Chap 015

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.
McGraw-Hill Companies, Inc., 2005

Solutions Manual, Chapter 15
123
9. Unrealized holding gains and losses are not reported on the standard income
statement for available-for-sale securities. Unrealized gains and losses for these
securities are reported in the stockholders equity section of the balance sheet.
(They can also be reported either in a separate comprehensive income statement or
in a combined statement of comprehensive income.)
10. The equity method is used when the investor has a significant influence over the
investee corporation; i.e., generally when the investor owns 20% or more of the
investee's voting stock. The equity method with consolidation is used when the
investor has a controlling influence over the investee.
11. A company prepares consolidated statements if the company has control over a
subsidiary as a result of owning more than 50% of the subsidiary's voting stock.
12A. Two major challenges in accounting for international operations include (1)
accounting for sales and purchases that are denominated in a foreign currency, and
(2) preparing consolidated financial statements with a foreign subsidiary.
13A. If the foreign exchange rate falls from $1.40 to $1.30 during the time the U.S.
company holds a receivable that is denominated in the foreign currency, the U.S.
company will incur an exchange loss. The foreign currency unit is worth $1.40 at the
time of sale but is worth only $1.30 at the time it is paid to the U.S. company; hence,
a loss of $0.10 is incurred for each foreign currency unit owed to the U.S. company.
14A. No. If a sales agreement requires a foreign customer to pay U.S. dollars to the United
States seller, the U.S. company is not exposed to the risk of exchange losses or
gains.
15. Krispy Kreme reports Accumulated other comprehensive income for February 2,
2003, which is a comprehensive loss of $1,486,000. On February 3, 2002, Krispy
Kreme had comprehensive income of $456,000.
16. Tastykakes financial statements, including its balance sheet, are all labeled as being
consolidated statements.
17. Harley-Davidsons return on total assets as of December 31, 2002, is ($ thousands):
$580,217/ [($3,861,217 +3,118,495)/2] = 16.6%
QUICK STUDIES
Quick Study 15-1 (10 minutes)
[Note: This actively managed (for profit) short-term investment in equity securities would
be classified as Trading Securities.]
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.

124
Fundamental Accounting Principles, 17th Edition

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)

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.

125

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*

True: c, e, f, g,

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

126

July 31
Cash.................................................................................900
Interest Revenue......................................................
900
Record interest earned ($30,000 x 6% x 6/12).
Dec. 31
Interest Receivable.........................................................750
750
Record interest earned ($900 x 5/6).

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)

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%).

127

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.

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.

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.

128
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).

129
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).
130

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 )

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.

131

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
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
1,000
Received interest payment on 8% notes

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

132

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).

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)

133

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.........................................
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
79,450

* $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
* $875,500 - $778,800 = $96,700 net loss
($105,750 prior gain + $202,450 current period loss).

134

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

135

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.

136

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

137
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).

138
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......................................................................
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].

139
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......................................................................
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
2,385
2,385
* Market adjustment computations

140
Trading securities
portfoli
o
Shares
Share Price
a
t
Market
Cost
Unrealized
Gain (Loss)
1
2
/
3
1
/
0
7
HCA
3,400
Black and Decker..............
1,000
Totals
$24.00
$43.50
$ 81,600 $ 75,020
43,500
47,695
$125,100 $122,715
$ 6,580
(4,195)
$ 2,385

141

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
7,600
Received dividends on PepsiCo (4,000 x$1.90).
Dec. 15 Cash......................................................................... 4,200

4,200
Received dividends on Gem (4,000 x $1.05).

142
31 Cash......................................................................... 5,200
5,200
Received dividends on PepsiCo (4,000 x$1.30).

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

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

144

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

145

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
*
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.

146

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
*
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)
Required balance............ $22,057 Dr.
147
Unadjusted balance......... 31,664 Cr.

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

148

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.

149

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
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)
150
80,000 shares of Company A stock..........1,070,600

Realized gain (loss) ...................................
1,025,900
(44,700)
$(48,800)

151

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
($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
($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

152

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
Dec. 31
Market AdjustmentAFS (LT)*...............................................

52,500
Record market adjustment.
*30,000 x $27.75 = $832,500
$832,500 - $780,000 = $52,500
2006
Oct. 15
Cash...........................................................................................
39,000
Received cash dividends (30,000 x $1.30).
Dec. 31

81,000
*30,000 x $30.45 = $913,500
$913,500 - $780,000 = $133,500
$133,500 - $52,500 = $81,000

153

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

154
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 *...................................................
Gain for the period ...
Dec. 31
2006
Jan. 12
Jan. 19
= $28,844
= 28,947
= $ 103
Foreign Exchange Loss*.........................................................

76
Accounts Receivable Hamid Albar................................
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
61
Accounts Receivable Hamid Albar**............................. 11,572
*(17,000 x $0.6771) **($11,648 - $76)
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.

156
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].

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


158
Trading Securities
Share Price Market
Portfolio
Shares
a
t
Cost
1
2
/
3
1
/
0
7
PepsiCo
1,000
Vodaphone.......................
750
Totals
$41.00
$37.00
$41,000 $44,445
27,750 31,215
$68,750 $75,660
Unrealized
G
a
i
n
(
L
o
s
s
)
$(3,445)
(3,465)
$(6,910)

159

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...................................................................
60
60
Received dividends on Dell stock

(600 x $0.10).
Nov. 9 Cash
255
255
Received dividends on Nokia stock

(1,275 x $0.20).
160
Dec. 18 Cash
90
90
Received dividends on Dell stock

(600 x $0.15).

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

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

161
(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

162

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

163
Problem 15-3B (Continued)

2006
Apr. 26
Cash...........................................................................................
79,663
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)*...........................................
*
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
Required balance ..... $1,266 Cr.
Unadjusted balance..
404 Dr.
Required change ...... $1,670 Cr.
164

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

Required balance...... $4,650 Cr.
165
Unadjusted balance. . 1,266 Cr.

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

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)

166

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
58,745
Unrealized Gain Equity.........................................................
Market AdjustmentAFS (LT)*............................................ 93,530
*December 31, 2004, available-for-sale securities:
Cost
Market Value
$1,118,250
$1,198,125
616,760
586,500
294,470
303,600
$2,029,480
$2,088,225
December 31, 2005, adjustment to the Market Adjustment account:
$2,088,225 - $2,029,480 =$58,745 Dr. balance on Dec. 31, 2004
$1,952,910 - $1,918,125 = 34,785 Cr. balance required on Dec. 31, 2005
$93,530 Cr. to adjust cost to market value
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2005 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2005 realized gain (loss)
Stock Sold
Cost
4,250 shares of Company S stock.........$154,190
22,000 shares of Company T stock......... 294,470
Sale
$142,110
308,100
Gain (Loss)
$(12,080)
13,630

167
Realized gain (loss) ..................................
$ 1,550

168

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
Dec. 31
Long-Term InvestmentsBloch.............................................
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
Record equity in investees earnings
($76,000 x 25%).
Cash...........................................................................................
204,750
Long-Term InvestmentsBloch*......................................196,500
Sold Bloch shares.
*Investment carrying value at Jan. 7, 2007
Original cost...........................................$187,500
Less 2005 dividends.............................. (14,250)
Plus 2005 earnings................................ 23,000
Less 2006 dividends.............................. (18,750)
Plus 2006 earnings................................ 19,000
Carrying value at date of sale..............$196,500

169

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
Dec. 31

6,000
Unrealized GainEquity....................................................
6,000
*15,000 x $12.90 = $193,500

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

170

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

9,750
Unrealized GainEquity....................................................
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
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

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
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
5,222
172
Accounts ReceivableMartinez Bros**............................. 58,188

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

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.

174
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.
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

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.

176
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.

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.

178
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.

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.

180
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).

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.
182

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Chapter 15

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:

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

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

McGraw-Hill Companies, Inc., 2005

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

Purchased 500 shares at 45 plus $150 fee.

Received dividend of $1 per share.

Fundamental Accounting Principles, 17th Edition

Quick Study 15-2 (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 15-3 (10 minutes)

Purchased 100 shares at 25 plus $200 fee.

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

To record sale of available-for-sale securities.

McGraw-Hill Companies, Inc., 2005

Quick Study 15-4 (10 minutes)

Purchased 400 shares at $50 plus $400 fee.

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

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

To reflect an unrealized loss in market value of

Quick Study 15-5 (10 minutes)

Quick Study 15-6 (10 minutes)

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Quick Study 15-7 (10 minutes)

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

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

Quick Study 15-8 (10 minutes)

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

Record purchase of securities.

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

Quick Study 15-9 (10 minutes)

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

Record equity in investee earnings

McGraw-Hill Companies, Inc., 2005

Quick Study 15-10 (10 minutes)

Record change in value of securities.

Quick Study 15-11 (10 minutes)

Quick Study 15-12 (10 minutes)

x Total asset turnover

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

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Quick Study 15-13A (10 minutes)

Record credit sale in value of pounds (10,000

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

Quick Study 15-14A (10 minutes)

Record credit sale in value of ringgits (20,000

Cash received on account (20,000 ringgits x

McGraw-Hill Companies, Inc., 2005

Purchased 90-day, 8% debt securities.

Purchased 700 shares of stock for

Collected proceeds of debt securities

Purchased 6-month, 10% debt securities.

Received dividend on stock (700 x $1.00).

Received cash interest payment

Fundamental Accounting Principles, 17th Edition

Exercise 15-2 (20 minutes)