Chapter 8
Long-Term Investments &
the Time Value of Money
Ethics Check
(5-10 min.) EC 8-1
a. Due care
b. Objectivity and independence
c. Integrity
d. Integrity
Short Exercises
(5-10 min.) S 8-1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Jan.
1
Held-to-Maturity Investment in Bonds .........
10,000
Cash ..........................................................
10,000
July
1
Cash ($10,000 × .05 × 6/12) ...........................
250
Interest Revenue ......................................
250
(5-10 min.) S 8-2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Jan.
1
Held-to-Maturity Investment in Bonds
($100,000 × .90) .............................................
90,000
Cash ..........................................................
90,000
July
1
Cash ($100,000 × .055 × 6/12) .......................
2,750
Interest Revenue ......................................
2,750
(5-10 min.) S 8-3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
July
1
Held-to-Maturity Investment in Bonds
($100,000 – $90,000)/10 interest periods)....
1,000
Interest Revenue ......................................
1,000
Total interest revenue = $2,750 + $1,000 = $3,750
(5-10 min.) S 8-4
(5-10 min.) S 8-6
3. Interest Revenue will be less than the amount of cash interest
received because the investor purchased the bond at a premium.
4.
Cash interest received each year ..............................
$65,000
− Amortization Amortization
$1,339,000 − $1,300,000
=
(7,800)
5 years
= Annual interest revenue ............................................
$57,200
(10-15 min) S 8-8
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
a.
June
30
Held-to-Maturity Investment in Bonds
($1,300,000 × 1.03) ........................................
1,339,000
Cash ..........................................................
1,339,000
b.
Dec.
31
Cash ($1,300,000 × .05 × 6/12) ......................
32,500
Interest Revenue ......................................
32,500
c.
31
Interest Revenue ...........................................
3,900
Held-to-Maturity Investment in Bonds
[($1,339,000 – $1,300,000) / 5 × 6/12] ...........
3,900
2021
d.
June 30
Cash ...............................................................
1,300,000
Held-to-Maturity Investment in Bonds ....
1,300,000
(5-10 min) S 8-9
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Mar.
23
Investment in AFSS (1,000 × $81.34) ............
81,340
Cash ..........................................................
81,340
June
22
Cash (1,000 × $0.29) .......................................
290
Dividend Revenue ....................................
290
(5-10 min) S 8-10
(15-20 min.) S 8-12
Unrealized (loss) on investment in AFSS……………
(200)
(5-10 min.) S 8-13
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2017
May
21
Allowance to Adjust Investment in AFSS to
Market ........................................................
Unrealized Loss on Investment in AFSS
200
200
Cash (300 × $30) .......................................
9,000
Investment in AFSS ............................
6,000
Gain on Sale of Investment in AFSS ..
3,000
Req. 2
This gain on sale of investment is a realized gain. The loss recorded at
December 31, 2016, was unrealized because it resulted from a change in
the investment’s market value, not from the sale of the investment.
(10-15 min.) S 8-14
Req. 1
Equity method is appropriate because the investor (Eastern Motors)
(5 min.) S 8-15
2. Consolidated financial statements combine the balance sheets,
3. The parent company’s name appears on the consolidated financial
(10 min.) S 8-17
1. Goodwill is an intangible asset. Goodwill is the excess of the
purchase price to acquire a subsidiary company over the sum of the
2. Noncontrolling interest arises when a parent company owns less than
100% of a subsidiary’s stock. The noncontrolling interest represents
2. Purchase of investment (or acquisition of other companies)
Sale of investment (or sale of other companies)
(10 min.) S 8-19
DATE: Early in 2017
TO: The Ink Spot Company Stockholders
FROM: Chief Executive Officer
RE: Investing Activities During 2016
Ink Spot Company’s investing activities used more cash than the
previous year principally due to the increase in purchases of property,
(5-10 min.) S 8-20
2. $10,871.63 EXCEL formula = PV(1%,60,-150,-7500)
Exercises
(15-20 min.) E8-22A
Req. 1
Rentex, Inc., should use the amortized-cost method to account for the
long-term investment in bonds.
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Sept.
30
Held-to-Maturity Investment in Bonds
($30,000 × .97) ................................................
29,100
Cash ..........................................................
To purchase bond investment.
29,100
Dec.
31
Interest Receivable ($30,000 × .06 × 3/12) ......
450
Interest Revenue ......................................
To accrue interest revenue.
450
31
Held-to-Maturity Investment in Bonds
[($30,000 – $29,100) / 5 × 3/12) ......................
45
Interest Revenue ......................................
45
To amortize discount on bond investment.
Req. 3
Balance sheet (partial)
ASSETS
Current assets:
Interest receivable ...........................................................
$ 450
Long-term assets:
Held-to-maturity investment in bonds
($29,100 + $45) ................................................................
$29,145
(10-15 min.) E 8-23A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
a.
Investment in AFSS (400 × $35).......................
14,000
Cash .............................................................
14,000
b.
Cash (400 × $1.60) ............................................
640
Dividend Revenue .......................................
640
c.
Allowance to Adjust Investment in AFSS
to Market [400 × ($42 − $35)] ............................
2,800
Unrealized Gain on Investment in AFSS ....
2,800
d.
Unrealized Gain on Investment in AFSS .........
2,800
Allowance to Adjust Investment in AFSS
to Market ......................................................
2,800
Cash (400 × $25) ...............................................
10,000
Loss on Sale of Investment in AFSS ...............
4,000
Investment in AFSS ....................................
14,000
(15-25 min.) E 8-24A
Req. 1
Stock
Cost
Fair Value
Canada
(3,800 × $38.00)
=
$144,400
(3,800 × $29.125)
=
$110,675
Brazil
(640 × $47.25)
=
30,240
(640 × $49.25)
=
31,520
Russian
(1,500 × $77.00)
=
115,500
(1,500 × $69.50)
=
104,250
Total ............................................
$290,140
...............................
$246,445
Req. 2
Dec. 31
Unrealized Loss on Investments in
AFSS ($290,140 − $246,445)....................
43,695
Allowance to Adjust Investments
in AFSS to Market ...........................
43,695
Req. 3
Statement of Comprehensive Income (partial):
Other comprehensive income:
Unrealized (loss) on investments in AFSS ............
$(43,695)
Balance Sheet (partial):
ASSETS
Long-term assets:
Investments in AFFS ....................................................
$246,445
STOCKHOLDERS’ EQUITY
Accumulated other comprehensive income:
Unrealized (loss) on investments in AFSS ............
$(43,695)
(10-15 min.) E 8-25A
(10-15 min.) E 8-26A
(15-20 min.) E 8-27A
(20-25 min.) E 8-28A
8-21
(10-15 min.) E 8-29A
Retained earnings
295,000
1.19
351,050
Accumulated other
comprehensive income:
(15-20 min.) E 8-30A
Net cash (used) in investing activities .......................
$(10.3)
Based on Honey Bakery’s investing activities, it appears that the
company is growing. Acquisitions of long-term assets and
investments are greater than the sales of long-term assets and other
businesses. Capital expenditures of $10.0 million exceed the sale of
PPE of $7.3 million.
8-23
(20-25 min.) E 8-31A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
(15-20 min.) E 8-33B
Req. 1
Baytex should use the amortized-cost method to account for the long-
term investment in bonds.
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Sept.
30
Held-to-Maturity Investment in Bonds
($46,000 × .97) ..............................................
44,620
Cash .........................................................
44,620
To purchase bond investment.
Dec.
31
Interest Receivable ($46,000 × .05 × 3/12) ......
575
Interest Revenue .....................................
575
To accrue interest revenue.
31
Held-to-Maturity Investment in Bonds
[($46,000 − $44,620) / 60 mo. × 3 mo.] .........
69
Interest Revenue .....................................
69
To amortize discount on bond investment.
Req. 3
8-25
(10-15 min.) E 8-34B
(15-25 min.) E 8-35B
Req. 1
Stock
Cost
Fair Value
Dublin
(2,800 × $35)
=
$ 98,000
(2,800 × $28.125)
=
$ 78,750
Chile
(590 × $45.50)
=
26,845
(590 × $48.00)
=
28,320
Russian
(1,000 × $70)
=
70,000
(1,000 × $63.25)
=
63,250
Total ............................................
$194,845
..............................
$170,320
Req. 2
Dec. 31
Unrealized Loss on Investments in
AFSS ($194,845 − $170,320) ....................
24,525
Allowance to Adjust Investments in
AFSS to Market ................................
24,525
Req. 3
Statement of Comprehensive Income (partial):
Other comprehensive income:
Unrealized (loss) on investments in AFSS ..............
$ (24,525)
Balance Sheet (partial):
8-27
(10-15 min.) E 8-36B
(10-15 min.) E 8-37B
Equity-Method Investment
a.
Purchase
1,300,000
c.
Dividends
135,000
b.
Net income
204,000
Balance
1,369,000
Proceeds from sale of investment .............
$1,000,000
Carrying amount of investment ..................
(1,369,000)
(Loss) on sale of investment ......................
$ (369,000)
8-29
(15-20 min.) E 8-38B
Req. 1
The equity method is appropriate for a 45% investment in another
(20-25 min.) E 8-39B
Req. 1 (consolidation work sheet and balance sheet)
Gamma,
Cressida
ELIMINATION
CONSOLIDATED
ASSETS
Inc.
Corp.
DEBIT
CREDIT
BALANCE SHEET
Cash
54,000
14,000
68,000
Accounts receivable, net
80,000
55,000
135,000
Note receivable from Gamma
—
40,000
(b) 40,000
—
Inventory
53,000
84,000
137,000
Plant assets, net
290,000
99,000
389,000
Investment in Cressida Corp.
98,000
—
(a) 98,000
—
Other assets
24,000
8,000
32,000
8-31
(10-15 min.) E 8-40B
Retained earnings
355,000
1.17
415,350
Accumulated other
comprehensive income:
(15-20 min.) E 8-41B
Sale of long-term investments .......................................
3.1
Net cash (used) in investing activities .......................
$ (10.7)
Based on Ellis Bakery’s investing activities, it appears that the
company is growing. Acquisitions of long-term assets and
investments are greater than the sales of long-term assets and other
businesses. Capital expenditures of $10.6 million exceed the sale of
PPE of $7.5 million.
(20-25 min.) E 8-42B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Quiz
Q8-55
b
8-35
Problems
(45-60 min.) P 8-56A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Jan.
1
Held-to-Maturity Investment in Bonds
($2,800,000 × 1.12) ......................................
3,136,000
Cash .......................................................
3,136,000
To purchase bond investment.
July
1
Cash ($2,800,000 × .09 × 6/12) ...................
126,000
Interest Revenue ...................................
126,000
(continued) P 8-56A
Req. 3
Balance sheet at October 31, 2016:
Current assets:
Interest receivable ....................................................
$ 84,000
Property, plant, and equipment, net ...........................
XXX,XXX
Long-term assets:
Held-to-maturity investment in bonds
8-37
(20-30 min.) P 8-57A
(continued) P 8-57A
Req. 2
Balance sheet:
ASSETS
Total current assets ...........................................................
$ XXX
Property, plant, and equipment, net .................................
XXX
Long-term assets:
Equity-method investment ..............................................
452,614*
Investment in AFSS .........................................................
30,100
STOCKHOLDERS’ EQUITY
Common stock ...................................................................
$ XXX
Retained earnings ..............................................................
XXX
Accumulated other comprehensive income:
Unrealized (loss) on investment in AFSS
[$30,100 − (1,000 × $41.50)] ............................................
(11,400)
Income statement:
Income from operations ....................................................
$ XXX
Other revenue:
Equity-method investment revenue ($540,000 × .25)....
135,000
Dividend revenue (1,000 × $.33) .....................................
330
Net income .........................................................................
XXX
Statement of comprehensive income:
Other comprehensive income:
Unrealized (loss) on investment in AFSS ......................
$ (11,400)
8-39
(45-60 min.) P 8-58A
(continued) P 8-58A
Req. 2
Equity-Method Investment
Jan.
1
Balance
610,000
Aug.
17
Dividends
90,000
Dec.
31
Net income
106,000
Dec.
31
Balance
626,000
8-41
(20-30 min.) P 8-59A
Total assets
$85.1
Req. 2
Total assets
$239.7
Consolidation of the finance subsidiary increased Spindler’s reported
(35-45 min.) P 8-60A
Req. 1
Ronny, Inc.
Consolidation Work Sheet
September 30, 2016
ELIMINATIONS
CONSOLIDATED
ASSETS
RONNY
BIRCHER
DEBIT
CREDIT
AMOUNTS
Cash
54,000
20,000
74,000
Accounts receivable, net
196,000
88,000
284,000
Note receivable from Bircher
194,000
—
(b) 194,000
0
Inventory
346,000
469,000
815,000
Plant assets, net
381,000
484,000
865,000
Investment in Bircher
362,000
—
(a) 362,000
0
Total
1,533,000
1,061,000
2,038,000
LIABILITIES AND
8-43
(20-25 min.) P 8-61A
(20-25 min.) P 8-62A
Req. 1
This situation will generate a positive translation adjustment, which is
like a gain. The gain occurs because the yen’s current exchange rate,
which is used to translate the subsidiary’s net assets, is greater than
the historical exchange rates at which Mason Corp. invested in the
Japanese subsidiary.
YEN
EXCHANGE
RATE
DOLLARS
Assets
410,000,000
$.0090
$3,690,000
Liabilities
145,000,000
.0090
$1,305,000
Stockholders’ equity:
Common stock
25,000,000
.0075
187,500
Retained earnings
240,000,000
.0088
2,112,000
Accumulated other
comprehensive income:
Foreign-currency
translation adjustment
85,500
410,000,000
$3,690,000
The foreign currency translation adjustment is reported in accumulated
other comprehensive income in stockholders’ equity on the balance sheet
and other comprehensive income on the statement of comprehensive
income .
Req. 2
The translation adjustment “belongs” to Mason, the parent company.
Therefore, the translation adjustment will be reported on Mason’s
8-45
(45-60 min.) P 8-63B
(continued) P 8-63B
Req. 3
Balance sheet at October 31, 2016:
Current assets:
Interest receivable ...................................................
$ 52,000
Property, plant, and equipment, net ..........................
XXX,XXX
Long-term assets:
Held-to-maturity investment in bonds
8-47
(20-30 min.) P 8-64B
(continued) P 8-64B
Req. 2
Balance sheet:
ASSETS
Total current assets ............................................................
$ XXX
Property, plant, and equipment, net ..................................
XXX
Long-term assets:
Equity-method investment ...............................................
575,590*
Investment in AFSS ..........................................................
30,900
STOCKHOLDERS’ EQUITY
Common stock ....................................................................
$ XXX
Retained earnings ...............................................................
XXX
Accumulated other comprehensive income:
Unrealized (loss) on investment in AFSS
[(1,100 × $42.25) − $30,900] .............................................
(15,575)
Income statement :
Income from operations .....................................................
$ XXX
Other revenue:
Equity-method investment revenue ($580,000 × .45)….
261,000
Dividend revenue (1,100 × $.34) ......................................
374
Net income ..........................................................................
XXX
Statement of Comprehensive Income:
Other comprehensive income:
8-49
(45-60 min.) P 8-65B
(continued) P 8-65B
Req. 2
Equity-Method Investment
Jan.
1
Balance
614,000
Aug.
17
Dividends
85,000
Dec.
31
Net income
143,000
Dec.
31
Balance
672,000
8-51
(20-30 min.) P 8-66B
Total assets
$80.6
Req. 2
from 0.793 to 0.929. Companies would prefer to report a lower debt
ratio, so they would prefer not to consolidate the financial statements
(35-45 min.) P 8-67B
Req. 1
Robertson, Inc.
Consolidation Work Sheet
September 30, 2016
ELIMINATION
CONSOLIDATED
ASSETS
ROBERTSON
DINETTE
DEBIT
CREDIT
AMOUNTS
Cash
59,000
57,000
116,000
Accounts receivable, net
199,000
87,000
286,000
Note receivable from Dinette
197,000
—
(b) 197,000
0
Inventory
294,000
412,000
706,000
Plant assets, net
388,000
441,000
829,000
Investment in Dinette
289,000
—
(a) 289,000
0
Total
1,426,000
997,000
1,937,000
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Accounts payable
121,000
77,000
198,000
Notes payable
405,000
335,000
(b) 197,000
543,000
Other liabilities
212,000
296,000
508,000
Common stock
550,000
272,000
(a) 272,000
550,000
Retained earnings
138,000
17,000
(a) 17,000
_______
138,000
(15-20 min.) P 8-68B
(20-25 min.) P 8-69B
Retained earnings
260,000,000
0.0100
2,600,000
Accumulated other
comprehensive income:
Foreign-currency
translation adjustment
312,500
Challenge Exercises and Problem
(15-20 min.) E 8-70
Req. 1
a. Consolidation
b. Available-for-sale
c. Equity
Req. 2
PlaySpace’s net income for 2016:
a. Increased by $209,000 (₤110,000 × $1.90).
b. Increased by $18,000.
c. Increased by $450,000 ($1,000,000 × .45).
Req. 3
(20 min.) E 8-71
2. Foreign-currency translation adjustments.
Req. 2
An unrealized gain (loss) on available-for-sale investments produces a
positive (negative) balance.
A foreign-currency translation adjustment is positive when the assets of
(20-25 min.) P 8-72
Req. 1
Amount of
Cash Flow
8% Factor
from Table
Present Value
of Cash Flow
$ 25,000
x
.926
=
$ 23,150
45,000
x
.857
=
38,565
35,000
x
.794
=
27,790
15,000
x
.735
=
11,025
50,000
x
.681
=
34,050
$170,000
$134,580
You should choose the option with the payments over the five years
rather than the one payment of $120,000. The present value of the
payments, $134,580, is higher than the present value of the single
payment, $120,000.
Req. 2
Amount of
Cash Flow
10% Factor
from Table
Present Value
of Cash Flow
$ 25,000
x
.909
=
$ 22,725
45,000
x
.826
=
37,170
35,000
x
.751
=
26,285
15,000
x
.683
=
10,245
50,000
x
.621
=
31,050
$170,000
$127,475
(continued) P 8-72
Decision Cases
4. These items should probably not scare you away from investing in
Infografix stock. After all, the foreign-currency translation adjustment
and the unrealized loss on investments haven’t been realized yet.
(20-30 min.) Decision Case 2
1. The Ohio Office Systems investment cannot be used to generate the
2. The bond investment cannot be used to generate the needed income
because a sale of the bonds would increase net income by only
$6,200, computed as follows:
3. The Microsoft stock can be used to generate the needed income, as
follows:
Sale price of the investment in Microsoft stock
Ethical Issue
Req. 1
The issue: Should Cohen have used his power to influence Web Talk to
pay a large cash dividend when they have to borrow to do so?
(continued) Ethical Issue
Focus on Financials: Apple Inc.
(15-20 min.)
Req. 1
From the caption Cash Equivalents and Marketable Securities in Note
1—Summary of Significant Accounting Policies—Marketable Debt
Investments for which the contractual maturity date is 12 months or less
are classified as short-term. Marketable Debt Investments for which the
contractual maturity is greater than 12 months are classified as long-
term. Marketable equity securities are classified as short-term or long-
term based on the nature of each security and its availability for use in
current operations.
Req. 2
Apple does adjust for periodic changes in fair value of their investments.
According to Cash Equivalents and Marketable Securities in Note 1—
Summary of Significant Accounting Policies—the company’s securities
(continued) Apple Inc.
Focus on Analysis: Under Armour, Inc.
(30 min.)
Req. 1
Under Armour’s three main categories are Apparel, Footwear, and
Accessories. The categories brought in the following revenue listed
from greatest to smallest for 2014.
(In Millions)
Apparel
$2,292
Footwear
$431
Accessories
$275
The apparel category brought in the most revenue in 2014.
Req. 2
Group Project