Dividend Revenue............................................
500
500
6,000
6,000
2,000
50,000
2,700
25
2,700
125
20,400
June 2 Cash.........................................................................11,020
Gain on Sale of Short-Term Investments.......
Short-Term InvestmentsAFS (X&O)............
820
10,200
1,000
As of
Dec. 31
Number
of
Shares
Cost
per
share
Total
Cost
Market
Value per
share
X&O
200
$51
$10,200
$46
Total
Unrealized
Market
Loss
Value (Market-Cost)
$9,200
$1,000*
Cash.................................................................................900
Interest Revenue......................................................
900
Dec. 31
Interest Receivable.........................................................750
Interest Revenue......................................................
750
2005
May 20
750,000
2006
Aug. 5
Cash.................................................................................
475,000
Long-Term InvestmentsAFS (TKR)*....................
Gain on Sale of Long-Term Investment..................
375,000
100,000
Cash ................................................................................
50,000
Long-Term InvestmentTKR..................................
50,000
Dec. 31
Long-Term InvestmentsTKR......................................
220,000
Earnings from Investment (TKR)............................
220,000
127
6,000
Unrealized Loss Equity...............................................
Market AdjustmentAvailable-for-Sale (LT)...........
6,000
2. Each of the accounts used in the entry for (1) would be reported on the
balance sheet. The unrealized loss of $6,000 is a reduction in equity.
When the Market Adjustment account contains a credit balance as
shown here, it serves as a contra asset account. This results in the
reporting of the asset (long-term investment) at its market value.
Profit margin
Net income
Average total assets
Net income
Net sales
16,000
Date of Payment
Cash.................................................................................
15,000
Foreign Exchange Loss.................................................
1,000
Accounts Receivable...............................................
16,000
Account ReceivableHamac........................................
13,622
Sales..........................................................................
13,622
Mar. 31
Cash.................................................................................
13,970
Foreign Exchange Gain...........................................
Accounts ReceivableHamac................................
348
13,622
129
EXERCISES
Exercise 15-1 (25 minutes)
a.
Feb. 15 Short-Term InvestmentsHTM (FTR)...................... 100,000
Cash..................................................................
100,000
b.
Mar. 22 Short-Term InvestmentsTrading (FIX).............. 21,150
Cash..................................................................
21,150
c.
May 16 Cash........................................................................ 102,000
Short-Term InvestmentsHTM (FTR)...........
Interest Revenue.............................................
100,000
2,000
d.
Aug. 1 Short-Term InvestmentsAFS (Better Buy)....... 60,000
Cash..................................................................
60,000
e.
Sept. 1 Cash........................................................................
Dividend Revenue...........................................
700
700
f.
Oct. 8 Cash*...................................................................... 13,860
Short-Term InvestmentsTrading (FIX)**......
Gain on Sale of Short-Term Investments.............
Sold 350 shares of stock.
* [(350 x $40) - $140] **($21,150/2)
g.
Oct. 30 Cash
1,500
Interest Revenue...............................................
10,575
3,285
1,500
10,000
2.
3.
2006
Jan. 3 Cash
30,000
Gain on Sale of Short-Term Investments......
Short-Term InvestmentsTrading*...............
2,000
28,000
Cost
Market
Unrealized
Gain (Loss)
$ 90,600
52,900
82,100
$ (100)
100
100
131
(b) Mar. 22
17,750
(c) June15
Cash.................................................................................
155,000
Short-Term InvestmentsHTM (A.G.)......................... 150,000
Interest Revenue......................................................
5,000
Collected proceeds of 10% notes
($150,000 x 10% x 120/360).
(d) July 30
50,000
(e) Sept. 1
Cash.................................................................................
350
Dividend Revenue....................................................
350
(f) Oct.
Cash*...............................................................................
11,025
Long-Term InvestmentsAFS (Fran)**.......................
Gain on Sale of L-T Investments.............................
8,875
2,150
(g) Oct. 30
Cash.................................................................................
1,000
Interest Revenue......................................................
1,000
Cost
Dec. 31
Unrealized LossEquity...............................................2,900
Market AdjustmentAFS (ST).................................
2,900
6,927
5,151
133
Unrealized LossEquity...............................................
11,440
Market AdjustmentAFS (LT)....................................
11,440
2004
Dec. 31
11,440
26,300
2005
Dec. 31
79,450
2006
Dec. 31
Unrealized LossEquity...............................................
96,700
Unrealized GainEquity................................................
105,750
Market AdjustmentAFS (LT)*.................................
202,450
Record market value of securities.
* $875,500 - $778,800 = $96,700 net loss
($105,750 prior gain + $202,450 current period loss).
11,575
135
Jan. 2
Long-Term InvestmentsBushtex*..................................
207,480
Cash...........................................................................
207,480
Record purchase of investment ($204,000 + $3,480).
*Kashs investment equals 33 1/3% of Bushtexs stock (30,000/90,000).
Kash should use the equity method to account for its investment.
Sept. 1
Cash.................................................................................
93,000
Long-Term InvestmentsBushtex.............................
93,000
Dec. 31
Long-Term InvestmentsBushtex...................................
208,300
Earnings from Long-Term Investment...................
208,300
Record equity in investee earnings ($624,900/3).
2006
June 1
Cash.................................................................................
108,000
Long-Term InvestmentsBushtex.............................
108,000
Record receipt of cash dividend (30,000 x $3.60).
Dec. 31
Long-Term InvestmentsBushtex...................................
233,250
Earnings from Long-Term Investment...................
233,250
Record equity in investee earnings ($699,750/3).
Dec. 31
Cash.................................................................................
162,500
Gain on Sale of Investments...................................
13,157
Long-Term InvestmentsBushtex*............................
149,343
Record sale of investment.
* Book value (Bushtex stock) at 12/31/2006:
Original cost.....................................................................................
$207,480
Less 2005 dividends........................................................................
(93,000)
Plus share of 2005 earnings............................................................
208,300
Less 2006 dividends........................................................................
(108,000)
Plus share of 2006 earnings............................................................
233,250
Book value at date of sale...............................................................
$448,030
Book value of shares sold ($448,030 x [10,000/30,000])...................
$149,343
$58,300
($320,000 + $750,000)/2 = 10.9%
Wright Industries appears to be less efficient in the use of its total assets in
2006 than in 2005 as suggested by the decline in return on total assets
from 14.3% to 10.9%. However, without additional information, it is not
possible to determine whether Wright is within the normal range as
compared to similar companies. In addition, conditions may exist that
explain the apparent decline in efficiency between 2005 and 2006. For
example, Wright may have increased its investment in plant assets in 2006
in anticipation of increased production and sales in 2007. Or, its
competitors returns may have fallen even more than that of Wrights
returns.
Exercise 15-11A (25 minutes)
2005
Dec. 16
Dec. 31
25,905
Accounts Receivable Bronson Ltd............................
Sales..........................................................................
Record credit sales (17,000 x $1.5238).
Foreign Exchange Loss*...............................................
422
Accounts Receivable Bronson Ltd......................
Record year-end adjustment.
*Original measure = (17,000 x $1.5238)
Year-end measure = (17,000 x $1.4990)
Loss for the period
2006
Jan. 15
=
=
=
=
=
=
422
$25,905
25,483
$ 422
25,905
24,483
282
$25,483
25,765
$ 282
137
$158,720
161,040
$ 2,320
$161,040
162,320
$ 1,280
$162,320
159,680
$ 2,640
$159,680
163,760
$ 4,080
Note The combined net gain for all four quarters equals:
$5,040 ($2,320 + $1,280 - $2,640 + $4,080).
This amount also equals the difference between the number of dollars finally
received ($163,760) and the initial measure of the account receivable ($158,720).
In addition, this amount equals the number of pesos (800,000) owed by the
customer times the change in the exchange rate ($0.0063) between the beginning
rate ($0.1984) and the ending rate ($0.2047).
PROBLEM SET A
Problem 15-1A (60 minutes)
Part 1
2005
Jan. 20 Short-Term InvestmentsTrading (Ford).................
Cash................................................................
32,525
32,525
44,200
44,200
4,100
4,100
2006
Apr. 15 Cash......................................................................
Gain on Sale of Short-Term Investments.....
Short-Term InvestmentsTrading (Ford)......
34,915
2,390
32,525
July 5 Cash......................................................................
Gain on Sale of Short-Term Investments.....
Short-Term InvestmentsTrading (Z-Seven).....
5,025
925
4,100
24,225
24,225
12,100
12,100
139
75,020
75,020
Mar. 3 Cash......................................................................
Loss on Sale of Short-Term Investments.................
Short-Term InvestmentsTrading (Hunt)......
Sold Hunt shares [(800 x $25.00) - $125].
June 21 Cash......................................................................
Loss on Sale of Short-Term Investments..........
Short-Term InvestmentsTrading (Lucent).....
19,875
4,350
24,225
35,020
9,180
44,200
47,695
47,695
Nov. 1 Cash......................................................................
Gain on Sale of Short-Term Investments.....
Short-Term InvestmentsTrading (D.Karan).....
21,792
9,692
12,100
2,385
2,385
Trading securities
portfoli
o
Shares
Share Price
a
t
Market
Cost
Unrealized
Gain (Loss)
1
2
/
3
1
/
0
7
HCA
3,400
Black and Decker..............
1,000
Totals
$24.00
$43.50
$ 81,600 $ 75,020
43,500
47,695
$125,100 $122,715
$ 6,580
(4,195)
$ 2,385
141
2005
Apr. 16 Short-Term InvestmentsAFS (Gem)..........................
194,360
Cash
194,360
200,000
197,350
33,910
Aug. 3 Cash...............................................................................
203,000
Short-Term InvestmentsAFS (T-bills).................
Interest Revenue............................................................
200,000
3,000
15 Cash
6,800
Dividend Revenue..................................................
6,800
28 Cash*
119,550
Short-Term InvestmentsAFS (Gem)**.................
Gain on Sale of Short-Term Investments.............
97,180
22,370
Oct. 1 Cash
7,600
Dividend Revenue............................................
7,600
4,200
31 Cash......................................................................... 5,200
Dividend Revenue............................................
5,200
143
Cost
Gem Co.
PepsiCo
Xerox
a
b
c
Market
a
(4,000 x $24.25) + 180 ............. $ 97,180
4,000 x $26.50..........................
(4,000 x $49.25) + 350b............. 197,350
4,000 x $46.50..........................
(2,000 x $16.75) + 410c.............
33,910
2,000 x $13.75.........
$328,440
Unrealized
Gain (Loss)
$106,000
186,000
27,500
$319,500
$8,940
Brokerage fee attached to remaining 4,000 shares: $360 x (8,000 sh 4,000 sh.)/ 8,000 sh.= $180.
Brokerage fee attached to remaining 4,000 shares: Entire $350 (none sold).
Brokerage fee attached to remaining 2,000 shares: Entire $410 (none sold).
Part 3
8,940
Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $328,440 and show a subtraction of $8,940
for the market adjustment. This yields $319,500 as the net market value for
these securities reported in the current assets section. An alternative
presentation is to list these securities at the market value of $319,500 with
a note disclosure of the cost.
Part 5
(a)
Income statement
(i) Interest Revenue, $3,000
(ii) Dividend Revenue, $23,800 [$6,800 + $7,600 + $4,200 + $5,200]
(iii) Gain on Sale of Short-Term Investments, $22,370
(iv) Net effect on income is $49,170
(b)
17,465
Feb.
June 12
Dec. 31
18,994
Unrealized Loss Equity...............................................
Market AdjustmentAFS (LT)*..................................
18,994
Market
$ 18,342
85,800
28,625
$132,767
145
Cash...........................................................................................
18,890
Gain on Sale of Investments............................................. 1,425
Long-Term InvestmentsAFS (J&J).................................. 17,465
Sold Johnson & Johnson shares
[(900 x $21.75) - $685].
July
Cash...........................................................................................
24,074
Loss on Sale of Investments...................................................
4,508
Long-Term InvestmentsAFS (Mattel)............................... 28,582
Sold Mattel shares [(500 x $49.13) - $491].
July 22
Aug. 19
Dec. 31
12,670
Unrealized Loss Equity.........................................................
Market AdjustmentAFS (LT)*............................................ 12,670
Annual adjustment to market values.
*
Cost
Kodak
$ 51,660
Sara Lee............... 59,740
Sony...................... 105,714
Total......................$217,114
Market
$ 57,150
48,000
80,300
$185,450
Kodak:
1,800 x $31.75 = $57,150
Sara Lee: 1,600 x $30.00 = $48,000
Sony:
2,200 x $36.50 = $80,300
$217,115 - $185,450 = $31,664
Market Adjustment account:
Required balance ..... $31,664 Cr.
Unadjusted balance.. 18,994 Cr.
Required change... $12,670 Cr.
June 21
Cash ..........................................................................................
85,360
Loss on Sale of Investments .................................................
20,354
Long-Term InvestmentsAFS (Sony)................................105,714
Sold Sony shares [(2,200 x $40.00) - $2,640].
June 30
Aug. 3
Cash ..........................................................................................
48,250
Loss on Sale of Investments ..................................................
11,490
Long-Term InvestmentsAFS (Sara Lee)............................ 59,740
Sold Sara Lee shares
[(1,600 x $31.25) - $1,750].
Nov. 1
Cash ..........................................................................................
74,641
Gain on Sale of Investments ............................................ 22,981
Long-Term InvestmentsAFS (E. Kodak)........................... 51,660
Sold Eastman Kodak shares
[(1,800 x $42.75) - $2,309].
Dec. 31
Market
$ 67,800
95,200
$163,000
147
$217,114
$140,943
(31,664)
22,057
$185,450
$163,000
2006
2007
Part 3
2005
Realized gains (losses)
Sale of Johnson & Johnson shares.......
Sale of Mattel shares................................
Sale of Sara Lee shares...........................
Sale of Sony shares.................................
Sale of Eastman Kodak shares............... _______
Total realized gain (loss)............................ $
0
$ 1,425
(4,508)
$(11,490)
(20,354)
_______
22,981
$( 3,083) $ (8,863)
$(31,664)
$ 22,057
149
Market Value
$ 162,750
1,220,625
236,250
557,600
$2,177,225
Disclosure
The portfolio of available-for-sale securities would be reported on the
December 31, 2005, balance sheet at its market value of $2,177,225.
Part 2
Dec. 31
Market AdjustmentAFS*.......................................................
40,000
Unrealized GainEquity.................................................... 40,000
Adjustment to market for AFS securities..
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2005 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2005 realized gains (losses)
Stock Sold
Cost
Sale
Gain (Loss)
7,000 shares of Company B stock............$ 159,375 $ 155,275 $ ( 4,100)
McGraw-Hill Companies, Inc., 2005
150
1,025,900
(44,700)
$(48,800)
151
Oct. 23
Cash...........................................................................................
48,000
Long-Term InvestmentsKildaire........................................ 48,000
Received cash dividend (30,000 x $1.60).
Dec. 31
Long-Term InvestmentsKildaire..............................................
116,400
Earnings from Long-Term Investment............................. 116,400
Record equity in investee earnings
($582,000 x 20%).
2006
Oct. 15
Cash...........................................................................................
39,000
Long-Term InvestmentsKildaire........................................ 39,000
Record cash dividend (30,000 x $1.30).
Dec. 31
Long-Term InvestmentsKildaire..............................................
147,600
Earnings from Long-Term Investment............................. 147,600
Record equity in investee earnings
($738,000 x 20%).
2007
Jan. 2
Cash...........................................................................................
947,000
Loss on Sale of Investments..................................................
10,000
Long-Term InvestmentsKildaire*...................................... 957,000
Sold Kildaire shares.
* Investment carrying value, January 2, 2007
Original cost.............................................
$780,000
Less 2005 dividends................................
(48,000)
Plus 2005 earnings..................................
116,400
Less 2006 dividends................................
(39,000)
Plus 2006 earnings..................................
147,600
Carrying value at date of sale.................
$957,000
Part 2
1. Journal entries (assuming NO significant influence)
2005
Jan. 5
Oct. 23
Cash...........................................................................................
48,000
Dividend Revenue.............................................................. 48,000
Received cash dividend (30,000 x $1.60).
Dec. 31
2006
Oct. 15
Cash...........................................................................................
39,000
Dividend Revenue.............................................................. 39,000
Received cash dividends (30,000 x $1.30).
Dec. 31
153
Cash...........................................................................................
947,000
Long-Term InvestmentsAFS (Kildaire).............................780,000
Gain on Sale of Investments.............................................167,000
Sold Kildaire shares.
Jan. 2
Unrealized GainEquity..........................................................
133,500
Market AdjustmentAFS (LT)............................................... 133,500
To remove market adjustment and related
accounts ($52,500 + $81,000 = $133,500).
7,938
July 21
14,400
Accounts Receivable Sumito...............................................
Sales.................................................................................... 14,400
(1,500,000 x $0.0096)
Oct. 14
28,844
Accounts Receivable Smithers............................................
Sales.................................................................................... 28,844
(19,000 x $1.5181)
Nov. 18
Cash...........................................................................................
13,650
Foreign Exchange Loss...........................................................
750
Accounts Receivable Sumito......................................... 14,400
(1,500,000 x $0.0091)
Dec. 20
11,648
Accounts Receivable Hamid Albar......................................
Sales.................................................................................... 11,648
(17,000 x $0.6852)
Dec. 31
103
Accounts Receivable Smithers............................................
Foreign Exchange Gain *...................................................
*Original measure = (19,000 x $1.5181)
Year-end measure = (19,000 x $1.5235)
Gain for the period ...
Dec. 31
2006
Jan. 12
Jan. 19
= $28,844
= 28,947
= $ 103
103
76
= $11,648
= 11,572
=$
76
Cash*.........................................................................................
29,097
Accounts Receivable Smithers**................................... 28,947
Foreign Exchange Gain.....................................................
150
*(19,000 x $1.5314) **($28,844 + $103)
Cash*.........................................................................................
11,511
Foreign Exchange Loss...........................................................
61
Accounts Receivable Hamid Albar**............................. 11,572
*(17,000 x $0.6771) **($11,648 - $76)
McGraw-Hill Companies, Inc., 2005
155
$(750)
103
(76)
$(723)
Part 3
To reduce the risk of foreign exchange gain or loss, Roundtree could
attempt to negotiate foreign customer sales that are denominated in U.S.
dollars. To accomplish this, Roundtree might be willing to offer favorable
terms, such as price discounts or longer credit terms. Another possibility
that may be of limited potential is for Roundtree to make credit purchases
denominated in foreign currencies, planning the purchases so that the
payables in foreign currencies match the foreign currency receivables in
time and amount.
NOTE: A few students may also understand Roundtree's opportunity for
hedging. This involves selling foreign currency futures to be delivered at
the time the receivables from foreign customers will be collected.
PROBLEM SET B
Problem 15-1B (60 minutes)
Part 1
2005
Mar. 10 Short-Term InvestmentsTrading (AOL)..............
Cash..............................................................
71,753
71,753
92,053
92,053
34,975
34,975
2006
Apr. 26 Cash....................................................................
Loss on Sale of Short-Term Investments........
Short-Term InvestmentsTrading (MTV)....
85,225
6,828
92,053
27 Cash....................................................................
Gain on Sale of Short-Term Investments. .
Short-Term InvestmentsTrading (UPS)....
35,406
431
34,975
311,225
23,154
23,154
157
44,445
31 Cash..................................................................... 301,380
Loss on Sale of Short-Term Investments......... 9,845
Short-Term InvestmentsTrading (SPW).......
311,225
71,753
31,215
6,910
6,910
Trading Securities
Share Price Market
Portfolio
Shares
a
t
Cost
1
2
/
3
1
/
0
7
PepsiCo
1,000
Vodaphone.......................
750
Totals
$41.00
$37.00
$41,000 $44,445
27,750 31,215
$68,750 $75,660
Unrealized
G
a
i
n
(
L
o
s
s
)
$(3,445)
(3,465)
$(6,910)
159
71,625
71,625
10,000
10,000
24,327
24,327
92,570
92,570
30 Cash
Dividend Revenue.........................................
323
323
Aug. 11 Cash*.................................................................
Gain on Sale of Short-Term Investments....
Short-Term InvestmentsAFS (Nokia)**....
19,025
1,119
17,906
16 Cash...................................................................
Short-Term InvestmentsAFS (T-bills).........
Interest Revenue*..........................................
10,300
10,000
300
24 Cash...................................................................
Dividend Revenue.........................................
60
60
Nov. 9 Cash
Dividend Revenue.........................................
255
255
Dec. 18 Cash
90
Dividend Revenue.........................................
90
Nokia
Dell
Merck
Cost
$ 53,719
$ 51,319
24,327
24,600
92,570
$170,616
a
b
c
Unrealized
Market Gain (Loss)
73,750
$149,669
$20,947
Brokerage fee attached to remaining 1,275 shares: $1,500 x (1,700 sh. 425 sh.)/ 1,700 sh. = $1,125.
Brokerage fee attached to remaining 600 shares: Entire $627 (none sold).
Brokerage fee attached to remaining 1,250 shares: Entire $1,945 (none sold).
Part 3
20,947
20,947
Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $ 170,616 and show a subtraction of $20,947
for the market adjustment. This yields $149,669 as the net market value for
these securities reported in the current assets section. An alternative
presentation is to list these securities at the market value of $149,669 with
a note disclosure of the cost.
Part 5
(a)
Income statement
(i) Interest Revenue, $300
(ii) Dividend Revenue, $728 [$323 + $60 + $255 + $90]
(iii) Gain on Sale of Short-Term Investments, $1,119
(iv) Net effect on income is $2,147
(b)
161
May 7
Sept. 1
Dec. 31
Cost
$ 81,795
90,125
59,976
$231,896
404
Market
$ 85,200
85,000
62,100
$232,300
Apple:
2,400 x $35.50 = $85,200
Ford:
5,000 x $17.00 = 85,000
Polaroid: 1,200 x $51.75 = 62,100
$232,300 - $231,896 = $404
163
Cash...........................................................................................
79,663
Loss on Sale of Investments...................................................
10,462
Long-Term InvestmentsAFS (Ford)................................ 90,125
Sold Ford shares [(5,000 x $16.38) $2,237].
June 2
June 14
Nov. 27
Cash ..........................................................................................
60,728
Gain on Sale of Investments.............................................
752
Long-Term InvestmentsAFS (Polaroid)............................ 59,976
Sold Polaroid shares
[1,200 x $52.00) - $1,672].
Dec. 31
Unrealized LossEquity.........................................................
1,670
Market AdjustmentAFS (LT)*...........................................
Annual adjustment to fair values.
*
Apple...........
Duracell.......
Sears...........
Total.............
Cost
$ 81,795
70,280
22,591
$174,666
1,670
Market
$ 85,200
64,800
23,400
$ 173,400
Apple:
2,400 x $35.50 = $85,200
Duracell: 3,600 x $18.00 = $64,800
Sears:
900 x $26.00 = $23,400
$174,666 - $173,400 = $1,266
Market Adjustment account:
Required balance ..... $1,266 Cr.
Unadjusted balance..
404 Dr.
Required change ...... $1,670 Cr.
McGraw-Hill Companies, Inc., 2005
164
Cash ..........................................................................................
69,061
Loss on Sale of Investments...................................................
12,734
Long-Term InvestmentsAFS (Apple).............................. 81,795
Sold Apple shares [(2,400 x $29.75) - $2,339].
Sept. 3
Oct.
Cash ..........................................................................................
24,131
Gain on Sale of Investments ............................................ 1,540
Long-Term InvestmentsAFS (Sears)............................... 22,591
Sold Sears shares [(900 x $27.50) - $619].
Oct. 31
Cash ..........................................................................................
56,104
Loss on Sale of Investments ..................................................
14,176
Long-Term InvestmentsAFS (Duracell)........................... 70,280
Sold Duracell shares
[(3,600 x $16.00) - $1,496].
Dec. 31
3,384
Unrealized Loss Equity.........................................................
Market AdjustmentAFS (LT)*............................................
Annual adjustment to fair values.
*
Cost
Coca-Cola......................... $ 85,280
Motorola............................
44,370
Total................................... $129,650
Coca-Cola:
Motorola:
3,384
Market
$ 92,000
33,000
$125,000
165
Market Adjustment.................................
404
12/31/2006
12/31/2007
$174,666
$129,650
(1,266)
(4,650)
$173,400
$125,000
2006
2007
Part 3
2005
Realized gains (losses)
Sale of Ford shares...............................
Sale of Polaroid shares.........................
Sale of Duracell shares.........................
Sale of Apple shares..............................
Sale of Sears shares..............................
Total realized gain (loss).........................
$(10,462)
752
____
$ 0
_______
$ (9,710)
$(14,176)
(12,734)
1,540
$(25,370)
$404
$ (1,266)
$ (4,650)
34,785
Unrealized Loss Equity.........................................................
58,745
Unrealized Gain Equity.........................................................
Market AdjustmentAFS (LT)*............................................ 93,530
*December 31, 2004, available-for-sale securities:
Cost
Market Value
$1,118,250
$1,198,125
616,760
586,500
294,470
303,600
$2,029,480
$2,088,225
December 31, 2005, adjustment to the Market Adjustment account:
$2,088,225 - $2,029,480 =$58,745 Dr. balance on Dec. 31, 2004
$1,952,910 - $1,918,125 = 34,785 Cr. balance required on Dec. 31, 2005
$93,530 Cr. to adjust cost to market value
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2005 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2005 realized gain (loss)
Stock Sold
Cost
4,250 shares of Company S stock.........$154,190
22,000 shares of Company T stock......... 294,470
Sale
$142,110
308,100
Gain (Loss)
$(12,080)
13,630
167
$ 1,550
Cash...........................................................................................
14,250
Long-Term InvestmentsBloch.......................................... 14,250
Received cash dividend (15,000 x $0.95).
Dec. 31
Long-Term InvestmentsBloch.............................................
23,000
Earnings from Long-Term Investment............................. 23,000
Record equity in investees earnings
($92,000 x 25%).
2006
Aug. 1
Dec. 31
2007
Jan. 8
Cash...........................................................................................
18,750
Long-Term InvestmentsBloch....................................... 18,750
Record cash dividend (15,000 x $1.25).
Long-Term Investments (Bloch).............................................
19,000
Earnings from Long-Term Investment............................. 19,000
Record equity in investees earnings
($76,000 x 25%).
Cash...........................................................................................
204,750
Long-Term InvestmentsBloch*......................................196,500
Gain on Sale of Investments............................................. 8,250
Sold Bloch shares.
*Investment carrying value at Jan. 7, 2007
Original cost...........................................$187,500
Less 2005 dividends.............................. (14,250)
Plus 2005 earnings................................ 23,000
Less 2006 dividends.............................. (18,750)
Plus 2006 earnings................................ 19,000
Carrying value at date of sale..............$196,500
169
Aug. 1
Cash...........................................................................................
14,250
Dividend Revenue.............................................................. 14,250
Received cash dividend (15,000 x $0.95).
Dec. 31
6,000
9,750
2007
Jan. 8
Jan. 8
Cash...........................................................................................
204,750
Long-Term InvestmentsAFS (Bloch).............................187,500
Gain on Sale of Investments............................................. 17,250
Sold Bloch shares.
Unrealized GainEquity..........................................................
15,750
Market AdjustmentAFS (LT)*.......................................... 15,750
To remove market adjustment and
related accounts.
*$9,750 + $6,000 = $15,750
171
June 1
Cash...........................................................................................
72,613
Sales.................................................................................... 72,613
July 25
Cash*.........................................................................................
58,500
Foreign Exchange Loss...........................................................
2,600
Accounts ReceivableFuji............................................... 61,100
*(6,500,000 x $0.0090)
Oct. 15
Dec. 6
Accounts ReceivableChi-Ying.............................................
47,795
Sales.................................................................................... 47,795
(242,000 x $0.1975)
Dec. 31
8,206
Dec. 31
Accounts ReceivableChi-Ying.............................................
605
Foreign Exchange Gain*....................................................
605
2006
Jan. 5
Cash*.........................................................................................
49,852
Accounts ReceivableChi-Ying**.................................... 48,400
Foreign Exchange Gain..................................................... 1,452
*(242,000 x $0.2060) **($47,795 + $605)
Jan. 13 Cash*.........................................................................................
52,966
Foreign Exchange Loss...........................................................
5,222
McGraw-Hill Companies, Inc., 2005
172
173
Part 3
To reduce the risk of foreign exchange gain or loss, Datamix could attempt
to negotiate foreign customer sales that are denominated in U.S. dollars.
To accomplish this, Datamix may be willing to offer favorable terms, such
as price discounts or longer credit terms. Another possibility that may be
of limited potential is for Datamix to make credit purchases denominated in
foreign currencies, planning the purchases so that the payables in foreign
currency match the foreign currency receivables in time and amount.
NOTE: A few students may also understand the companys opportunity for
hedging. This involves selling foreign currency futures to be delivered at
the time the receivables from foreign customers will be collected.
Serial Problem
Serial Problem, Success Systems (35 minutes)
Part 1
2005
April 16 Short-Term InvestmentsTrading (J&J)...............
Cash..............................................................
11,240
11,240
2,520
2,520
Part 2
340
340
Cost
Unrealized
Gain (Loss)
6
/
3
0
/
0
5
J&J
Starbucks
Totals
200
100
$60
$21
$12,000 $11,240
2,100
2,520
$14,100 $13,760
$ 760
(420)
$ 340
175
Reporting in Action
BTN 15-1
Comparative Analysis
BTN 15-2
177
Ethics Challenge
BTN 15-3
1. Kendras bonus is not contingent on the classification of available-forsale versus held-to-maturity. Designation of the bonds as available-forsale debt securities will require that an entry be made to recognize the
unrealized holding loss on the bondsbut it will affect equity and not
net income. Also, if the bonds are designated as held-to-maturity debt
securities then there will be no recognition of their loss in market value
over the past year in net income (and neither in equity).
2. Generally, Kendra must classify its debt securities as either short or
long term and as available-for-sale or held-to-maturity. Since the bonds
are 10-year bonds they should be classified as long-term investments
unless management intends to sell them within the current year or
operating cycle. Since the problem states that management probably
will not hold the bonds for the full ten years the correct classification is
available-for-sale. So, if management does not intend to sell within the
current year or operating cycle the correct classification is: long term
available-for-sale debt securities.
3. The companys auditors (internal and external) and/or its board of
directors should serve as an effective check on Kendras accounting for
the companys long-term investments in securities.
Communicating in Practice
BTN 15-4
TO:
Abel Terrio
FROM:
(Your Name)
SUBJECT: Sale of Blackhawk Common Stock
The $6,000 loss on the sale of Blackhawk common stock is correctly
stated. Jackson Company owned 40% of the outstanding shares, and
therefore accounts for the investment according to the equity method.
Under the equity method, investments are reported at the investor's cost
plus its share in the undistributed earnings accumulated by the investee
since the stock was purchased. At sale, the book value of the investment is
compared to the net proceeds to determine gain or loss.
During year 2005, the income statement showed earnings from all
investments of $126,000. This amount included $81,000 from the
investment in Blackhawk (Blackhawks 2005 net income of $202,500 x 40%),
which was debited to the Long-Term InvestmentsBlackhawk account.
This increased the book value of the investment to $581,000. When sold,
the net proceeds of $575,000 was compared to the book value of $581,000
and the result was the $6,000 loss.
Please call me if you have any questions.
BTN 15-5
179
Teamwork in Action
BTN 15-6
BTN 15-7
Entrepreneurial Decision
BTN 15-8
1.
Email Composition
To:
From:
Re:
Andy Iglesias
Ralph Cruzs assistant
Understanding realized and unrealized gains and losses
A realized gain or loss occurs when a security is actually sold for more or
less than what it had cost to purchase it. An unrealized gain or loss occurs
when a securitys market value differs from what it had cost to purchase it
unrealized implies that the security is not yet sold and, thus, any realized gain
or loss might be substantially different. Unrealized gains or losses are often
referred to as paper losses as one is just comparing what the shares are
currently valued at in the market compared to the cost at which they were
originally purchased.
To:
From:
Re:
Gloria Perez
Ralph Cruzs assistant
Comparing long-term stock investments to CDs
181
15-9A
15-10