Appendix C

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 $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.
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.
5.
6.
b) equity securities giving an investor control over an investee.

To be classified as current assets, investments must be capable of being converted
into cash quickly and management must intend to sell the investments as a source
of cash to satisfy the needs of current operations. To be classified as long-term,
investments must not meet the requirements for short-term investmentsnot
marketable and not intended to be converted into cash. Long-term investments also
include funds earmarked for a special purpose, and other assets not used in
company operations.
Unrealized lossEquity ...................................................... ##
Market AdjustmentAvailable-for-Sale (LT) ............
##
7.
The portfolio for investments in available-for-sale securities should be reported on

the balance sheet at (fair) market valuethis is separated into short- and long-term.
8.
The portfolio of long-term investments in debt securities is reported at cost adjusted

for amortization of any difference between cost and maturity when the investments
are classified as held-to-maturity debt securities.
McGraw-Hill Companies, 2008

Solutions Manual, Appendix C
725
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.
Best Buy reported $59 million in foreign currency adjustments. This is an unrealized
gain.
16.
Circuit Citys financial statements, including its balance sheet, are all labeled as
being consolidated statements.
17.
Apples return on total assets as of September 25, 2004 is ($ millions):

$276/ [($8,050 + $6,815)/2] = 3.7%
QUICK STUDIES
Quick Study C-1 (10 minutes)
[Note: This actively managed (for profit) short-term investment in equity securities would
be classified as Trading Securities.]
Apr. 18 Short-Term InvestmentsTrading (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.

726
Financial Accounting, 4th Edition

1. 2008
Dec. 31 Unrealized LossEquity ..........................................
Market AdjustmentAvailable-for-Sale (ST) ...
3,000
3,000
To reflect an unrealized loss in market 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 Market AdjustmentAvailable-for-Sale (ST)
account is a contra asset account. It reduces the (cost) balance in the
Short-Term InvestmentsAvailable-for-Sale account to its market
value.
3. 2009
Apr. 6
Cash ...........................................................................
Gain on Sale of Short-Term Investments ........
Short-Term InvestmentsAFS ........................
26,000
1,000
25,000
To record sale of one-half of the available-for-sale

securities. (Cost = $50,000 x 1/2)
May 7 Short-Term InvestmentsAFS (Kraft) ....................... 10,300

Cash ...................................................................
10,300
June 6 Cash ......................................................................... 11,050

Gain on Sale of Short-Term Investments .......
Short-Term InvestmentsAFS (Kraft) ...........
750
10,300
To record sale of available-for-sale securities.

200 shares at $56 less $150 fee

727

May 9 Short-Term InvestmentsAFS (Higo) ....................... 5,150
Cash ...................................................................
5,150
June 2 Cash* ....................................................................... 2,710

Gain on Sale of Short-Term Investments .......
Short-Term InvestmentsAFS (Higo) ............
135
2,575
To record sale of available-for-sale securities. The

original cost is $5,150 x 100/200 = $2,575
*($100 x $28) - $90
Dec. 31 Unrealized Loss Equity* .........................................

Market AdjustmentAvailable-for-Sale (ST) ......
275
275
To reflect an unrealized loss in market value of

available-for-sale securities.
As of
Dec. 31
Number
of
Shares
Cost
per
share
Total
Cost
Market
Value per
share
Higo
100
$25.75
$2,575
$23
Total
Unrealized
Market
Loss
Value (Market-Cost)
$2,300
$275*

True: b, d, f, g

1. Interest revenue (or interest earned)
2. Equity method
3. Market value (or fair value)
4. Current (or short-term)
5. Parent, subsidiary

728

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
1,000
Record interest earned ($1,200 x 5/6).

Valuation Method: The (fair) market value method is used to account for this
investment in long-term equity securities (AFS portfolio).
2008
May 20
Long-Term InvestmentsAFS (ORD)..........................

1,000,000
Cash ..........................................................................
1,000,000
Record purchase of securities.
2009
Aug. 5
Cash ................................................................................
625,000
Long-Term InvestmentsAFS (ORD)* ..................
Gain on Sale of Long-Term Investment.................
500,000
125,000
Record sale of securities. *( x $1,000,000)

a.
Nov. 1
Cash ...............................................................................
40,000
Long-Term InvestmentORD ................................
40,000
Received cash dividends ($100,000 x 40%).
b.
Dec. 31
Long-Term InvestmentsORD ....................................

280,000
Earnings from Investment (ORD) ...........................
280,000
Record equity in investee earnings

($700,000 x 40%).

729

1.
Dec. 31
12,000
Unrealized LossEquity ..............................................
Market AdjustmentAvailable-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 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.

Return on total assets =
Net income
Average total assets
This ratio provides information to evaluate a company's profitability

(efficiency) in using its available assets.

Return on Total Assets
Profit margin
Net income
Net income
Net sales
x Total asset turnover

x
Net sales
Component analysis is useful as it allows the determination of whether the

return on assets is achieved primarily due to profitability or efficiency of
asset usage (or a balanced combination of both). Component analysis
often is more useful when computed and examined over a period of several
years and when comparisons are made with competitors.

730
Quick Study C-13A (10 minutes)

Date of Sale
Accounts Receivable ....................................................
14,500
Sales .........................................................................
14,500
Record credit sale in value of pounds

(10,000 pounds x 1.45).
Date of Payment
Cash ................................................................................
13,500
Foreign Exchange Loss ................................................
1,000
Accounts Receivable ..............................................
14,500
Cash received on account (10,000 x 1.35).
Quick Study C-14A (10 minutes)

Mar. 1
Account ReceivableHamac .......................................

9,076
Sales .........................................................................
9,076
Record credit sale in value of ringgits

(20,000 ringgits x $0.4538).
Mar. 31
Cash ................................................................................
9,798
Foreign Exchange Gain ..........................................
Accounts ReceivableHamac ...............................
722
9,076
Cash received on account

(20,000 ringgits x $0.4899).

731
EXERCISES
Exercise C-1 (25 minutes)
a.
Feb. 15 Short-Term InvestmentsHTM (RTF) ...................... 120,000
Cash ..................................................................
120,000
Purchased 90-day, 8% debt securities.
b.
Mar. 22 Short-Term InvestmentsTrading (XIF) ............. 19,400
Cash ..................................................................
19,400
Purchased 700 shares of stock for

(700 x $27.50) + $150 brokerage fee.
c.
May 16 Cash ........................................................................ 122,400
Short-Term InvestmentsHTM (RTF) ...........
Interest Revenue .............................................
120,000
2,400
Collected proceeds of debt securities

with interest of $120,000 x .08 x 90/360.
d.
Aug. 1 Short-Term InvestmentsAFS (Flash Co.)......... 80,000
Cash ..................................................................
80,000
Purchased 6-month, 10% debt securities.
e.
Sept. 1 Cash ........................................................................
Dividend Revenue ...........................................
700
700
Received dividend on stock (700 x $1.00).
f.
Oct. 8 Cash* ...................................................................... 11,760
Short-Term InvestmentsTrading (XIF)** ......
Gain on Sale of Short-Term Investments ............
Sold 350 shares of stock.
* [(350 x $34) - $140] **($19,400/2)
g.
Oct. 30 Cash .............................................................................. 2,000
Interest Revenue ..............................................
9,700
2,060
2,000
Received cash interest payment

($80,000 x .10 x 90/360).
732

1.
2008
Dec. 31 Market AdjustmentTrading ..............................
Unrealized GainIncome ..............................
6,000
6,000
To reflect an unrealized gain in market values

of trading securities.
2. The accounts in part (1) are reported on different financial statements.

i. The $6,000 debit balance in the Market AdjustmentTrading account
is an adjunct asset account in the balance sheet. It increases the
balance of the Short-Term InvestmentTrading account to the
securities market value of $72,000.
ii. The Unrealized Gain of $6,000 is reported in the Other Revenues and
Gains section of the income statement.
3.
2009
Jan. 3 Cash ....................................................................... 35,000
Gain on Sale of Short-Term Investments .....
Short-Term InvestmentsTrading ................
2,000
33,000
To record sale of trading securities.

Available-for-Sale Portfolio
Cost
Verrizano Corporation bonds payable .............. $ 89,600

Preble Corporation notes payable .....................
70,600
Lucerne Company common stock .....................
86,500
$246,700
Market
Unrealized
Gain (Loss)
$ 91,600
62,900
83,100
$237,600
$(9,100)
Dec. 31 Unrealized LossEquity.............................................. 9,100

Market AdjustmentAFS (ST) ........................
9,100
To reflect unrealized loss.

733

2008
(a) Feb. 15
Short-Term InvestmentsHTM (A.G.) ..............................

160,000
Cash .......................................................................... 160,000
Purchased 90-day, 10% notes.
(b) Mar. 22
Long-Term InvestmentsAFS (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 InvestmentsHTM (A.G.) ........................ 160,000
4,000
Collected proceeds of 10% notes
($160,000 x 10% x 90/360).
(d) July 30
Short-Term InvestmentsTrading (MP3) ..........................

100,000
Cash .......................................................................... 100,000
Purchased 8% notes, due Jan. 30, 2009.
(e) Sept. 1
Cash ................................................................................
700
Dividend Revenue ...................................................
700
Received dividend on Fran shares

(700 x $1).
(f) Oct.
Cash*...............................................................................
22,275
Long-Term InvestmentsAFS (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
2,000
Received interest payment on 8% notes

($100,000 x .08 x 3/12).

734

Computation of Market Adjustment
Cost
Market
Value
Nintendo Co. common stock ........................................

$ 44,450 $ 48,900
Atlantic Richfield Co. bonds payable ..........................
49,000
47,000
Kellogg Company notes payable .................................
25,000
23,200
McDonald's Corp. common stock ................................
46,300
44,800
$164,750 $163,900
Dec. 31
Unrealized
Gain (Loss)
$ (850)
Unrealized LossEquity .............................................. 850

Market AdjustmentAFS (ST) ...............................
850
Record market value adjustment for securities.

Dec. 31
Market AdjustmentAFS (LT) ......................................8,562

Unrealized LossEquity ........................................
Unrealized GainEquity .........................................
7,562
1,000
Record market (fair) value of AFS securities.
Computation of Market Adjustment

12/31/2007
12/31/2008
Cost ...............................
$87,855
$89,980
Market value ..................
80,293
90,980
Gain (loss) .....................
$ (7,562)
$ 1,000
Adjustment = $7,562 + $1,000 = $8,562
(recovery of unrealized loss &
recording of unrealized gain)

735

2006
Dec. 31

11,140
Market AdjustmentAFS (LT) ................................
11,140
Record market value of securities

($372,000 - $360,860).
2007
Dec. 31
Market AdjustmentAFS (LT)* ....................................

38,440
Unrealized LossEquity ........................................
11,140
27,300
Record market value of securities.

* $428,500 - $455,800 = $27,300 net gain
($11,140 prior loss + $27,300 current period gain).
2008
Dec. 31
Market AdjustmentAFS (LT)* ....................................

73,000
73,000

* $600,200 - $700,500 = $100,300 net gain
($100,300 current period gain - $27,300 prior gain).
2009
Dec. 31

96,700
Unrealized GainEquity ...............................................
100,300
Market AdjustmentAFS (LT)* .............................
197,000
* $876,900 - $780,200 = $96,700 net loss
($100,300 prior gain + $96,700 current period loss).

736

1. Classification of Investments in Securities
a. The Beeman 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 Carroll stock is a long-term investment in available-for-sale equity
securities.
d. The Newtech stock is a long-term investment in available-for-sale
equity securities.
e. Since the Flock stock is marketable and is held as an investment of
cash available for operations, it is a current asset.
2. Market Adjustment entry at December 31, 2008

Dec. 31 Market AdjustmentAFS (LT) ......................................
10,825
10,825
Record market value of securities ($255,800 - $266,625).
Long-term AFS securities

Cost
Market Value
Carroll common stock ...............................
$165,500
$178,000
Newtech common stock ...........................
90,300
88,625
Totals ..........................................................
$255,800
$266,625

737

2008
Jan. 2
Long-Term InvestmentsGoreten* .................................

411,000
Cash ..........................................................................
411,000
Record purchase of investment ($408,000 + $3,000).
* Kodans investment equals 33 1/3% of Goretens stock (30,000/90,000).
Kodan should use the equity method to account for its investment.
Sept. 1
Cash ................................................................................
45,000
Long-Term InvestmentsGoreten ............................
45,000
Record receipt of cash dividend (30,000 x $1.50).
Dec. 31
Long-Term InvestmentsGoreten ..................................

162,300
Earnings from Long-Term Investment ..................
162,300
Record equity in investee earnings ($486,900/3).
2009
June 1
Cash ................................................................................
63,000
Long-Term InvestmentsGoreten ............................
63,000
Record receipt of cash dividend (30,000 x $2.10).
Dec. 31
Long-Term InvestmentsGoreten ..................................

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 InvestmentsGoreten* ...........................
233,183
Record sale of investment.
* Book value (Goreten stock) at 12/31/2009:
Original cost ....................................................................................
$411,000
Less 2008 dividends .......................................................................
(45,000)
Plus share of 2008 earnings ...........................................................
162,300
Less 2009 dividends .......................................................................
(63,000)
Plus share of 2009 earnings ...........................................................
234,250
Book value at date of sale ..............................................................
$699,550
Book value of shares sold ($699,550 x [10,000/30,000]) ..................
$233,183
Rounded to nearest dollar.

738

2008 return on total assets
$38,400
($210,000 + $340,000)/2
2009 return on total assets

= 14.0%
$60,300
= 10.9%
($340,000 + $770,000)/2
Regae Industries appears to be less efficient in the use of its total assets in
2009 than in 2008 as suggested by the decline in return on total assets
from 14.0% to 10.9%. However, without additional information, it is not
possible to determine whether Regae is within the normal range as
compared to similar companies. In addition, conditions may exist that
explain the apparent decline in efficiency between 2008 and 2009. For
example, Regae may have increased its investment in plant assets in 2009
in anticipation of increased production and sales in 2010.
Or, its
competitors returns may have fallen even more than that of Regaes
returns.
Exercise C-11A (25 minutes)
2008
Dec. 16
24,791
Accounts ReceivableBronson Ltd. ..........................
Sales .........................................................................
24,791
Record credit sales (17,000 x $1.4583).
Dec. 31
Foreign Exchange Loss* ...............................................

342
Accounts ReceivableBronson 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
2009
Jan. 15
=
=
=
$24,791
24,449
$ 342
Cash (17,000 x $1.4482) ................................................

24,619
Accounts ReceivableBronson 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

739
Exercise C-12A (25 minutes)

Quarter ended June 30, 2008
May 8 recorded amount (800,000 x $0.1323) ......................
June 30 balance sheet amount (800,000 x $0.1352)...........
Unrealized gain reported on income statement ................
$105,840
108,160
$ 2,320
Quarter ended September 30, 2008

June 30 balance sheet amount ............................................
Sept. 30 balance sheet amount (800,000 x $0.1368) ..........
Unrealized gain reported on income statement .................
$108,160
109,440
$ 1,280
Quarter ended December 31, 2008

Sept. 30 balance sheet amount ............................................
Dec. 31 balance sheet amount (800,000 x $0.1335) ...........
Unrealized loss reported on income statement .................
$109,440
106,800
$ 2,640
Quarter ended March 31, 2009

Dec. 31 balance sheet amount ............................................
Feb. 10, 2009, amount received (800,000 x $0.1386) .........
Realized gain reported on income statement .....................
$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).

740
PROBLEM SET A
Problem C-1A (60 minutes)
Part 1
2008
Jan. 20 Short-Term InvestmentsTrading (Ford) ................
Cash ................................................................
20,925
20,925
Purchased Ford Motor Co.

shares [(800 x $26.00) + $125].
Feb. 9 Short-Term InvestmentsTrading (Lucent) ......

Cash ................................................................
97,928
97,928
Purchased Lucent shares

[(2,200 x $44.25) + $578].
Oct. 12 Short-Term InvestmentsTrading (Z-Seven) .....

Cash ................................................................
5,825
5,825
Purchased Z-Seven shares

[(750 x $7.50) + $200].
2009
Apr. 15 Cash ......................................................................
Gain on Sale of Short-Term Investments ....
Short-Term InvestmentsTrading (Ford) .....
22,915
1,990
20,925
Sold Ford Motor shares

[(800 x $29.00) - $285].
July 5 Cash ......................................................................

Short-Term InvestmentsTrading (Z-Seven) ...
7,585
1,760
5,825
Sold Z-Seven shares

[(750 x $10.25) - $102.50].
22 Short-Term InvestmentsTrading (Hunt) ...........

Cash ................................................................
48,444
48,444
Purchased Hunt shares

[(1,600 x $30.00) + $444].
Aug. 19 Short-Term InvestmentsTrading (D.Karan)......

Cash ................................................................
33,140
33,140
Purchased Donna Karan shares

[(1,800 x $18.25) + $290].

741
Problem C-1A (Concluded)

2010
Feb. 27 Short-Term InvestmentsTrading (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 InvestmentsTrading (Hunt) .....
Sold Hunt shares [(1,600 x $25.00) - $250].
June 21 Cash ......................................................................

Loss on Sale of Short-Term Investments .........
Short-Term InvestmentsTrading (Lucent) ....
39,750
8,694
48,444
91,980
5,948
97,928
Sold Lucent shares [(2,200 x $42.00) - $420].
30 Short-Term InvestmentsTrading (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 InvestmentsTrading (D.Karan)....
32,541
599
33,140
Sold Donna Karan shares

[(1,800 x $18.25) - $309].
Part 2 (Adjusting entry at Dec. 31, 2010)

Dec. 31 Market AdjustmentTrading*....................................
Unrealized GainIncome ....................................
985
985
* Market adjustment computations

Trading securities
Share Price Market
Unrealized
portfolio
Shares at 12/31/07
Value
Cost
Gain (Loss)
HCA .................................
3,400
$36.00
$122,400 $116,020
$ 6,380
Black and Decker ..............
1,200
$43.50
52,200
57,595
(5,395)
Totals...............................
$174,600 $173,615
$ 985

742

Part 1
2008
Apr. 16 Short-Term InvestmentsAFS (Gem) .........................
97,180
Cash ...............................................................................
97,180
Purchased 4,000 shares of Gem

[(4,000 x $24.25) + $180].
May. 1 Short-Term InvestmentsAFS (T-bills) .......................

100,000
Cash .........................................................................
100,000
Purchased U.S. Treasury bills.
July 7 Short-Term InvestmentsAFS (Pepsi) ........................

98,675
Cash .........................................................................
98,675
Purchased 2,000 shares of PepsiCo

[(2,000 x $49.25) + $175].
20 Short-Term InvestmentsAFS (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 InvestmentsAFS (T-bills) .................
Interest Revenue ..........................................................
100,000
1,500
Proceeds of U.S. Treasury bills

($100,000 x .06 x 3/12).
15 Cash .....................................................................................
3,400
Dividend Revenue ..................................................
3,400
Received dividends on Gem (4,000 x $0.85).
28 Cash*....................................................................................
59,775
Short-Term InvestmentsAFS (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

3,800
Received dividends on PepsiCo (2,000 x $1.90).
Dec. 15 Cash ......................................................................... 2,100

2,100
Received dividends on Gem (2,000 x $1.05).
31 Cash ......................................................................... 2,600

2,600
Received dividends on PepsiCo (2,000 x $1.30).

743
Problem C-2A (Continued)

Part 2
Comparison of Cost and Market 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
Market
Unrealized
Gain (Loss)
$ 53,000
93,000
13,750
$159,750
$(4,470)
Brokerage fee attached to remaining 2,000 shares: $180 x (4,000 sh 2,000 sh.)/ 4,000 sh.= $90.
Brokerage fee attached to remaining 4,000 shares: Entire $175 (none sold).
Brokerage fee attached to remaining 2,000 shares: Entire $205 (none sold).
Part 3
Dec. 31 Unrealized LossEquity ................................................ 4,470

Market AdjustmentAFS (ST) ...........................
4,470
To reflect an unrealized loss in market values of

Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $164,220 and show a subtraction of $4,470
for the market adjustment. This yields $159,750 as the net market value for
these securities reported in the current assets section. An alternative
presentation is to list these securities at the market value of $159,750 with
a note disclosure of the cost.
Part 5
(a)
Income statement
(i) Interest Revenue, $1,500
(ii) Dividend Revenue, $11,900 [$3,400 + $3,800 + $2,100 + $2,600]
(iii) Gain on Sale of Short-Term Investments, $11,185
(iv) Net effect on income is $24,585
(b)
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

744

Part 1
2008
Jan. 20
Long-Term InvestmentsAFS (J&J) .............................

20,740
Cash ..........................................................................
20,740
Purchased Johnson & Johnson

shares [(1,000 x $20.50) + $240].
Feb.
Long-Term InvestmentsAFS (Sony) ............................

55,665
Cash ..........................................................................
55,665
Purchased Sony shares

[(1,200 x $46.20) + $225].
June 12
Long-Term InvestmentsAFS (Mattel) ....................................

40,695
Cash .................................................................................... 40,695
Purchased Mattel shares
[(1,500 x $27.00) + $195].
Dec. 31
Unrealized LossEquity ..............................................3,650

Market AdjustmentAFS (LT)* ................................
3,650
Annual adjustment to market values.

*
Cost
J & J .................. $ 20,740
Sony ..................
55,665
Mattel ................
40,695
Total .................. $117,100
Market
$ 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
Mkt. Adj.: $117,100 - $113,450 = $3,650

745

2009
Apr. 15
Cash ..........................................................................................
22,975
Gain on Sale of Investments ............................................ 2,235
Long-Term InvestmentsAFS (J&J) ................................. 20,740
Sold Johnson & Johnson shares
[(1,000 x $23.50) - $525].
July
Cash ..........................................................................................
35,615
Loss on Sale of Investments ..................................................
5,080
Long-Term InvestmentsAFS (Mattel) .............................. 40,695
Sold Mattel shares [(1,500 x $23.90) - $235].
July 22
Long-Term InvestmentsAFS (Sara Lee) .................................

13,980
Cash .................................................................................... 13,980
Purchased Sara Lee shares
[(600 x $22.50) + $480].
Aug. 19
Long-Term InvestmentsAFS (Eastman Kodak) .......................

15,498
Cash .................................................................................... 15,498
Purchased Eastman Kodak shares
[(900 x $17.00) + $198].
Dec. 31
10,168
Unrealized LossEquity ........................................................
Market AdjustmentAFS (LT)* ........................................... 10,168
*
Cost
Kodak ................... $15,498
Sara Lee ............... 13,980
Sony ..................... 55,665
Total ..................... $85,143
Market
$17,325
12,000
42,000
$71,325
Kodak:
900 x $19.25 = $17,325
Sara Lee:
600 x $20.00 = $12,000
Sony:
1,200 x $35.00 = $42,000
$85,143 - $71,325 = $13,818
Market Adjustment account:
Required balance ..... $13,818 Cr.
Unadjusted balance.. 3,650 Cr.
Required change... $10,168 Cr.

746

2010
Feb. 27
Long-Term InvestmentsAFS (Microsoft) ................................

161,325
Cash ...................................................................................161,325
Purchased Microsoft shares
[(2,400 x $67.00) + $525].
June 21
Cash .........................................................................................
56,720
Long-Term InvestmentsAFS (Sony) ............................... 55,665
Sold Sony shares [(1,200 x $48.00) - $880].
June 30
Long-Term InvestmentsAFS (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 InvestmentsAFS (Sara Lee)........................... 13,980
Sold Sara Lee shares
[(600 x $16.25) - $435].
Nov. 1
Cash .........................................................................................
19,850
Gain on Sale of Investments ........................................... 4,352
Long-Term InvestmentsAFS (E. Kodak) .......................... 15,498
Sold Eastman Kodak shares
[(900 x $22.75) - $625].
Dec. 31
Market AdjustmentAFS (LT)* ................................................

21,858
Unrealized LossEquity .................................................. 13,818
Unrealized GainEquity ................................................... 8,040
*
Cost
Black & Decker ................. $ 50,835
Microsoft ...........................
161,325
Total................................... $212,160
Market
$ 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 (market exceeds cost)
Required balance ............ $ 8,040 Dr.
Unadjusted balance......... 13,818 Cr.
Required change ............. $21,858 Dr.
747

Part 2
12/31/2008 12/31/2009 12/31/2010
Long-Term AFS Securities (cost)................... $117,100
$85,143
$212,160
Market Adjustment .....................................
(3,650)
(13,818)
8,040
Long-Term AFS Securities (market) .............. $113,450
$71,325
$220,200
Part 3
2008
2009
2010
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
$ 2,235
(5,080)
_______
$ (2,845)
$(4,665)
1,055
4,352
$ 742
Unrealized gains (losses) at year-end*..... $(3,650)
$(13,818)
$ 8,040
* Equals the balance of the Market Adjustment account.

748

Part 1
Available-for-sale securities on December 31, 2008
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
Market Value
$ 81,375
610,312
118,125
278,800
$1,088,612
Disclosure
The portfolio of available-for-sale securities would be reported on the
December 31, 2008, balance sheet at its market value of $1,088,612.
Part 2
Dec. 31
Market AdjustmentAFS* ......................................................

20,002
Unrealized LossEquity ................................................. 20,002
Adjustment to market for AFS securities..
* December 31, 2007, available-for-sale securities

Cost
Market Value
$ 535,300
$ 490,000
159,380
154,000
662,750
640,938
$1,357,430
$1,284,938
December 31, 2008, adjustment to the Market Adjustment account:
$1,357,430 - $1,284,938 = $ 72,492 Cr. balance on Dec. 31, 2007
$1,141,102 - $1,088,612 =
52,490 Cr. balance required on Dec. 31, 2008
$ 20,002 Dr. to adjust cost to market value
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2008 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2008 realized gains (losses)
Stock Sold
Cost
3,500 shares of Company B stock ............ $ 79,690
40,000 shares of Company A stock .......... 535,300
Realized gain (loss) ...................................
Sale
Gain (Loss)
$ 77,688 $ (2,002)
510,900
(24,400)
$(26,402)
749

Part 1
1. Journal entries (assuming significant influence)
2008
Jan. 5 Long-Term InvestmentsKildaire .............................................
1,560,000
Cash ....................................................................................
1,560,000
Purchased Kildaire shares.
Oct. 23
Cash ..........................................................................................
192,000
Long-Term InvestmentsKildaire ....................................... 192,000
Received cash dividend (60,000 x $3.20).
Dec. 31
Long-Term InvestmentsKildaire .............................................

232,800
Earnings from Long-Term Investment ............................ 232,800
($1,164,000 x 20%).
2009
Oct. 15
Cash ..........................................................................................
156,000
Long-Term InvestmentsKildaire ....................................... 156,000
Record cash dividend (60,000 x $2.60).
Dec. 31
Long-Term InvestmentsKildaire .............................................

295,200
($1,476,000 x 20%).
2010
Jan. 2
Cash ..........................................................................................
1,894,000
Gain on Sale of Investments ............................................. 154,000
Long-Term InvestmentsKildaire* .....................................
1,740,000
Sold Kildaire shares.
* Investment carrying value, January 2, 2010
Original cost ............................................ $1,560,000
Less 2008 dividends ...............................
(192,000)
Plus 2008 earnings ..................................
232,800
Less 2009 dividends ...............................
(156,000)
Plus 2009 earnings ..................................
295,200
Carrying value at date of sale ................. $1,740,000

750

2. Carrying value per share, January 1, 2010 (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 (2008) .......................................
$232,800
Earnings from Kildaire (2009) .......................................
295,200
Gain on sale of investments .........................................
154,000
Net increase ...................................................................
$682,000
Part 2
1. Journal entries (assuming NO significant influence)
2008
Jan. 5
Long-Term InvestmentsAFS (Kildaire) ..................................

1,560,000
Cash ....................................................................................1,560,000
Purchased Kildaire shares.
Oct. 23
Cash ..........................................................................................
192,000
Dividend Revenue ............................................................. 192,000
Dec. 31
Market AdjustmentAFS (LT)* ..............................................

240,000
Record market adjustment.
*60,000 x $30.00 = $1,800,000
$1,800,000 - $1,560,000 = $240,000
2009
Oct. 15
Cash ..........................................................................................
156,000
Received cash dividends (60,000 x $2.60).
Dec. 31

120,000
*60,000 x $32.00 = $1,920,000
$1,920,000 - $1,560,000 = $360,000
$360,000 - $240,000 = $120,000

751

2010
Jan. 2
Cash ..........................................................................................
1,894,000
Long-Term InvestmentsAFS (Kildaire) ............................
1,560,000
Sold Kildaire shares.
Jan. 2
Unrealized GainEquity .........................................................

360,000
Market AdjustmentAFS (LT) .............................................. 360,000
To remove market adjustment and related
accounts ($240,000 + $120,000 = $360,000).
2. Investment cost per share, January 1, 2010

$1,560,000 / 60,000 shares = $26
3. Change in Selks equity due to stock investment
Dividend Revenue (2008) ...............................
Dividend Revenue (2009) ...............................
Gain on sale of investments ..........................
Net increase ....................................................
$192,000
156,000
334,000
$682,000

752
Problem C-6AA (60 minutes)

Part 1
2008
Apr. 8 Cash ..........................................................................................
5,938
Sales ...................................................................................
5,938
July 21
14,100
Accounts ReceivableSumito ...............................................
Sales ................................................................................... 14,100
(1,500,000 x $0.0094)
Oct. 14
27,675
Accounts ReceivableSmithers ...........................................
Sales ................................................................................... 27,675
(19,000 x $1.4566)
Nov. 18
Cash ..........................................................................................
13,800
Foreign Exchange Loss ..........................................................
300
Accounts ReceivableSumito ......................................... 14,100
(1,500,000 x $0.0092)
Dec. 20
7,652
Accounts ReceivableHamid Albar......................................
Sales ...................................................................................
(17,000 x $0.4501)
Dec. 31
103
Accounts ReceivableSmithers. ..........................................
Foreign Exchange Gain * ..................................................
Gain for the period ...
Dec. 31
2009
Jan. 12
Jan. 19
103
= $27,675
= 27,778
= $ 103
Foreign Exchange Loss* .........................................................

77
Accounts ReceivableHamid Albar................................
Loss for the period .................
7,652
77
= $7,652
= 7,575
=$
77
Cash*.........................................................................................
27,928
Accounts ReceivableSmithers**................................... 27,778
Foreign Exchange Gain ....................................................
150
*(19,000 x $1.4699) **($27,675 + $103)
Cash*.........................................................................................
7,514
61
Accounts ReceivableHamid Albar** .............................
*(17,000 x $0.4420) **($7,652 - $77)
7,575

753
Problem C-6AA (Continued)

Part 2
Foreign exchange loss reported on the 2008 income statement
November 18 .......................................
December 31........................................
December 31........................................
Total ......................................................
$(300)
103
(77)
$(274)
Part 3
To reduce the risk of foreign exchange gain or loss, Doering could attempt
to negotiate foreign customer sales that are denominated in U.S. dollars.
To accomplish this, Doering might be willing to offer favorable terms, such
as price discounts or longer credit terms. Another possibility that may be
of limited potential is for Doering to make credit purchases denominated in
foreign currencies, planning the purchases so that the payables in foreign
currencies match the foreign currency receivables in time and amount.
NOTE: A few students may also understand Doering's opportunity for hedging.
This involves selling foreign currency futures to be delivered at the time the
receivables from foreign customers will be collected.

754
PROBLEM SET B
Problem C-1B (60 minutes)
Part 1
2008
Mar. 10 Short-Term InvestmentsTrading (AOL) ............. 143,505
Cash .............................................................
143,505
Purchased AOL shares

[(2,400 x $59.15) + $1,545].
May 7 Short-Term InvestmentsTrading (MTV) ......... 184,105

Cash .............................................................
184,105
Purchased MTV shares

[(5,000 x $36.25) + $2,855].
Sept. 1 Short-Term InvestmentsTrading (UPS) .........

Cash .............................................................
69,950
69,950
Purchased UPS shares

[(1,200 x $57.25) + $1,250].
2009
Apr. 26 Cash ................................................................... 170,450
Loss on Sale of Short-Term Investments ....... 13,655
Short-Term InvestmentsTrading (MTV) ...
184,105
Sold MTV shares [(5,000 x $34.50) - $2,050].
27 Cash ...................................................................
Gain on Sale of Short-Term Investments .
Short-Term InvestmentsTrading (UPS) ...
70,812
862
69,950
Sold UPS shares [(1,200 x $60.50) - $1,788].
June 2 Short-Term InvestmentsTrading (SPW) ............ 622,450

Cash .............................................................
622,450
Purchased SPW shares

[(3,600 x $172.00) + $3,250].
14 Short-Term InvestmentsTrading (W-M) .........

Cash .............................................................
46,307
46,307
Purchased Wal-Mart shares

[(900 x $50.25) + $1,082].

755
Problem C-1B (Concluded)

2010
Jan. 28 Short-Term InvestmentsTrading (Pepsi) ........ 88,890
Cash ..............................................................
88,890
Purchased PepsiCo shares

[(2,000 x $43.00) + $2,890].
31 Cash .................................................................... 602,760

Loss on Sale of Short-Term Investments ........ 19,690
Short-Term InvestmentsTrading (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 InvestmentsTrading (AOL) ......
143,505
Sold AOL shares [(2,400 x $56.75) - $2,480].
Sept. 3 Short-Term InvestmentsTrading (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 InvestmentsTrading (W-M) ........
Sold Wal-Mart shares
[(900 x $53.75) - $1,220].
848
46,307
Part 2 (Adjusting entry at December 31, 2010)

Dec. 31 Unrealized LossIncome ......................................
Market AdjustmentTrading*....................
13,820
13,820
To reflect an unrealized loss in market

values of trading securities.
Trading Securities
Price at
Portfolio
Shares 12/31/10
PepsiCo ...........................
2,000
$41.00
Vodaphone .......................
1,500
$37.00
Totals ..............................
Market
Value
$ 82,000
55,500
$137,500
Cost
$ 88,890
62,430
$151,320
Unrealized
Gain (Loss)
$ (6,890)
(6,930)
$(13,820)

756

Part 1
Feb. 6 Short-Term InvestmentsAFS (Nokia)............ 143,250

Cash ............................................................
143,250
Purchased 3,400 shares of Nokia

[(3,400 x $41.25) + $3,000].
15 Short-Term InvestmentsAFS (T-bills) ...........

Cash ............................................................
20,000
20,000
Purchased U.S. Treasury bills.
Apr. 7 Short-Term InvestmentsAFS (Dell) ..............

Cash ............................................................
48,655
48,655
Purchased 1,200 shares of Dell

[(1,200 x $39.50) + $1,255].
June 2 Short-Term InvestmentsAFS (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* .................................................................

Short-Term InvestmentsAFS (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 InvestmentsAFS (T-bills) ........
Interest Revenue*..........................................
20,600
20,000
600
Proceeds of U.S. Treasury bills.

*($20,000 x .06 x 6/12)
24 Cash ..................................................................
120
120
Received dividends on Dell stock

(1,200 x $0.10).
Nov. 9 Cash ...................................................................

510
510
Received dividends on Nokia stock

(2,550 x $0.20).
Dec. 18 Cash ...................................................................

180
180
Received dividends on Dell stock

(1,200 x $0.15).
757

Part 2
Comparison of Cost and Market Values of AFS Portfolio
Nokia
Dell
Merck
(2,550 x $41.25) + $2,250 .........

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 ..........................
Cost
$107,437
$102,638
48,655
48,600
184,140
$340,232
a
b
c
Market
Unrealized
Gain (Loss)
147,500
$298,738
$41,494
Brokerage fee attached to remaining 2,550 shares: $3,000 x (3,400 sh. 850 sh.)/ 3,400 sh. = $2,250.
Brokerage fee attached to remaining 1,200 shares: Entire $1,255 (none sold).
Brokerage fee attached to remaining 2,500 shares: Entire $2,890 (none sold).
Part 3
Dec. 31 Unrealized LossEquity ............................................

Market AdjustmentAFS (ST) .........................
41,494
41,494
To reflect an unrealized loss in market values of

Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $340,232 and show a subtraction of $41,494
for the market adjustment. This yields $298,738 as the net market value for
these securities reported in the current assets section. An alternative
presentation is to list these securities at the market value of $298,738 with
a note disclosure of the cost.
Part 5
(a)
Income statement
(i) Interest Revenue, $600
(ii) Dividend Revenue, $1,456 [$646 + $120 + $510 + $180]
(iii) Gain on Sale of Short-Term Investments, $2,237
(iv) Net effect on income is $4,293
(b)
Equity section of Balance sheet

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

758

Part 1
2008
Mar. 10
Long-Term InvestmentsAFS (Apple) ...................................

31,400
Cash .................................................................................... 31,400
Purchased Apple shares
[(1,200 x $25.50) + $800].
April 7
Long-Term InvestmentsAFS (Ford) .....................................

57,283
Cash .................................................................................... 57,283
Purchased Ford shares
[(2,500 x $22.50) + $1,033].
Sept. 1
Long-Term InvestmentsAFS (Polaroid) ...............................

29,090
Cash .................................................................................... 29,090
Purchased Polaroid shares
[(600 x $47.00) + $890].
Dec. 31
Unrealized LossEquity.........................................................
2,873
Market AdjustmentAFS (LT)* .....................................................
Annual adjustment to fair values.
*
Cost
Apple .....................
$ 31,400
Ford .......................57,283
Polaroid .................29,090
Total.......................
$117,773
2,873
Market
$ 33,000
52,500
29,400
$114,900
Apple:
1,200 x $27.50 = $33,000
Ford:
2,500 x $21.00 = 52,500
Polaroid: 600 x $49.00 = 29,400
$117,773 - $114,900 = $2,873

759
Problem C-3B (Continued)

2009
Apr. 26 Cash ..........................................................................................
50,043
7,240
Long-Term InvestmentsAFS (Ford) ............................... 57,283
Sold Ford shares
[(2,500 x $20.50) - $1,207].
June 2
Long-Term InvestmentsAFS (Duracell)................................

35,700
Cash .................................................................................... 35,700
Purchased Duracell shares
[(1,800 x $19.25) + $1,050].
June 14
Long-Term InvestmentsAFS (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 InvestmentsAFS (Polaroid) ........................... 29,090
Sold Polaroid shares
[600 x $51.00) - $845].
Dec. 31
Market AdjustmentAFS (LT)* ...............................................................

5,093
Unrealized LossEquity ...................................................
Unrealized GainEquity ....................................................
*
Cost
Market
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
Required balance ..... $2,220 Dr.
Unadjusted balance.. 2,873 Cr.
Required change ...... $5,093 Dr.

760

2010
Jan. 28 Long-Term InvestmentsAFS (Coca-Cola) ............................
41,480
Cash ................................................................................... 41,480
Purchased Coca-Cola shares
[(1,000 x $40.00) + $1,480].
Aug. 22
Cash .........................................................................................
23,950
7,450
Long-Term InvestmentsAFS (Apple) ............................. 31,400
Sold Apple shares [(1,200 x $21.50) - $1,850].
Sept. 3
Long-Term InvestmentsAFS (Motorola) ...............................

84,780
Cash .................................................................................... 84,780
Purchased Motorola shares
[(3,000 x $28) + $780].
Oct.
Cash .........................................................................................
28,201
Gain on Sale of Investments ........................................... 2,721
Long-Term InvestmentsAFS (Sears) .............................. 25,480
Sold Sears shares [(1,200 x $24.00) - $599].
Oct. 31
Cash .........................................................................................
26,102
Loss on Sale of Investments .................................................
9,598
Long-Term InvestmentsAFS (Duracell).......................... 35,700
Sold Duracell shares [(1,800 x $15.00) - $898].
Dec. 31
2,220
6,260
Market AdjustmentAFS (LT)* ...........................................
8,480

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

Required balance ...... $6,260 Cr.
Unadjusted balance .. 2,220 Dr.
Required change ....... $8,480 Cr.
761

Part 2
12/31/2008
12/31/2009
12/31/2010
$92,580
$126,260
(2,873)
2,220
(6,260)
Long-Term AFS Securities (market) .......... $114,900
$94,800
$120,000
2009
2010
Long-Term AFS Securities (cost)............... $117,773
Market Adjustment .................................
Part 3
2008
Realized gains (losses)
Sale of Ford shares ...............................
Sale of Polaroid shares .........................
Sale of Duracell shares .........................
Sale of Apple shares .............................
Sale of Sears shares ............................. ______
Total realized gain (loss) ........................ $
0
$(7,240)
665
______
$(6,575)
$ (9,598)
(7,450)
2,721
$(14,327)
Unrealized gains (losses) at year-end ... $(2,873)
$ 2,220
$ (6,260)

762

Part 1
Available-for-sale securities on December 31, 2008
Security
Cost
Market Value
27,500 shares of Company R common stock .............$559,125
$568,125
6,375 shares of Company S common stock ............. 231,285
210,375
42,500 shares of Company V common stock ............. 135,000
134,938
5,000 shares of Company X common stock ............. 49,920
45,625
$975,330
$959,063
Disclosure
The portfolio of available-for-sale securities would be reported on the
December 31, 2008, balance sheet at its fair market value of $959,063.
Part 2
Dec. 31
16,267
29,313
Market AdjustmentAFS (LT)* ........................................... 45,580
*December 31, 2007, available-for-sale securities:
Cost
Market Value
$ 559,125
$ 599,063
308,380
293,250
147,295
151,800
$1,014,800
$1,044,113
December 31, 2008, adjustment to the Market Adjustment account:
$1,014,800 - $1,044,113 = $29,313 Dr. balance on Dec. 31, 2007
$ 975,330 - $ 959,063 = 16,267 Cr. balance required on Dec. 31, 2008
$45,580 Cr. to adjust cost to market value
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2008 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2008 realized gain (loss)
Stock Sold
Cost
2,125 shares of Company S stock ........ $ 77,095
11,000 shares of Company T stock ........ 147,295
Realized gain (loss) ..................................
Sale
$ 71,055
154,050
Gain (Loss)
$(6,040)
6,755
$ 715

763

Part 1
1. Journal entries (assuming significant influence)
2008
Jan. 5
Long-Term InvestmentsBloch ............................................
200,500
Cash .................................................................................... 200,500
Purchased Bloch shares.
Aug. 1
Cash ..........................................................................................
21,000
Long-Term InvestmentsBloch............................................... 21,000
Dec. 31
Long-Term InvestmentsBloch ............................................

20,500
Record equity in investees earnings
($82,000 x 25%).
2009
Aug. 1
Dec. 31
2010
Jan. 8
Cash ..........................................................................................
27,000
Long-Term InvestmentsBloch ...................................... 27,000
Record cash dividend (20,000 x $1.35).
Long-Term Investments (Bloch) ............................................
19,500
Record equity in investees earnings
($78,000 x 25%).
Cash ..........................................................................................
375,000
Long-Term InvestmentsBloch* ..................................... 192,500
Sold Bloch shares.
*Investment carrying value at Jan. 7, 2008
Original cost ..........................................$200,500
Less 2008 dividends ............................. (21,000)
Plus 2008 earnings ............................... 20,500
Less 2009 dividends ............................. (27,000)
Plus 2009 earnings ............................... 19,500
Carrying value at date of sale ..............$192,500

764

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 Brinkleys equity

Earnings from Bloch-2008 ..................................$ 20,500
Earnings from Bloch-2009 .................................. 19,500
Gain on sale of investments ............................... 182,500
Net increase .........................................................$222,500
Part 2
1. Journal entries (assuming NO significant influence)
2008
Jan. 5
Long-Term InvestmentsAFS (Bloch) ..................................

200,500
Cash .................................................................................... 200,500
Purchased Bloch shares.
Aug. 1
Cash ..........................................................................................
21,000
Dec. 31

37,500
*20,000 x $11.90 = $238,000
$238,000 - $200,500 = $37,500

765

2009
Aug. 1 Cash ..........................................................................................
27,000
Received cash dividends (20,000 x $1.35).
Dec. 31

35,000
*20,000 x $13.65 = $273,000
$273,000 - $200,500 = $72,500
$72,500 - $37,500 = $35,000
2010
Jan. 8
Cash ..........................................................................................
375,000
Long-Term InvestmentsAFS (Bloch)............................ 200,500
Sold Bloch shares.
Jan. 8

72,500
Market AdjustmentAFS (LT)* ........................................ 72,500
To remove market adjustment and
related accounts.
*$37,500 + $35,000 = $72,500
2. Investment cost per share, January 7, 2010

$200,500 / 20,000 shares = $10.03*
*rounded to the nearest cent
3. Change in Brinkley's equity

Dividend Revenue-2008 ......................................$ 21,000
Dividend Revenue-2009 ...................................... 27,000
Gain on sale of investments ............................... 174,500
Net increase .........................................................$222,500

766
Problem C-6BA (60 minutes)

Part 1
2008
May 26 Accounts ReceivableFuji ....................................................
60,450
Sales ................................................................................... 60,450
(6,500,000 x $0.0093)
June 1
Cash ..........................................................................................
64,800
Sales ................................................................................... 64,800
July 25
Cash*.........................................................................................
59,800
650
Accounts ReceivableFuji .............................................. 60,450
*(6,500,000 x $0.0092)
Oct. 15
Accounts ReceivableMartinez Brothers ............................

38,556
Sales ................................................................................... 38,556
(378,000 x $0.1020)
Dec. 6
Accounts ReceivableChi-Ying ............................................

35,975
Sales ................................................................................... 35,975
(250,000 x $0.1439)
Dec. 31
Accounts Receivable--Martinez Brothers .............................

1,512
Foreign Exchange Gain* ...................................................
1,512
*Original measure = (378,000 x $0.1020) = $38,556

Year-end measure = (378,000 x $0.1060) = 40,068
Gain for the period ................ = $ 1,512
Dec. 31
Accounts ReceivableChi-Ying ............................................

275
Foreign Exchange Gain* ...................................................
275
*Original measure = (250,000 x $0.1439) = $35,975

Year-end measure = (250,000 x $0.1450) = 36,250
Gain for the period ................ = $ 275
2009
Jan. 5
Cash*.........................................................................................
39,500
Accounts ReceivableChi-Ying** ................................... 36,250
Foreign Exchange Gain .................................................... 3,250
*(250,000 x $0.1580) **($35,975 + $275)
Jan. 13
Cash*.........................................................................................
39,274
794
Accounts ReceivableMartinez Bros** ............................ 40,068
* (378,000 x $0.1039) ** ($38,556 + $1,512)

767
Problem C-6BA (Concluded)

Part 2
Foreign exchange gain reported on 2008 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 companys opportunity for
hedging. This involves selling foreign currency futures to be delivered at the time
the receivables from foreign customers will be collected.

768
Serial Problem SP C
Serial Problem, Success Systems (35 minutes)
Part 1
2008
April 16 Short-Term InvestmentsTrading (J&J) .................. 22,300
Cash .................................................................
22,300
Purchased Johnson & Johnson shares

[(400 x $55) + $300].
30 Short-Term InvestmentsTrading (Starbucks) ....... 5,650

Cash .................................................................
5,650
Purchased Starbucks shares

[(200 x $27) + $250].
Part 2
Adjusting entry at June 30, 2008
June 30 Market AdjustmentTrading*..............................

Unrealized GainIncome ...............................
850
850

Trading securities
Share Price Market
Unrealized
portfolio
Shares
at 6/30/08
Value
Cost
Gain (Loss)
J & J ...................... 400
$60
$24,000 $22,300 $1,700
Starbucks............... 200
$24
4,800
5,650
(850)
Totals ....................
$28,800 $27,950 $ 850

769
Reporting in Action
BTN C-1
1. Yes, Best Buys financial statements are consolidated. The statements

are labeled as consolidated in all the financial statement headings.
2. Best Buys comprehensive income for the year ended February 26,
2005, is $1,047,000,000. The comprehensive income amount is reported
on Best Buys consolidated statement of changes in shareholders
equity.
3. Yes. Its consolidated statement of changes in shareholders' equity
includes a Foreign Currency Translation Adjustments amount.
4. The return on total assets for the year ended February 26, 2005, ($
millions) follows
$984 / [($10,294 + $8,652) / 2] = 10.39%
5. Answer depends on the annual report information obtained.

770
Comparative Analysis
BTN C-2
1. Best Buys return on total assets

Current Year: $984 / [($10,294 + $8,652)/2] = 10.4%
One Year Prior: $705 / [($8,652 + $7,694)/2] = 8.6%
Circuit Citys return on total assets
Current Year: $62 / [($3,789 +$3,731)/ 2] = 1.6%
One Year Prior: $(89)/ [($3,731 + $3,841)/2)] = (2.4)%
2. Return on total assets = Profit margin x Total asset turnover
Best Buys component analysis of return on total assets*
Current Year
10.4% = $984/$27,433 x $27,433/[($10,294 + $8,652)/2]
10.4% =
3.6%
x
2.9
One Year Prior
8.7% = $705/$24,548 x $24,548/[($8,652 + $7,694)/2]
8.7% =
2.9%
x
3.0
*(Some difference due to rounding).
Circuit Citys component analysis of total return on assets*

Current Year
1.6% = $62/$10,472 x $10,472/[($3,789 + $3,731)/2]
1.6% =
0.6% x
2.8
One Year Prior
(2.3)%= $(89)/$9,857 x $9,857/[($3,731 + $3,841)/2]
(2.3)%=
(0.9)% x
2.6
*(Some difference due to rounding).
3. Current Year Analysis: Best Buy has a higher return on total assets
versus Circuit City (10.4% vs. 1.6%), a higher profit margin (3.6% vs.
0.6%), and a higher total asset turnover (2.9 vs. 2.8). In addition, Best
Buys return on total assets is higher than the industry average.
One Year Prior Analysis: Best Buy has a higher return on total assets
versus Circuit City [8.6% vs. (2.4)%], a higher profit margin (2.9% vs.
(0.9)%), and a higher total asset turnover (3.0 vs. 2.6).
This comparative analysis shows that Circuit City must improve on
both components; but it especially must increase its profit margin.
771
Ethics Challenge
BTN C-3
1. Kendras bonus is not contingent on the classification of available-forsale versus held-to-maturity. Designation of the bonds as available-forsale debt securities will require that an entry be made to recognize the
unrealized holding loss on the bondsbut it will affect equity and not
net income. Also, if the bonds are designated as held-to-maturity debt
securities then there will be no recognition of their loss in market value
over the past year in net income (and neither in equity).
2. Generally, Kendra must classify its debt securities as either short or
long term and as available-for-sale or held-to-maturity. Since the bonds
are 10-year bonds they should be classified as long-term investments
unless management intends to sell them within the current year or
operating cycle. Since the problem states that management probably
will not hold the bonds for the full ten years the correct classification is
available-for-sale. So, if management does not intend to sell within the
current year or operating cycle the correct classification is: long-term
available-for-sale debt securities.
3. The companys auditors (internal and external) and/or its board of
directors should serve as an effective check on Kendras accounting for
the companys long-term investments in securities.

772
Communicating in Practice
BTN C-4
TO:
Abel Terrio
FROM:
(Your Name)
SUBJECT: Sale of Blackhawk Common Stock
The $6,000 loss on the sale of Blackhawk common stock is correctly
stated. Jackson Company owned 40% of the outstanding shares, and
therefore accounts for the investment according to the equity method.
Under the equity method, investments are reported at the investor's cost
plus its share in the undistributed earnings accumulated by the investee
since the stock was purchased. At sale, the book value of the investment is
compared to the net proceeds to determine gain or loss.
During year 2008, the income statement showed earnings from all
investments of $126,000.
This amount included $81,000 from the
investment in Blackhawk (Blackhawks 2008 net income of $202,500 x 40%),
which was debited to the Long-Term InvestmentsBlackhawk account.
This increased the book value of the investment to $581,000. When sold,
the net proceeds of $575,000 was compared to the book value of $581,000
and the result was the $6,000 loss.
Please call me if you have any questions.
Taking It to the Net
BTN C-5
($ millions for Parts 1 through 4)
1. At June 30, 2005 (cost-basis) ................................................... $46,654

At June 30, 2004 (cost-basis) ................................................... $71,275
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 stock and equivalents; and Preferred stock.
3. Unrealized gains = $2,359; and Unrealized losses = $(258).
4. Market (recorded) value is greater. Specifically: Market is $48,755; and
cost-basis is $46,654.
773
Teamwork in Action
BTN C-6
There is no specific solution to this activity. The instructor should serve as

a facilitator during this learning reinforcement activity.
Business Week Activity
BTN C-7
1. Typically, accountants focus on and report historical data. Investors

usually desire future-oriented information about companies they are
interested in evaluating.
2. Marking-to-market means that the assets and liabilities are to be
shown on a companys financial statements at their current market
values. Each reporting period, asset and liabilities are to be adjusted
from previously reported values to reflect the most current value.
3. Ideas to curb fraud and facilitate mark-to-market accounting include:
a. Marking can be performed by outsiders who do not have a vested
interest in making the numbers look good.
b. The assumptions that went into estimating the values could be
publicized and audited.
c. A range of possible asset values could be published which would
serve to highlight the uncertain nature of the data.
4. Economists argue that marking-to-market results in asymmetrical
balance sheets. That is, financial assets on the balance sheet can
fluctuate and show both increases and decreases in current values.
However, non-financial assets (such as inventories, plant assets, and
goodwill) can be marked down in value but not increased in value
should they appreciate.
Accountants believe that the non-mark-up in value rule is a good
precaution in that it prevents unjustified markups of non-financial
assets. Accountants also argue that CEOs will be sure to alert investors
if key assets have increased in value, even if such increases are not
allowed to be explicitly reported on the balance sheet.
5. The best argument for mark-to-market accounting is that it helps society
allocate capital more efficiently by improving financial understanding.

774
Entrepreneurial Decision
1.
2008
Jan. 1
2.
Mar. 31
June 30
Sept. 30
Dec. 31
3.
BTN C-8
Publishing rights ............................................... 106,920

Accounts payable .......................................
Agreed to pay for publishing rights
12,000,000 yen x $0.00891
Accounts payable* ............................................
Loss from currency translation .......................
Cash ..............................................................
Paid of total amount due
*$106,920/4 **3,000,000 yen x $0.00893
26,730
60
Accounts payable .............................................

Cash* .............................................................
*3,000,000 yen x 0.00901
26,730
300

Cash* .............................................................
*3,000,000 yen x 0.00902
26,730
330

Cash* .............................................................
*3,000,000 yen x 0.00897
26,730
180
106,920
26,790
27,030
27,060
26,910
Since all of his payments are to be in yen, Stu can buy yen in advance
to lock in his payment amount.
NOTE: A few students may also understand the companys opportunity for
hedging. For example, this can involve selling foreign currency futures to be
delivered at the time that receivables from foreign customers will be
collected.

775
Hitting the Road BTN
C-9
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

1.
C-10
Dixons Group ( millions)

Return on total assets = Net Income / Average Total Assets
Current Year: 284/ [(3,874 + 4,158)/2] = 7.1%
Prior Year:
209/ [(4,158 + 3,577)/2] = 5.4%
Return on total assets = Profit margin x Total asset turnover

Current Year
7.1%
7.1%
= 284/6,492 x 6,492/[(3,874 + 4,158)/2]

=
4.4%
x 1.62
One Year Prior

5.4%
5.4%
= 209/5,758 x 5,758/[(4,158 + 3,577)/2]

=
3.6%
x 1.49
2. Current Year Analysis: Best Buy has a higher return on total assets
(10.4% vs. Circuit Citys 7.1% and Dixons 1.6%), but Dixons has the
higher profit margin (4.4% vs. Best Buys 3.6% and Circuit Citys 0.6%).
However, Best Buy has a higher total asset turnover (2.9 vs. Circuit
Citys 2.8 and Dixons 1.62).
One Year Prior Analysis: Best Buy has a higher return on total assets
[8.7% vs. Dixons 5.4% and Circuit Citys (2.3)%], but Dixons has the
higher profit margin [3.6% vs. Best Buys 2.9% and Circuit Citys
(0.9)%]. Best Buy has the higher total asset turnover (3.0 vs. Circuit
Citys 2.6 and Dixons 1.49).
Overall, Best Buy is the superior performer. While Dixons profit
margins and turnover are acceptable, Circuit City should focus on
improving a lower than normal profit margin and asset turnover.
776

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Appendix C

Investments and International Operations

To be classified as current assets, investments must be (i) capable of being

The three classes of noninfluential investments in securities are:

b) equity securities giving an investor control over an investee.

The portfolio for investments in available-for-sale securities should be reported on

The portfolio of long-term investments in debt securities is reported at cost adjusted

McGraw-Hill Companies, 2008

A company prepares consolidated statements if the company has control over a

Apples return on total assets as of September 25, 2004 is ($ millions):

Apr. 18 Short-Term InvestmentsTrading (XLT) ................... 12,850

Purchased 300 shares at $42 plus $250 fee.

May 30 Cash .........................................................................

Received dividend of $1 per share.

McGraw-Hill Companies, 2008

Financial Accounting, 4th Edition

Quick Study C-2 (10 minutes)

To reflect an unrealized loss in market value

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

To record sale of one-half of the available-for-sale

Quick Study C-3 (10 minutes)

May 7 Short-Term InvestmentsAFS (Kraft) ....................... 10,300

Purchased 200 shares at $50 plus $300 fee.

June 6 Cash ......................................................................... 11,050

To record sale of available-for-sale securities.

McGraw-Hill Companies, 2008

Quick Study C-4 (10 minutes)

Purchased 200 shares at $25 plus $150 fee.

June 2 Cash* ....................................................................... 2,710

To record sale of available-for-sale securities. The

Dec. 31 Unrealized Loss Equity* .........................................

To reflect an unrealized loss in market value of

Quick Study C-5 (10 minutes)

Quick Study C-6 (10 minutes)

McGraw-Hill Companies, 2008

Financial Accounting, 4th Edition

Quick Study C-7 (10 minutes)

Record interest earned ($40,000 x 6% x 6/12).

Interest Receivable ........................................................

Record interest earned ($1,200 x 5/6).

Quick Study C-8 (10 minutes)

Long-Term InvestmentsAFS (ORD)..........................

Record purchase of securities.

Record sale of securities. *( x $1,000,000)

Quick Study C-9 (10 minutes)

Received cash dividends ($100,000 x 40%).

Long-Term InvestmentsORD ....................................

Record equity in investee earnings

McGraw-Hill Companies, 2008

Quick Study C-10 (10 minutes)

Record change in value of securities.

Quick Study C-11 (10 minutes)

This ratio provides information to evaluate a company's profitability

Quick Study C-12 (10 minutes)

x Total asset turnover

Component analysis is useful as it allows the determination of whether the

McGraw-Hill Companies, 2008

Financial Accounting, 4th Edition

Quick Study C-13A (10 minutes)

Record credit sale in value of pounds

Cash received on account (10,000 x 1.35).

Quick Study C-14A (10 minutes)