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Chapter 15

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

5. To be classified as current assets, investments must be capable of being converted


into cash quickly and management must intend to sell the investments as a source
of cash to satisfy the needs of current operations. To be classified as long-term,
investments must not meet the requirements for short-term 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.
6. Unrealized loss Equity...................................................... ##
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.

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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.]

Apr. 18 Short-Term InvestmentsTrading (XLT).....................22,650


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

22,650

Purchased 500 shares at 45 plus $150 fee.

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

500
500

Received dividend of $1 per share.


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Quick Study 15-2 (10 minutes)


1. 2005
Dec. 31 Unrealized LossEquity...........................................
Market AdjustmentAvailable-for-Sale (ST)...........

6,000
6,000

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. 2006
Apr. 6 Cash ...................................................................52,000
Gain on Sale of Short-Term Investments...............
Short-Term InvestmentsAFS................................

2,000
50,000

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


securities. (Cost = $100,000 x 1/2)

Quick Study 15-3 (10 minutes)


May 7 Short-Term InvestmentsAFS (Lov)........................... 2,700
Cash...................................................................

2,700

Purchased 100 shares at 25 plus $200 fee.

June 6 Cash......................................................................... 2,725


Gain on Sale of Short-Term Investments.......
Short-Term InvestmentsAFS (Lov)..............

25
2,700

To record sale of available-for-sale securities.

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Quick Study 15-4 (10 minutes)


May 9 Short-Term InvestmentsAFS (X&O).......................20,400
Cash...................................................................

20,400

Purchased 400 shares at $50 plus $400 fee.

June 2 Cash.........................................................................11,020
Gain on Sale of Short-Term Investments.......
Short-Term InvestmentsAFS (X&O)............

820
10,200

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


original cost is $20,400 x200/400 =$10,200

Dec. 31 Unrealized Loss Equity*......................................... 1,000


Market AdjustmentAvailable-for-Sale (ST) .......

1,000

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

X&O

200

$51

$10,200

$46

Total
Unrealized
Market
Loss
Value (Market-Cost)
$9,200

$1,000*

Quick Study 15-5 (10 minutes)


True: c, e, f, g,

Quick Study 15-6 (10 minutes)


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

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Quick Study 15-7 (10 minutes)


July 31

Cash.................................................................................900
Interest Revenue......................................................

900

Record interest earned ($30,000 x 6% x 6/12).

Dec. 31

Interest Receivable.........................................................750
Interest Revenue......................................................

750

Record interest earned ($900 x 5/6).

Quick Study 15-8 (10 minutes)


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

2005
May 20

Long-Term InvestmentsAFS (TKR)...........................


750,000
Cash...........................................................................

750,000

Record purchase of securities.

2006
Aug. 5

Cash.................................................................................
475,000
Long-Term InvestmentsAFS (TKR)*....................
Gain on Sale of Long-Term Investment..................

375,000
100,000

Record sale of securities. *( x $750,000)

Quick Study 15-9 (10 minutes)


Nov. 1

Cash ................................................................................
50,000
Long-Term InvestmentTKR..................................

50,000

Received cash dividends ($125,000 x 40%).

Dec. 31

Long-Term InvestmentsTKR......................................
220,000
Earnings from Investment (TKR)............................

220,000

Record equity in investee earnings


($550,000 x 40%).

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Quick Study 15-10 (10 minutes)


1.
Dec. 31

6,000
Unrealized Loss Equity...............................................
Market AdjustmentAvailable-for-Sale (LT)...........

6,000

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 $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.

Quick Study 15-11 (10 minutes)


Net income
Return on total assets = Average total assets
This ratio provides information to evaluate a company's profitability
(efficiency) in using its available assets.

Quick Study 15-12 (10 minutes)


Return on Total Assets

Profit margin

Net income
Average total assets

Net income
Net sales

x Total asset turnover


Net sales
x Average total assets

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


return on assets is achieved primarily due to profitability or efficiency of
asset-use (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.

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Quick Study 15-13A (10 minutes)


Date of Sale
Accounts Receivable.....................................................
16,000
Sales..........................................................................

16,000

Record credit sale in value of pounds (10,000


pounds x 1.60).

Date of Payment
Cash.................................................................................
15,000
Foreign Exchange Loss.................................................
1,000
Accounts Receivable...............................................

16,000

Cash received on account (10,000 x 1.50).

Quick Study 15-14A (10 minutes)


Mar. 1

Account ReceivableHamac........................................
13,622
Sales..........................................................................

13,622

Record credit sale in value of ringgits (20,000


ringgits x $0.6811).

Mar. 31

Cash.................................................................................
13,970
Foreign Exchange Gain...........................................
Accounts ReceivableHamac................................

348
13,622

Cash received on account (20,000 ringgits x


$0.6985).

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EXERCISES
Exercise 15-1 (25 minutes)
a.
Feb. 15 Short-Term InvestmentsHTM (FTR)...................... 100,000
Cash..................................................................

100,000

Purchased 90-day, 8% debt securities.

b.
Mar. 22 Short-Term InvestmentsTrading (FIX).............. 21,150
Cash..................................................................

21,150

Purchased 700 shares of stock for


(700 x $30) + $150 brokerage fee.

c.
May 16 Cash........................................................................ 102,000
Short-Term InvestmentsHTM (FTR)...........
Interest Revenue.............................................

100,000
2,000

Collected proceeds of debt securities


with interest of $100,000 x .08 x 90/360.

d.
Aug. 1 Short-Term InvestmentsAFS (Better Buy)....... 60,000
Cash..................................................................

60,000

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*...................................................................... 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

Received cash interest payment


($60,000 x .10 x 90/360).
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Exercise 15-2 (20 minutes)


1.
2005
Dec. 31 Market AdjustmentTrading.............................. 10,000
Unrealized GainIncome..............................

10,000

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 $10,000 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 $66,000.
ii. The Unrealized Gain of $10,000 is reported in the Other Revenues and
Gains section of the income statement.

3.
2006
Jan. 3 Cash
30,000
Gain on Sale of Short-Term Investments......
Short-Term InvestmentsTrading*...............

2,000
28,000

To record sale of trading securities.


*($56,000 x )

Exercise 15-3 (15 minutes)


Available-for-Sale Portfolio

Cost

Vicks Corporation bonds payable...................... $ 79,600


Pace Corporation notes payable........................ 60,600
Lake Lugano Company common stock............. 85,500
$225,700
$225,600

Market

Unrealized
Gain (Loss)

$ 90,600
52,900
82,100
$ (100)

Dec. 31 Unrealized LossEquity...............................................


Market AdjustmentAFS (ST).........................

100
100

To reflect unrealized loss.

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Exercise 15-4 (30 minutes)


2005
(a) Feb. 15

Short-Term InvestmentsHTM (A.G.)...............................


150,000
Cash........................................................................... 150,000
Purchased 120-day, 10% notes.

(b) Mar. 22

Long-Term InvestmentsAFS (Fran)................................


17,750
Cash...........................................................................

17,750

Purchased 700 shares of Fran common


stock ([700 x $25] + $250).

(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

Short-Term InvestmentsTrading (MP3)...........................


50,000
Cash...........................................................................

50,000

Purchased 8% notes, due Jan. 30, 2006.

(e) Sept. 1

Cash.................................................................................
350
Dividend Revenue....................................................

350

Received dividend on Fran shares


(700 x $0.50).

(f) Oct.

Cash*...............................................................................
11,025
Long-Term InvestmentsAFS (Fran)**.......................
Gain on Sale of L-T Investments.............................

8,875
2,150

Sold 350 shares of Fran stock.


*([350 x $32] - $175) **($17,750/2)

(g) Oct. 30

Cash.................................................................................
1,000
Interest Revenue......................................................

1,000

Received interest payment on 8% notes


($50,000 x .08 x 3/12).

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Exercise 15-5 (15 minutes)


Computation of Market Adjustment
Market
Unrealized
Value
Gain (Loss)
Nintendo Co. common stock.........................................
$ 68,900 $ 75,300
Atlantic Richfield Co. bonds payable...........................
24,500
22,800
Kellogg Company notes payable..................................
50,000
47,200
McDonald's Corp. common stock................................
91,400
86,600
$234,800 $231,900 $ (2,900)

Cost

Dec. 31

Unrealized LossEquity...............................................2,900
Market AdjustmentAFS (ST).................................

2,900

Record market value adjustment for securities


($234,800 - $231,900).

Exercise 15-6 (15 minutes)


Dec. 31

Market AdjustmentAFS (LT).......................................


12,078
Unrealized LossEquity.........................................
Unrealized GainEquity..........................................

6,927
5,151

Record market (fair) value of AFS securities.

Computation of Market Adjustment


12/31/2004
12/31/2005
Cost...............................
$79,483
$85,120
Market value..................
72,556
90,271
Gain (loss).....................
$ (6,927)
$ 5,151
Adjustment = $6,927 + $5,151 = $12,078
(recovery of unrealized loss &
recording of unrealized gain)

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Exercise 15-7 (30 minutes)


2003
Dec. 31

Unrealized LossEquity...............................................
11,440
Market AdjustmentAFS (LT)....................................

11,440

Record market value of securities


($374,000 - $362,560).

2004
Dec. 31

Market AdjustmentAFS (LT)*.....................................


37,740
Unrealized LossEquity.........................................
Unrealized GainEquity..........................................

11,440
26,300

Record market value of securities.


* $453,200 - $426,900 = $26,300 net gain
($11,440 prior loss + $37,740 current period gain).

2005
Dec. 31

Market AdjustmentAFS (LT)*.....................................


79,450
Unrealized GainEquity..........................................

79,450

Record market value of securities.


* $686,450 - $580,700 = $105,750 net gain
($26,300 prior gain +$79,450 current period gain).

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).

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Exercise 15-8 (15 minutes)


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 Carrollton 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 Flockhart stock is marketable and is held as an investment of
cash available for operations, it is a current asset.

Market Adjustment entry at Dec. 31, 2005


Dec. 31 Market AdjustmentAFS (LT).......................................
11,575
Unrealized Gain Equity.........................................

11,575

Record market value of securities ($265,050 - $276,625).

Long-term AFS securities


Cost
Market Value
Carrollton common stock..........................
$169,750
$183,000
Newtech common stock............................
95,300
93,625
Total.............................................................
$265,050
$276,625

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Exercise 15-9 (30 minutes)


2005

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

Record receipt of cash dividend (30,000 x $3.10).

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

Rounded to nearest dollar.

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Exercise 15-10 (15 minutes)


2005 return on total assets
$36,400
($190,000 + $320,000)/2

2006 return on total assets


= 14.3%

$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

Cash (17,000 x $1.5156).................................................


25,765
Accounts Receivable Bronson Ltd......................
Foreign Exchange Gain*..........................................
Record cash receipt on account.
*Year-end measure = (17,000 x $1.4990)
Final measure = (17,000 x $1.5156)
Gain for the period

25,905

24,483
282

$25,483
25,765
$ 282

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Exercise 15-12A (25 minutes)


Quarter ended June 30, 2005
May 8 recorded amount (800,000 x $0.1984)......................
June 30 balance sheet amount (800,000 x $0.2013)...........
Unrealized gain reported on income statement ................

$158,720
161,040
$ 2,320

Quarter ended September 30, 2005


June 30 balance sheet amount............................................
Sept. 30 balance sheet amount (800,000 x $0.2029)..........
Unrealized gain reported on income statement.................

$161,040
162,320
$ 1,280

Quarter ended December 31, 2005


Sept. 30 balance sheet amount............................................
Dec. 31 balance sheet amount (800,000 x $0.1996)...........
Unrealized loss reported on income statement.................

$162,320
159,680
$ 2,640

Quarter ended March 31, 2006


Dec. 31 balance sheet amount ............................................
Feb. 10, 2003, amount received (800,000 x $0.2047) .........
Unrealized gain reported on income statement.................

$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).

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PROBLEM SET A
Problem 15-1A (60 minutes)
Part 1
2005
Jan. 20 Short-Term InvestmentsTrading (Ford).................
Cash................................................................

32,525
32,525

Purchased Ford Motor Co.


shares [(900 x $36.00) + $125].

Feb. 9 Short-Term InvestmentsTrading (Lucent).......


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

44,200
44,200

Purchased Lucent shares


[(4,400 x $10) + $200].

Oct. 12 Short-Term InvestmentsTrading (Z-Seven)......


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

4,100
4,100

Purchased Z-Seven shares


[(500 x $8) + $100].

2006
Apr. 15 Cash......................................................................
Gain on Sale of Short-Term Investments.....
Short-Term InvestmentsTrading (Ford)......

34,915
2,390
32,525

Sold Ford Motor shares


[(900 x $39.00) - $185].

July 5 Cash......................................................................
Gain on Sale of Short-Term Investments.....
Short-Term InvestmentsTrading (Z-Seven).....

5,025
925
4,100

Sold Z-Seven shares [(500 x $10.25) - $100].

22 Short-Term InvestmentsTrading (Hunt)............


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

24,225
24,225

Purchased Hunt shares


[(800 x $30.00) + $225].

Aug. 19 Short-Term InvestmentsTrading (D.Karan).......


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

12,100
12,100

Purchased Donna Karan shares


[(1,000 x $12) + $100].

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Problem 15-1A (Concluded)


2007
Feb. 27 Short-Term InvestmentsTrading (HCA).................
Cash................................................................

75,020
75,020

Purchased HCA shares


[(3,400 x $22.00) + $220].

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

Sold Lucent shares [(4,400 x $8.00) - $180].

30 Short-Term InvestmentsTrading (B&D)............


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

47,695
47,695

Purchased Black & Decker shares


[(1,000 x $47.50) + $195].

Nov. 1 Cash......................................................................
Gain on Sale of Short-Term Investments.....
Short-Term InvestmentsTrading (D.Karan).....

21,792
9,692
12,100

Sold Donna Karan shares


[(1,000 x $22) - $208].

Part 2 (Adjusting entry at Dec. 31, 2007)


Dec. 31 Market AdjustmentTrading*.....................................
Unrealized GainIncome.....................................
To reflect an unrealized gain in market
values of trading securities.

2,385
2,385

* Market adjustment computations

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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

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Solutions Manual, Chapter 15

141

Problem 15-2A (40 minutes)


Part 1

2005
Apr. 16 Short-Term InvestmentsAFS (Gem)..........................
194,360
Cash

194,360

Purchased 8,000 shares of Gem


[(8,000 x $24.25) + $360].

May. 1 Short-Term InvestmentsAFS (T-bills).......................


200,000
Cash.........................................................................

200,000

Purchased U.S. Treasury bills.

July 7 Short-Term InvestmentsAFS (Pepsi)........................


197,350
Cash.........................................................................

197,350

Purchased 4,000 shares of PepsiCo


[(4,000 x $49.25) + $350].

20 Short-Term InvestmentsAFS (Xerox)........................


33,910
Cash.........................................................................

33,910

Purchased 2,000 shares of Xerox


[(2,000 x $16.75) + $410].

Aug. 3 Cash...............................................................................
203,000
Short-Term InvestmentsAFS (T-bills).................
Interest Revenue............................................................

200,000
3,000

Proceeds of U.S. Treasury bills


($200,000 x .06 x 3/12).

15 Cash
6,800
Dividend Revenue..................................................

6,800

Received dividends on Gem (8,000 x $0.85).

28 Cash*
119,550
Short-Term InvestmentsAFS (Gem)**.................
Gain on Sale of Short-Term Investments.............

97,180
22,370

Sold 4,000 shares of Gem.


*(4,000 x $30) - $450 **($194,360 x 4,000/8,000)

Oct. 1 Cash
7,600
Dividend Revenue............................................

7,600

Received dividends on PepsiCo (4,000 x$1.90).

Dec. 15 Cash......................................................................... 4,200


Dividend Revenue............................................

4,200

Received dividends on Gem (4,000 x $1.05).


McGraw-Hill Companies, Inc., 2005
142

Fundamental Accounting Principles, 17th Edition

31 Cash......................................................................... 5,200
Dividend Revenue............................................

5,200

Received dividends on PepsiCo (4,000 x$1.30).

McGraw-Hill Companies, Inc., 2005


Solutions Manual, Chapter 15

143

Problem 15-2A (Continued)


Part 2
Comparison of Cost and Market Values for AFS Portfolio

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

Dec. 31 Unrealized Loss Equity................................................. 8,940


Market AdjustmentAFS (ST)............................

8,940

To reflect an unrealized loss in market values of


available-for-sale securities.

Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $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)

Equity section of Balance sheet


(i) Subtraction from equity due to the Unrealized Loss, $8,940
(ii) Increase to equity from the $49,170 increase in income
(iii) Net effect on equity is $40,230

McGraw-Hill Companies, Inc., 2005


144

Fundamental Accounting Principles, 17th Edition

Problem 15-3A (50 minutes)


Part 1
2005
Jan. 20

Long-Term InvestmentsAFS (J&J)..............................


17,465
Cash...........................................................................

17,465

Purchased Johnson & Johnson


shares [(900 x $18.75) + $590].

Feb.

Long-Term InvestmentsAFS (Sony).............................


105,714
Cash...........................................................................
105,714
Purchased Sony shares
[(2,200 x $46.88) + $2,578].

June 12

Long-Term InvestmentsAFS (Mattel).....................................


28,582
Cash..................................................................................... 28,582
Purchased Mattel shares
[(500 x $55.50) + $832].

Dec. 31

18,994
Unrealized Loss Equity...............................................
Market AdjustmentAFS (LT)*..................................

18,994

Annual adjustment to market values.


*
Cost
J&J
$ 17,465
Sony................... 105,714
Mattel.................
28,582
Total................... $151,761

Market
$ 18,342
85,800
28,625
$132,767

J & J: 900 x $20.38 = $18,342


Sony: 2,200 x $39.00 = $85,800
Mattel: 500 x $57.25 = $28,625

Mkt. Adj.: $151,761 - $132,767 = $18,994

McGraw-Hill Companies, Inc., 2005


Solutions Manual, Chapter 15

145

Problem 15-3A (Continued)


2006
Apr. 15

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

Long-Term InvestmentsAFS (Sara Lee)..................................


59,740
Cash..................................................................................... 59,740
Purchased Sara Lee shares
[(1,600 x $36.25) + $1,740].

Aug. 19

Long-Term InvestmentsAFS (Eastman Kodak)........................


51,660
Cash..................................................................................... 51,660
Purchased Eastman Kodak shares
[(1,800 x $28.00) + $1,260].

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.

McGraw-Hill Companies, Inc., 2005


146

Fundamental Accounting Principles, 17th Edition

Problem 15-3A (Continued)


2007
Feb. 27

Long-Term InvestmentsAFS (Microsoft).................................


81,948
Cash .................................................................................... 81,948
Purchased Microsoft shares
[(3,400 x $23.63) + $1,606].

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

Long-Term InvestmentsAFS (Black & Decker).........................


58,995
Cash .................................................................................... 58,995
Purchased Black & Decker shares
[(1,200 x $47.50) + $1,995].

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 AdjustmentAFS (LT)*.................................................


53,721
Unrealized LossEquity................................................... 31,664
Unrealized GainEquity.................................................... 22,057
Annual adjustment to market values.
*
Cost
Black & Decker.................. $ 58,995
Microsoft............................
81,948
Total.................................... $140,943

Market
$ 67,800
95,200
$163,000

Black & Decker: 1,200 x $56.50 = $67,800


Microsoft:
3,400 x $28.00 = $95,200
$163,000 - $140,943 = $22,057 (market exceeds cost)
Market Adjustment account:
Required balance............ $22,057 Dr.
McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 15

147

Unadjusted balance......... 31,664 Cr.


Required change............ $53,721 Dr.

McGraw-Hill Companies, Inc., 2005


148

Fundamental Accounting Principles, 17th Edition

Problem 15-3A (Concluded)


Part 2
12/31/2005 12/31/2006 12/31/2007
Long-Term AFS Securities (cost)....................$151,761

Market Adjustment..................................... (18,994)


Long-Term AFS Securities (market)...............$132,767

$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)

Unrealized gains (losses) at year-end*.... $(18,994)

$(31,664)

$ 22,057

* Equals the balance of the Market Adjustment account.

McGraw-Hill Companies, Inc., 2005


Solutions Manual, Chapter 15

149

Problem 15-4A (40 minutes)


Part 1
Available-for-sale securities on December 31, 2005
Security
Cost
7,000 shares of Company B common stock..............
$ 159,375
35,000 shares of Company C common stock..............
1,325,500
9,000 shares of Company X common stock.............. 256,625
17,000 shares of Company Z common stock.............. 540,700
$2,282,200

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..

* December 31, 2004, available-for-sale securities


Cost
Market Value
$1,070,600
$ 980,000
318,750
308,000
1,325,500
1,281,875
$2,714,850
$2,569,875
December 31, 2005, adjustment to the Market Adjustment account:
$2,714,850 - $2,569,875 = $144,975 Cr. balance on Dec. 31, 2004
$2,282,200 - $2,177,225 = 104,975 Cr. balance required on Dec. 31, 2005
$ 40,000 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 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

Fundamental Accounting Principles, 17th Edition

80,000 shares of Company A stock..........1,070,600


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

1,025,900

(44,700)
$(48,800)

McGraw-Hill Companies, Inc., 2005


Solutions Manual, Chapter 15

151

Problem 15-5A (30 minutes)


Part 1
1. Journal entries (assuming significant influence)
2005
Jan. 5 Long-Term InvestmentsKildaire..............................................
780,000
Cash..................................................................................... 780,000
Purchased Kildaire shares.

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

McGraw-Hill Companies, Inc., 2005


152

Fundamental Accounting Principles, 17th Edition

Problem 15-5A (Continued)


2. Carrying value per share, January 1, 2007 (see computations in part 1)
$957,000 / 30,000 shares = $31.90
3. Change in Pillar's equity due to stock investment
Earnings from Kildaire (2005).......................................
$116,400
Earnings from Kildaire (2006).......................................
147,600
Loss on sale of investments.........................................
(10,000)
Net increase....................................................................
$254,000

Part 2
1. Journal entries (assuming NO significant influence)
2005
Jan. 5

Long-Term InvestmentsAFS (Kildaire)...................................


780,000
Cash..................................................................................... 780,000
Purchased Kildaire shares.

Oct. 23

Cash...........................................................................................
48,000
Dividend Revenue.............................................................. 48,000
Received cash dividend (30,000 x $1.60).

Dec. 31

Market AdjustmentAFS (LT)*...............................................


52,500
Unrealized GainEquity.................................................... 52,500
Record market adjustment.
*30,000 x $27.75 = $832,500
$832,500 - $780,000 = $52,500

2006
Oct. 15

Cash...........................................................................................
39,000
Dividend Revenue.............................................................. 39,000
Received cash dividends (30,000 x $1.30).

Dec. 31

Market AdjustmentAFS (LT)*...............................................


81,000
Unrealized GainEquity.................................................... 81,000
Record market adjustment.
*30,000 x $30.45 = $913,500
$913,500 - $780,000 = $133,500
$133,500 - $52,500 = $81,000

McGraw-Hill Companies, Inc., 2005


Solutions Manual, Chapter 15

153

Problem 15-5A (Concluded)


2007
Jan. 2

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).

2. Investment cost per share, January 1, 2007 (see computations in part 1)


$780,000 / 30,000 shares = $26
3. Change in Pillar's equity due to stock investment
Dividend Revenue (2005)............................... $ 48,000
Dividend Revenue (2006)...............................
39,000
Gain on sale of investments..........................
167,000
Net increase..................................................... $254,000

McGraw-Hill Companies, Inc., 2005


154

Fundamental Accounting Principles, 17th Edition

Problem 15-6AA (60 minutes)


Part 1
2005
Apr. 8 Cash...........................................................................................
7,938
Sales....................................................................................

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

Foreign Exchange Loss*.........................................................


76
Accounts Receivable Hamid Albar................................
*Original measure = (17,000 x $0.6852)
Year-end measure = (17,000 x $0.6807)
Loss for the period .................

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

Solutions Manual, Chapter 15

155

Problem 15-6AA (Continued)


Part 2
Foreign exchange loss reported on the 2005 income statement
November 18........................................
December 31........................................
December 31........................................
Total

$(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.

McGraw-Hill Companies, Inc., 2005


156

Fundamental Accounting Principles, 17th Edition

PROBLEM SET B
Problem 15-1B (60 minutes)
Part 1

2005
Mar. 10 Short-Term InvestmentsTrading (AOL)..............
Cash..............................................................

71,753
71,753

Purchased AOL shares


[(1,200 x $59.15) + $773].

May 7 Short-Term InvestmentsTrading (MTV)..........


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

92,053
92,053

Purchased MTV shares


[(2,500 x $36.25) + $1,428].

Sept. 1 Short-Term InvestmentsTrading (UPS)..........


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

34,975
34,975

Purchased UPS shares


[(600 x $57.25) + $625].

2006
Apr. 26 Cash....................................................................
Loss on Sale of Short-Term Investments........
Short-Term InvestmentsTrading (MTV)....

85,225
6,828
92,053

Sold MTV shares [(2,500 x $34.50) - $1,025].

27 Cash....................................................................
Gain on Sale of Short-Term Investments. .
Short-Term InvestmentsTrading (UPS)....

35,406
431
34,975

Sold UPS shares [(600 x $60.50) - $894].

June 2 Short-Term InvestmentsTrading (SPW).............. 311,225


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

311,225

Purchased SPW shares


[(1,800 x $172.00) + $1,625].

14 Short-Term InvestmentsTrading (W-M)..........


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

23,154
23,154

Purchased Wal-Mart shares


[(450 x $50.25) + $541.50].

McGraw-Hill Companies, Inc., 2005


Solutions Manual, Chapter 15

157

Problem 15-1B (Concluded)


2007
Jan. 28 Short-Term InvestmentsTrading (Pepsi)......... 44,445
Cash...............................................................

44,445

Purchased PepsiCo shares [(1,000 x


$43.00) + $1,445].

31 Cash..................................................................... 301,380
Loss on Sale of Short-Term Investments......... 9,845
Short-Term InvestmentsTrading (SPW).......

311,225

Sold SPW shares [(1,800 x $168) - $1,020].

Aug. 22 Cash..................................................................... 66,860


Loss on Sale of S-T Investments...................... 4,893
Short-Term InvestmentsTrading (AOL).......

71,753

Sold AOL shares [(1,200 x $56.75) - $1,240].

Sept. 3 Short-Term InvestmentsTrading (Voda).......... 31,215


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

31,215

Purchased Vodaphone shares


[(750 x $40.50) + $840].

Oct. 9 Cash..................................................................... 23,577


423
23,154

Gain on Sale of Short-Term Investments..........


Short-Term InvestmentsTrading (W-M)..........
Sold Wal-Mart shares
[(450 x $53.75) - $610.50].

Part 2 (Adjusting entry at Dec. 31, 2007)


Dec. 31 Unrealized LossIncome.......................................
Market AdjustmentTrading*....................

6,910
6,910

To reflect an unrealized loss in market


values of trading securities.
* Market adjustment computations

McGraw-Hill Companies, Inc., 2005


158

Fundamental Accounting Principles, 17th Edition

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)

McGraw-Hill Companies, Inc., 2005


Solutions Manual, Chapter 15

159

Problem 15-2B (40 minutes)


Part 1

Feb. 6 Short-Term InvestmentsAFS (Nokia)............


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

71,625
71,625

Purchased 1,700 shares of Nokia


[(1,700 x $41.25) + $1,500].

15 Short-Term InvestmentsAFS (T-bills)...........


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

10,000
10,000

Purchased U.S. Treasury bills.

Apr. 7 Short-Term InvestmentsAFS (Dell)...............


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

24,327
24,327

Purchased 600 shares of Dell


[(600 x $39.50) + $627].

June 2 Short-Term InvestmentsAFS (Merck)...........


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

92,570
92,570

Purchased 1,250 shares of Merck


[(1,250 x $72.50) + $1,945].

30 Cash

Dividend Revenue.........................................

323
323

Received dividends on Nokia stock


(1,700 x $0.19).

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

19,025
1,119
17,906

Sold 425 shares of Nokia. (rounded)


* [(425 x $46.00) - $525] **($71,625 x 425/1,700)

16 Cash...................................................................
Short-Term InvestmentsAFS (T-bills).........
Interest Revenue*..........................................

10,300
10,000
300

Proceeds of U.S. Treasury bills.


*($10,000 x .06 x 6/12)

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

60
60

Received dividends on Dell stock


(600 x $0.10).

Nov. 9 Cash

Dividend Revenue.........................................

255
255

Received dividends on Nokia stock


(1,275 x $0.20).
McGraw-Hill Companies, Inc., 2005
160

Fundamental Accounting Principles, 17th Edition

Dec. 18 Cash

90

Dividend Revenue.........................................

90

Received dividends on Dell stock


(600 x $0.15).

Problem 15-2B (Concluded)


Part 2
Comparison of Cost and Market Values of AFS Portfolio

(1,275 x $41.25) + $1,125a...................


1,275 x $40.25 (rounded).........
( 600 x $39.50) + $627b............
600 x $41.00...........................
(1,250 x $72.50) + $1,945c...................
1,250 x $59.00...........................

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

Dec. 31 Unrealized LossEquity.............................................


Market AdjustmentAFS (ST).........................

20,947
20,947

To reflect an unrealized loss in market values of


available-for-sale securities.

Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $ 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)

Equity section of Balance sheet


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(i) Subtraction from equity of Unrealized LossEquity, $20,947


(ii) Increase to equity from the $2,147 increase in income
(iii) Net effect on equity is a decrease of $18,800

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Fundamental Accounting Principles, 17th Edition

Problem 15-3B (60 minutes)


Part 1
2005
Mar. 10

Long-Term InvestmentsAFS (Apple)....................................


81,795
Cash..................................................................................... 81,795
Purchased Apple shares
[(2,400 x $33.25) + $1,995].

May 7

Long-Term InvestmentsAFS (Ford)......................................


90,125
Cash..................................................................................... 90,125
Purchased Ford shares
[(5,000 x $17.50) + $2,625].

Sept. 1

Long-Term InvestmentsAFS (Polaroid)................................


59,976
Cash..................................................................................... 59,976
Purchased Polaroid shares
[(1,200 x $49.00) + $1,176].

Dec. 31

Market AdjustmentAFS (LT)*.................................................


404
Unrealized GainEquity.....................................................
Annual adjustment to fair values.
*
Apple...........
Ford.............
Polaroid.......
Total.............

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

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163

Problem 15-3B (Continued)


2006
Apr. 26

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

Long-Term InvestmentsAFS (Duracell).................................


70,280
Cash..................................................................................... 70,280
Purchased Duracell shares
[(3,600 x $18.88) + $2,312].

June 14

Long-Term InvestmentsAFS (Sears).....................................


22,591
Cash .................................................................................... 22,591
Purchased Sears shares
[(900 x $24.50) + $541].

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.
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164

Fundamental Accounting Principles, 17th Edition

Problem 15-3B (Continued)


2007
Jan. 28 Long-Term InvestmentsAFS (Coca-Cola).............................
85,280
Cash .................................................................................... 85,280
Purchased Coca-Cola shares
[(2,000 x $41.00) + $3,280].
Aug. 22

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

Long-Term InvestmentsAFS (Motorola)................................


44,370
Cash..................................................................................... 44,370
Purchased Motorola shares
[(1,500 x $29) + $870].

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

2,000 x $46.00 = $92,000


1,500 x $22.00 = $33,000

$129,650 - $125,000 = $4,650


Market Adjustment account:
Required balance...... $4,650 Cr.
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165

Unadjusted balance. . 1,266 Cr.


Required change....... $3,384 Cr.

Problem 15-3B (Concluded)


Part 2
12/31/2005
Long-Term AFS Securities (cost)................ $231,896

Market Adjustment.................................

404

Long-Term AFS Securities (market)........... $232,300

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)

Unrealized gains (losses) at year-end. . .

$404

$ (1,266)

$ (4,650)

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Fundamental Accounting Principles, 17th Edition

Problem 15-4B (40 minutes)


Part 1
Available-for-sale securities on December 31, 2005
Security
Cost
Market Value
45,000 shares of Company R common stock.............
$1,118,250
$1,136,250
12,750 shares of Company S common stock............. 462,570
420,750
85,000 shares of Company V common stock............. 272,250
269,875
10,000 shares of Company X common stock............. 99,840
91,250
$1,952,910
$1,918,125
Disclosure
The portfolio of available-for-sale securities would be reported on the
December 31, 2005, balance sheet at its fair market value of $1,918,125.
Part 2
Dec. 31

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

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167

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

$ 1,550

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168

Fundamental Accounting Principles, 17th Edition

Problem 15-5B (50 minutes)


Part 1
1. Journal entries (assuming significant influence)
2005
Jan. 5
Long-Term InvestmentsBloch.............................................
187,500
Cash.....................................................................................187,500
Purchased Bloch shares.
Aug. 1

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

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169

Problem 15-5B (Continued)


2. Carrying value per share (see computations in part 1)
$196,500 / 15,000 shares = $13.10
3. Change in Bengal's equity
Earnings from Bloch-2005...................................$23,000
Earnings from Bloch-2006................................... 19,000
Gain on sale of investments................................ 8,250
Net increase..........................................................$50,250
Part 2
1. Journal entries (assuming NO significant influence)
2005
Jan. 5

Long-Term InvestmentsAFS (Bloch)...................................


187,500
Cash.....................................................................................187,500
Purchased Bloch shares.

Aug. 1

Cash...........................................................................................
14,250
Dividend Revenue.............................................................. 14,250
Received cash dividend (15,000 x $0.95).

Dec. 31

Market AdjustmentAFS (LT)*...............................................


6,000
Unrealized GainEquity....................................................
Record market adjustment.

6,000

*15,000 x $12.90 = $193,500


$193,500 - $187,500 = $6,000

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Fundamental Accounting Principles, 17th Edition

Problem 15-5B (Concluded)


2006
Aug. 1 Cash...........................................................................................
18,750
Dividend Revenue.............................................................. 18,750
Received cash dividends (15,000 x
$1.25).
Dec. 31

Market AdjustmentAFS (LT)*...............................................


9,750
Unrealized GainEquity....................................................
Record market adjustment.

9,750

*15,000 x $13.55 = $203,250


$203,250 - $187,500 = $15,750
$15,750 - $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

2. Investment cost per share, January 7, 2007


$187,500 / 15,000 shares = $12.50
3. Change in Bengal's equity
Dividend Revenue-2005....................................... $14,250
Dividend Revenue-2006....................................... 18,750
Gain on sale of investments............................... 17,250
Net increase.......................................................... $50,250

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171

Problem 15-6BA (60 minutes)


Part 1
2005
May 26 Accounts ReceivableFuji.....................................................
61,100
Sales.................................................................................... 61,100
(6,500,000 x $0.0094)

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

Accounts ReceivableMartinez Brothers.............................


49,982
Sales.................................................................................... 49,982
(373,000 x $0.1340)

Dec. 6

Accounts ReceivableChi-Ying.............................................
47,795
Sales.................................................................................... 47,795
(242,000 x $0.1975)

Dec. 31

Accounts Receivable--Martinez Brothers..............................


8,206
Foreign Exchange Gain*....................................................

8,206

*Original measure = (373,000 x $0.1340) = $49,982


Year-end measure = (373,000 x $0.1560) = 58,188
Gain for the period ................ = $ 8,206

Dec. 31

Accounts ReceivableChi-Ying.............................................
605
Foreign Exchange Gain*....................................................

605

*Original measure = (242,000 x $0.1975) = $47,795


Year-end measure = (242,000 x $0.2000) = 48,400
Gain for the period ................ = $ 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
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Fundamental Accounting Principles, 17th Edition

Accounts ReceivableMartinez Bros**............................. 58,188


* (373,000 x $0.1420) ** ($49,982 + $8,206)

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173

Problem 15-6BA (Concluded)


Part 2
Foreign exchange gain reported on 2005 income statement
July 25.................................................... $(2,600)
December 31.......................................... 8,206
December 31..........................................
605
Total........................................................ $ 6,211

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.

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Fundamental Accounting Principles, 17th Edition

Serial Problem
Serial Problem, Success Systems (35 minutes)
Part 1
2005
April 16 Short-Term InvestmentsTrading (J&J)...............
Cash..............................................................

11,240
11,240

Purchased Johnson & Johnson shares


[(200 x $55) + $240].

30 Short-Term InvestmentsTrading (Starbucks)....


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

2,520
2,520

Purchased Starbucks shares


[(100 x $24) + $120].

Part 2

Adjusting entry at June 30, 2005

June 30 Market AdjustmentTrading*..............................


Unrealized GainIncome...............................

340
340

To reflect an unrealized gain in market values


of trading securities.
* Market adjustment computations
Trading securities
Share Price Market
portfolio
Shares
a
t

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

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Solutions Manual, Chapter 15

175

Reporting in Action

BTN 15-1

1. Yes, Krispy Kremes financial statements are consolidated. The


statements are labeled as consolidated in all the financial statement
headings.
2. Krispy Kremes comprehensive loss for the year ended February 2,
2003, is $1,942,000. The comprehensive loss amount is reported on
Krispy Kremes consolidated statement of shareholders equity.
3. Yes. Its consolidated statement of shareholders' equity includes a
Foreign Currency Translation Adjustment column.
4. The return on total assets for the year ended February 2, 2003, ($
thousands) follows
$33,478 / [($410,487 + $255,376) / 2] = 10.06%
5. Answer depends on the annual report information obtained.

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176

Fundamental Accounting Principles, 17th Edition

Comparative Analysis

BTN 15-2

1. Krispy Kremes return on total assets


Current Year: $33,478 / [($410,487 + $255,376)/2] = 10.1%
One Year Prior: $26,378/ [($255,376 + $171,493)/2] = 12.4%
Tastykakes return on total assets
Current Year: $2,000 / [($116,560 +116,137)/ 2] = 1.7%
One Year Prior: $6,320/ [($116,137 + $112,192)/2)] = 5.5%
2. Return on total assets = Profit margin x Total asset turnover
Krispy Kremes component analysis of return on total assets*
Current Year
10.1% = $33,478/$491,549 x $491,549/[($410,897 + $255,376)/2]
10.1% =
6.8%
x
1.48
One Year Prior
12.4% = $26,378/$394,354 x $394,354/[($255,376 + $171,493)/2]
12.4% =
6.7%
x
1.85
*(Some difference due to rounding).

Tastykakes component analysis of total return on assets


Current Year
1.7% = $2,000/$162,263 x $162,263/[($116,560 + $116,137)/2]
1.7% =
1.2%
x
1.39
One Year Prior
5.5% = $6,320/$166,245 x $166,245/[($116,137 + $112,192)/2]
5.5% =
3.8%
x
1.46
3. Current Year Analysis: Krispy Kreme has a higher return on total
assets versus Tastykake (10.1% vs. 1.7%), a higher profit margin (6.8%
vs. 1.2%), and a higher total asset turnover (1.48 vs. 1.39).
One Year Prior Analysis: Krispy Kreme has a higher return on total
assets versus Tastykake (12.4% vs. 5.5%), a higher profit margin (6.7%
vs. 3.8%), and a higher total asset turnover (1.85 vs. 1.46).
This comparative analysis shows that Tastykake must improve on both
components; but it especially must increase its profit margin.

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Solutions Manual, Chapter 15

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.

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178

Fundamental Accounting Principles, 17th Edition

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.

Taking It to the Net

BTN 15-5

($ millions for Parts 1 through 4)

1. At June 30, 2002.................................$38,652


At June 30, 2001.................................$31,600
2. Commercial paper; U.S. government and agency securities; Corporate
notes and bonds; Municipal securities; and Certificates of Deposit.
3. Gains = $816; and Losses = $(558).
4. Market value is greater. Specifically: Cost is $38,451; and Market Value
is $38,652.

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Solutions Manual, Chapter 15

179

Teamwork in Action

BTN 15-6

There is no specific solution to this activity. The instructor should serve as


a facilitator during this learning reinforcement activity.

Business Week Activity

BTN 15-7

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.

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180

Fundamental Accounting Principles, 17th Edition

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.

2. Any unrealized gains or losses on the available-for-sale securities will


not affect Iglesias Companys income statement. Unrealized gains or
losses on AFS securities are reported in the equity section of the
balance sheet, as part of other comprehensive income.
3.
Email Composition

To:
From:
Re:

Gloria Perez
Ralph Cruzs assistant
Comparing long-term stock investments to CDs

There are several possible advantages to investing in long-term stock


investments in comparison to CDs. You can better control the timing of cash
investments in stocks. That is, you can sell the stocks at any time per your
discretion at typically lower costs that you can with CDs. In the case of CDs,
the bank fixes the length of the investment. Your investment in long-term
stocks gives you opportunity to earn returns (substantially) in excess of the
rates of returns on the CDs.
There are also potential disadvantages of investing in long-term stock vis-vis CDs. Stock investments absorb trading costs. Stock investments also
can decline in market value over timeindeed, they potentially could lose
their entire value. More generally, the decision to invest in long-term stock
vis--vis CDs is the classic investment decision involving the trade-off
between return and risk (higher expected returns carry higher risk).

McGraw-Hill Companies, Inc., 2005


Solutions Manual, Chapter 15

181

Hitting the Road BTN

15-9A

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.

15-10

Grupo Bimbo (millions of pesos)


Return on total assets = Net Income / Average Total Assets
Current Year: 1,002.7 / [(31,718.6 + 23,781.3)/2] = 3.6%
Prior Year:

1,682.0 / [(23,781.3 + 25,035.1)/2] = 6.9%

Return on total assets = Profit margin x Total asset turnover


Current Year
3.6%
3.6%

= 1,002.7/41,373.3 x 41,373.3/[(31,718.6 + 23,781.3)/2]


=
2.4%
x 1.49

One Year Prior


6.9%
6.9%

= 1,682.0/34,968.1 x 34,968.1/[(23,781.3 + 25,035.1)/2]


=
4.8%
x 1.43

2. Current Year Analysis: Krispy Kreme has a higher return on total


assets (10.1% vs. 3.6% and 1.7%), and higher profit margin (6.8% vs.
2.4% and 1.2%). However, Grupo Bimbo has a slightly higher total asset
turnover (1.49 vs. 1.48 and 1.39).
One Year Prior Analysis: Krispy Kreme has a higher return on total
assets (12.4% vs. 6.9% and 5.5%), higher profit margin (6.7% vs. 4.8%
and 3.8%), and higher total asset turnover (1.85 vs. 1.46 and 1.43).
Overall, Krispy Kreme is the superior performer. Both Grupo Bimbo
and Tastykake should focus on improving a lower than normal profit
margin.
McGraw-Hill Companies, Inc., 2005
182

Fundamental Accounting Principles, 17th Edition