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Chapter 15

Investments and International Operations
QUESTIONS
1.

To be classified as current assets, investments must be (i) capable of being
converted into cash quickly and (ii) management must intend to sell the investments
as a source of cash to satisfy the needs of current operations (within one year or the
operating cycle, whichever is longer).

2.

Short-term investments in trading securities are reported on the balance sheet at the
(fair) market value of the portfolio of trading securities.

3.

The $720 difference between the proceeds ($7,500) and the cost ($6,780) is credited
to Gain on Sale of Short-Term Investments and reported in the income statement.

4.

The three classes of noninfluential investments in securities are:
a) debt and equity trading securities.
b) debt securities held-to-maturity.
c) debt and equity securities available-for-sale.
The two classes of influential investments in securities are:
a) equity securities giving an investor a significant influence over an investee.
b) equity securities giving an investor control over an investee.

5. To be classified as current assets, investments must be capable of being converted
into cash quickly and management must intend to sell the investments as a source
of cash to satisfy the needs of current operations. To be classified as long-term,
investments must not meet the requirements for short-term investments—not
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 Adjustment—Available-for-Sale (LT).............

##

7. The portfolio for investments in available-for-sale securities should be reported on
the balance sheet at (fair) market value—this is separated into short- and long-term.
8. The portfolio of long-term investments in debt securities is reported at cost adjusted
for amortization of any difference between cost and maturity when the investments
are classified as held-to-maturity debt securities.

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9. Unrealized holding gains and losses are not reported on the standard income
statement for available-for-sale securities. Unrealized gains and losses for these
securities are reported in the stockholders’ equity section of the balance sheet.
(They can also be reported either in a separate comprehensive income statement or
in a combined statement of comprehensive income.)
10. The equity method is used when the investor has a “significant influence” over the
investee corporation; i.e., generally when the investor owns 20% or more of the
investee's voting stock. The equity method with consolidation is used when the
investor has a “controlling influence” over the investee.
11. A company prepares consolidated statements if the company has control over a
subsidiary as a result of owning more than 50% of the subsidiary's voting stock.
12A. Two major challenges in accounting for international operations include (1)
accounting for sales and purchases that are denominated in a foreign currency, and
(2) preparing consolidated financial statements with a foreign subsidiary.
13A. If the foreign exchange rate falls from $1.40 to $1.30 during the time the U.S.
company holds a receivable that is denominated in the foreign currency, the U.S.
company will incur an exchange loss. The foreign currency unit is worth $1.40 at the
time of sale but is worth only $1.30 at the time it is paid to the U.S. company; hence,
a loss of $0.10 is incurred for each foreign currency unit owed to the U.S. company.
14A. No. If a sales agreement requires a foreign customer to pay U.S. dollars to the United
States seller, the U.S. company is not exposed to the risk of exchange losses or
gains.
15. Krispy Kreme reports “Accumulated other comprehensive income” for February 2,
2003, which is a comprehensive loss of $1,486,000. On February 3, 2002, Krispy
Kreme had comprehensive income of $456,000.
16. Tastykake’s financial statements, including its balance sheet, are all labeled as being
consolidated statements.
17. Harley-Davidson’s return on total assets as of December 31, 2002, is ($ 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 Investments—Trading (XLT).....................22,650
Cash...................................................................

22,650

Purchased 500 shares at 45 plus $150 fee.

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

500
500

Received dividend of $1 per share.
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Fundamental Accounting Principles, 17th Edition

Quick Study 15-2 (10 minutes)
1. 2005
Dec. 31 Unrealized Loss—Equity...........................................
Market Adjustment—Available-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 Adjustment—Available-for-Sale (ST)
account is a contra asset account. It reduces the (cost) balance in the
Short-Term Investments—Available-for-Sale account to its market
value.
3. 2006
Apr. 6 Cash ...................................................................52,000
Gain on Sale of Short-Term Investments...............
Short-Term Investments—AFS................................

2,000
50,000

To record sale of one-half of the available-for-sale
securities. (Cost = $100,000 x 1/2)

Quick Study 15-3 (10 minutes)
May 7 Short-Term Investments—AFS (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 Investments—AFS (Lov)..............

25
2,700

To record sale of available-for-sale securities.

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000 To reflect an unrealized loss in market value of available-for-sale securities..200 $1.....020 Gain on Sale of Short-Term Investments...... 1..........400 Cash............400 x200/400 =$10.... Parent... 17th Edition .. 2005 126 Fundamental Accounting Principles....... f...20.... 820 10...200 To record sale of available-for-sale securities..............000* Quick Study 15-5 (10 minutes) True: c........................11......400 Purchased 400 shares at $50 plus $400 fee. 20..... Current (or short-term) 4... 31 Unrealized Loss – Equity*.. Inc..200 $46 Total Unrealized Market Loss Value (Market-Cost) $9...Quick Study 15-4 (10 minutes) May 9 Short-Term Investments—AFS (X&O)............. g....... As of Dec.. June 2 Cash.........200 Dec.... Quick Study 15-6 (10 minutes) 1.... The original cost is $20.....000 Market Adjustment—Available-for-Sale (ST) . Interest revenue (or interest earned) 2............. 31 Number of Shares Cost per share Total Cost Market Value per share X&O 200 $51 $10.......... 1................... Short-Term Investments—AFS (X&O)........... Market value (or fair value) ©McGraw-Hill Companies....................... e........ Equity method 5. subsidiary 3..........

......................... Dec..... 2005 Solutions Manual........................................ 50........... 2006 Aug....... 750...................................................... 31 Long-Term Investments—TKR.............000 Long-Term Investments—AFS (TKR)*...... 900 Record interest earned ($30................000 Earnings from Investment (TKR).......000 x 40%).....750 Interest Revenue................ 1 Cash .............. 220....000 Record sale of securities.000 100................................................... Chapter 15 127 ..000 x 40%)....................... 2005 May 20 Long-Term Investments—AFS (TKR)....... 220.000 x 6% x 6/12). 750 Record interest earned ($900 x 5/6)................................................................................. Inc........ ©McGraw-Hill Companies...000 Record equity in investee earnings ($550..................000 Long-Term Investment—TKR............................. 50.....Quick Study 15-7 (10 minutes) July 31 Cash................ 31 Interest Receivable...000 Cash................... Quick Study 15-8 (10 minutes) Valuation Method: The (fair) market value method is used to account for this investment in long-term equity securities (AFS portfolio)........... 750....... 475...... Dec.......... Gain on Sale of Long-Term Investment.............. 5 Cash.......... 375.................................... *(½ x $750.....000 Record purchase of securities.900 Interest Revenue...000 Received cash dividends ($125.000) Quick Study 15-9 (10 minutes) Nov.................................................................................

©McGraw-Hill Companies..... When the Market Adjustment account contains a credit balance as shown here... 31 6...... Dec........ Each of the accounts used in the entry for (1) would be reported on the balance sheet. Inc.. Component analysis often is more useful when computed and examined over a period of several years and when comparisons are made with competitors................... Market Adjustment—Available-for-Sale (LT).. Quick Study 15-11 (10 minutes) Net income Return on total assets = Average total assets This ratio provides information to evaluate a company's profitability (efficiency) in using its available assets. 2005 128 Fundamental Accounting Principles. This results in the reporting of the asset (long-term investment) at its market value........000 is a reduction in equity. it serves as a contra asset account... 17th Edition ...Quick Study 15-10 (10 minutes) 1. 6.000 Record change in value of securities.. Quick Study 15-12 (10 minutes) Return on Total Assets = Profit margin Net income Average total assets = Net income Net sales x Total asset turnover Net sales x Average total assets Component analysis is useful as it allows the determination of whether the return on assets is achieved primarily due to profitability or efficiency of asset-use (or a balanced combination of both).......000 Unrealized Loss Equity. The unrealized loss of $6. 2..

....... Quick Study 15-14A (10 minutes) Mar.6811)................ 31 Cash......000 ringgits x $0...............60)........Quick Study 15-13A (10 minutes) Date of Sale Accounts Receivable........ 16.............. Inc........622 Record credit sale in value of ringgits (20.....000 ringgits x $0..................................................000 Sales........................ ©McGraw-Hill Companies.............. 2005 Solutions Manual......................50)...970 Foreign Exchange Gain..000 Foreign Exchange Loss..622 Sales... Accounts Receivable—Hamac.......... Mar...... 15..............000 Record credit sale in value of pounds (10......000 Accounts Receivable................ 16.6985). 16................................... 1. Date of Payment Cash................000 Cash received on account (£10................. 13.............................................622 Cash received on account (20.. 13...........000 pounds x 1.................... Chapter 15 129 ....... 348 13.......... 1 Account Receivable—Hamac....................................................................................... 13..................................................000 x 1.......................................

.......... Gain on Sale of Short-Term Investments............ 102. 700 700 Received dividend on stock (700 x $1..... Oct............................. 21.....000 Collected proceeds of debt securities with interest of $100....150 Purchased 700 shares of stock for (700 x $30) + $150 brokerage fee..575 3............................ 10....... 100.......................................... 100. 8% debt securities.....................................500 Interest Revenue..........................285 1.$140] **($21...... c....................... ©McGraw-Hill Companies..... 60. Feb..EXERCISES Exercise 15-1 (25 minutes) a.................... * [(350 x $40) .......... 1 Cash.. Sold 350 shares of stock............... d... 13.... Mar......................000 Short-Term Investments—HTM (FTR).......................10 x 90/360)............00).. 8 Cash*...........500 Received cash interest payment ($60............... Dividend Revenue.... 17th Edition .. Oct.................. 10% debt securities. Sept... Aug........................................150 Cash............................ 22 Short-Term Investments—Trading (FIX)........ 30 Cash 1...........08 x 90/360............................000 Cash....... 21......000 Cash... 2005 130 Fundamental Accounting Principles......... Inc.....................860 Short-Term Investments—Trading (FIX)**. Interest Revenue..000 Purchased 90-day..000 x ....... 60..000 Purchased 6-month.. 100.....150/2) g. b... f..............000 x ..... 1 Short-Term Investments—AFS (Better Buy).......................... May 16 Cash...........000 2.... 15 Short-Term Investments—HTM (FTR).... e....

.. Chapter 15 131 ......900 82..... 2...... The accounts in part (1) are reported on different financial statements..000 To record sale of trading securities...... The $10. 60. ©McGraw-Hill Companies.....000 x ½) Exercise 15-3 (15 minutes) Available-for-Sale Portfolio Cost Vicks Corporation bonds payable.... 2005 Solutions Manual.....................000 To reflect an unrealized gain in market values of trading securities.700 $225......100 $ (100) Dec..... 3.......... 100 100 To reflect unrealized loss.......000 debit balance in the Market Adjustment—Trading account is an adjunct asset account in the balance sheet..000 28.... 10.... Short-Term Investments—Trading*...... 2005 Dec...................... The Unrealized Gain of $10.. i. 31 Unrealized Loss—Equity................... Inc.... 3 Cash 30...000.600 Market Unrealized Gain (Loss) $ 90......500 $225... *($56.000 is reported in the Other Revenues and Gains section of the income statement.....Exercise 15-2 (20 minutes) 1... It increases the balance of the Short-Term Investment—Trading account to the securities’ market value of $66.......600 Lake Lugano Company common stock...... ii. 31 Market Adjustment—Trading............600 52....... 2006 Jan.............. $ 79.000 Unrealized Gain—Income.. 10.. 2.....600 Pace Corporation notes payable... 85......000 Gain on Sale of Short-Term Investments. Market Adjustment—AFS (ST)........

..............50)....... 50.....025 Long-Term Investments—AFS (Fran)**.........................000 Short-Term Investments—HTM (A....................................................... (b) Mar.......000 Received interest payment on 8% notes ($50............. 5......................000 Cash........08 x 3/12)........ 155............................ 1 Cash.... 8 Cash*.... (c) June15 Cash... 350 Dividend Revenue......... (d) July 30 Short-Term Investments—Trading (MP3). 50.000 x ....................150 Sold 350 shares of Fran stock................... ©McGraw-Hill Companies...... 30 Cash.. Inc......................................000 Purchased 8% notes.....000 Cash.......... 10% notes....... 17th Edition .................Exercise 15-4 (30 minutes) 2005 (a) Feb........ (e) Sept.......................................................750/2) (g) Oct................... 22 Long-Term Investments—AFS (Fran)...........................000 Collected proceeds of 10% notes ($150....G... 8............... 2005 132 Fundamental Accounting Principles......... Gain on Sale of L-T Investments........................................ 1........G..................... due Jan..000 Interest Revenue........................................... 30........000 Interest Revenue................................ 1..................750 Purchased 700 shares of Fran common stock ([700 x $25] + $250)...................000 Purchased 120-day......... *([350 x $32] .............. 150................................................ 17.............).. 2006........ 350 Received dividend on Fran shares (700 x $0...$175) **($17..........875 2... 15 Short-Term Investments—HTM (A.......... (f) Oct..)................................ 150........ 11..................... 17..............000 x 10% x 120/360).......................... 150.......750 Cash....................

..151 Adjustment = $6... 12...800 ............271 Gain (loss).. 24... $ 68..............900 Record market value adjustment for securities ($234..... Unrealized Gain—Equity.900) Cost Dec. 31 Unrealized Loss—Equity.800 Kellogg Company notes payable................927) $ 5..........................................................800 $231.....151 = $12.....927 5... $79.... common stock......927 + $5.......078 Unrealized Loss—Equity....... 2005 Solutions Manual....................... 91.....200 McDonald's Corp..............500 22..........900 $ 75........ Exercise 15-6 (15 minutes) Dec.....151 Record market (fair) value of AFS securities..483 $85........900).........400 86..........900 $ (2.. bonds payable........ 2....................................... Inc..............2.Exercise 15-5 (15 minutes) Computation of Market Adjustment Market Unrealized Value Gain (Loss) Nintendo Co. Chapter 15 133 .. 31 Market Adjustment—AFS (LT)..........000 47........120 Market value.556 90.$231...........078 (recovery of unrealized loss & recording of unrealized gain) ©McGraw-Hill Companies... Computation of Market Adjustment 12/31/2004 12/31/2005 Cost..600 $234................ 72...................................................300 Atlantic Richfield Co.... 50. 6....... common stock. $ (6..........900 Market Adjustment—AFS (ST).

... * $686...........................440 26..................$778.450 current period loss).$426...440 Record market value of securities ($374.......300 prior gain +$79... * $875......... * $453................................ 11..................... 2005 Dec.... 79...........700 Unrealized Gain—Equity....................750 Market Adjustment—AFS (LT)*.......900 = $26.440 prior loss + $37.560)...750 net gain ($26.......... 202..................000 . 96. 31 Market Adjustment—AFS (LT)*................. 11.............750 prior gain + $202.... 105.... 2005 134 Fundamental Accounting Principles......... 11.................... Unrealized Gain—Equity...........740 current period gain).300 Record market value of securities... 31 Unrealized Loss—Equity... Inc..740 Unrealized Loss—Equity....... 17th Edition .700 net loss ($105.. ©McGraw-Hill Companies.....450 Unrealized Gain—Equity... 31 Unrealized Loss—Equity.....................200 .......... 79..... 2006 Dec.....Exercise 15-7 (30 minutes) 2003 Dec...........440 Market Adjustment—AFS (LT).........450 Record market value of securities....................$580................. 2004 Dec...450 Record market value of securities...450 current period gain)........500 ..700 = $105... 31 Market Adjustment—AFS (LT)*...800 = $96.......$362.. 37...................300 net gain ($11.450 .

.300 93. it is a current asset. e.... The Beeman Company bonds are a long-term investment in held-tomaturity debt securities.....................575 Record market value of securities ($265..Exercise 15-8 (15 minutes) Classification of Investments in Securities a.. Chapter 15 135 ........ The Newtech stock is a long-term investment in available-for-sale equity securities....750 $183... 2005 Dec........050 .........575 Unrealized Gain Equity.......... $265.625 Total....... b............... 31. d. 95............625).......625 ©McGraw-Hill Companies......$276.. $169..000 Newtech common stock...... The Baybridge stock is a long-term investment in equity securities where the investor has a significant influence over the investee. 31 Market Adjustment—AFS (LT)......... Since the Flockhart stock is marketable and is held as an investment of cash available for operations........... Long-term AFS securities Cost Market Value Carrollton common stock....................... Inc.... The Carrollton stock is a long-term investment in available-for-sale equity securities....... c... Market Adjustment entry at Dec......... 2005 Solutions Manual....... 11.... 11...........050 $276...

...................................................000 Record receipt of cash dividend (30............... Dec...........000/30.......... 207............. 13...........343† † Rounded to nearest dollar....Exercise 15-9 (30 minutes) 2005 Jan.......... 108.............000 x $3..... Sept... * Book value (Bushtex stock) at 12/31/2006: Original cost.. 233............................................ (108.............000) Plus share of 2006 earnings.............250 Earnings from Long-Term Investment......... $207................................................................ 2006 June 1 Cash..... $448............... 233...... 233....... 208...............000) Plus share of 2005 earnings.................750/3).....300 Record equity in investee earnings ($624.................... 31 Long-Term Investments—Bushtex.......000)............................. 208...................................10).....250 Record equity in investee earnings ($699..........60).......................... 162..............000 x $3.. 93....250 Book value at date of sale............................. 2005 136 Fundamental Accounting Principles.................................000 Long-Term Investments—Bushtex....... 31 Long-Term Investments—Bushtex..... 108....... 2 Long-Term Investments—Bushtex*..343 Record sale of investment...900/3).. 17th Edition ..................................... Dec. (93......... ©McGraw-Hill Companies.............000/90....................157 Long-Term Investments—Bushtex*......... Dec...000 Record receipt of cash dividend (30.....................000 + $3...................... 1 Cash........... 31 Cash...000 Long-Term Investments—Bushtex........... 208................................030 Book value of shares sold ($448.................................................. Inc...............480)......................480 Cash. 149..................500 Gain on Sale of Investments................ *Kash’s investment equals 33 1/3% of Bushtex’s stock (30....................... Kash should use the equity method to account for its investment........................................480 Record purchase of investment ($204.................... 207........300 Less 2006 dividends..............300 Earnings from Long-Term Investment............. 93...........030 x [10........480 Less 2005 dividends....000])..... $149...

483 $ 422 Cash (17.....4990) Loss for the period 2006 Jan....483 282 $25.. it is not possible to determine whether Wright is within the normal range as compared to similar companies.... Or......000)/2 2006 return on total assets = 14..483 25.......... Exercise 15-11A (25 minutes) 2005 Dec................. 15 = = = = = = 422 $25... 31 25....000)/2 = 10. 16 Dec..........000 + $320...........5238) Year-end measure = (17.......905 24...5238).3% $58..... Foreign Exchange Gain*.........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. 2005 Solutions Manual.............. *Year-end measure = (17..3% to 10.... Sales. Wright may have increased its investment in plant assets in 2006 in anticipation of increased production and sales in 2007...... For example.......................... *Original measure = (17..... 422 Accounts Receivable Bronson Ltd....905 Accounts Receivable Bronson Ltd... In addition.......300 ($320...5156)....4990) Final measure = (17....000 x $1......Exercise 15-10 (15 minutes) 2005 return on total assets $36...................... Record cash receipt on account.......765 $ 282 ©McGraw-Hill Companies....... 25.. Inc.000 x $1.905 25...765 Accounts Receivable Bronson Ltd... Chapter 15 137 ................. without additional information.......000 x $1.... However........ its competitors’ returns may have fallen even more than that of Wright’s returns....400 ($190...... Record year-end adjustment...9%..............5156) Gain for the period 25......000 x $1.. Record credit sales (17... Foreign Exchange Loss*.000 + $750.....000 x $1...000 x $1. conditions may exist that explain the apparent decline in efficiency between 2005 and 2006...........

... 30 balance sheet amount (800......... $162... $159......680 163... $158.$2....280 ....000 x $0.040 ($2................... Inc....1984) and the ending rate ($0..... 31 balance sheet amount ..... $161......760) and the initial measure of the account receivable ($158.... ©McGraw-Hill Companies..........2029)............ 2005 June 30 balance sheet amount.2047) ..000 x $0......Exercise 15-12A (25 minutes) Quarter ended June 30.. This amount also equals the difference between the number of dollars finally received ($163..320 159................ this amount equals the number of pesos (800...... Unrealized loss reported on income statement..... Unrealized gain reported on income statement ... 2003...... 10.1996).. 30 balance sheet amount.000 x $0......720 161.... 2006 Dec...640 Quarter ended March 31. Sept..280 Quarter ended December 31.680 $ 2.......320 Quarter ended September 30..000) owed by the customer times the change in the exchange rate ($0. June 30 balance sheet amount (800.000 x $0...0063) between the beginning rate ($0.... Feb.....040 162. Dec. Unrealized gain reported on income statement.320 + $1............... 17th Edition ...... 31 balance sheet amount (800..2047). 2005 138 Fundamental Accounting Principles.......... 2005 May 8 recorded amount (800.040 $ 2..080). 2005 Sept.......720)......1984)...............640 + $4..... amount received (800.....320 $ 1.........000 x $0...............080 Note — The combined net gain for all four quarters equals: $5.. In addition.760 $ 4.2013)..... Unrealized gain reported on income statement............

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

32,525
32,525

Purchased Ford Motor Co.
shares [(900 x $36.00) + $125].

Feb. 9 Short-Term Investments—Trading (Lucent).......
Cash................................................................

44,200
44,200

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

Oct. 12 Short-Term Investments—Trading (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 Investments—Trading (Ford)......

34,915
2,390
32,525

Sold Ford Motor shares
[(900 x $39.00) - $185].

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

5,025
925
4,100

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

22 Short-Term Investments—Trading (Hunt)............
Cash................................................................

24,225
24,225

Purchased Hunt shares
[(800 x $30.00) + $225].

Aug. 19 Short-Term Investments—Trading (D.Karan).......
Cash................................................................

12,100
12,100

Purchased Donna Karan shares
[(1,000 x $12) + $100].

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Problem 15-1A (Concluded)
2007
Feb. 27 Short-Term Investments—Trading (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 Investments—Trading (Hunt)......
Sold Hunt shares [(800 x $25.00) - $125].

June 21 Cash......................................................................
Loss on Sale of Short-Term Investments..........
Short-Term Investments—Trading (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 Investments—Trading (B&D)............
Cash................................................................

47,695
47,695

Purchased Black & Decker shares
[(1,000 x $47.50) + $195].

Nov. 1 Cash......................................................................
Gain on Sale of Short-Term Investments.....
Short-Term Investments—Trading (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 Adjustment—Trading*.....................................
Unrealized Gain—Income.....................................
To reflect an unrealized gain in market
values of trading securities.

2,385
2,385

* Market adjustment computations

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Fundamental Accounting Principles, 17th Edition

Trading securities’
portfoli
o

Shares

Share Price
a
t

Market
Cost

Unrealized
Gain (Loss)

1
2
/
3
1
/
0
7
HCA
3,400
Black and Decker..............
1,000
Totals

$24.00
$43.50

$ 81,600 $ 75,020
43,500
47,695
$125,100 $122,715

$ 6,580
(4,195)
$ 2,385

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141

..........90)...... 200..06 x 3/12)............360 Purchased 8..............................000 Cash.................. 20 Short-Term Investments—AFS (Xerox)..............000 shares of PepsiCo [(4............... 197...000 x $1..........600 Dividend Revenue. 97......... Interest Revenue........000 x ...... 33.. 200.350 Purchased 4...... July 7 Short-Term Investments—AFS (Pepsi)......................... Gain on Sale of Short-Term Investments......... 7...................910 Purchased 2.550 Short-Term Investments—AFS (Gem)**. 194...$450 **($194....800 Received dividends on Gem (8...................................... Treasury bills ($200...200 Dividend Revenue...................................000 Purchased U...... 17th Edition .... Inc........200 Received dividends on Gem (4..........................75) + $410]..000 x $49........................ Treasury bills................ 4................... Aug.... 4......Problem 15-2A (40 minutes) Part 1 2005 Apr............. May...000/8..000 shares of Gem. 1 Cash 7. 15 Cash 6.. 28 Cash* 119........... 200.350 Cash..........000 x $16...05)..........910 Cash........25) + $350]...000) Oct....S............000 3....................360 Cash 194.............................. 33...180 22..............000 shares of Gem [(8............ ©McGraw-Hill Companies...... 3 Cash.... 1 Short-Term Investments—AFS (T-bills)........................000 x $24. 197......25) + $360].............600 Received dividends on PepsiCo (4..........000 x $0......000 x $30) .000 Proceeds of U.......000 Short-Term Investments—AFS (T-bills)......... 2005 142 Fundamental Accounting Principles............................800 Dividend Revenue.............. 203..........360 x 4.000 x$1.......... 6....370 Sold 4..... 16 Short-Term Investments—AFS (Gem). Dec.... 15 Cash...............85).........S.............. *(4....000 shares of Xerox [(2....

.... Chapter 15 143 ..................... Inc......200 Received dividends on PepsiCo (4.....000 x$1........... ©McGraw-Hill Companies........................ 2005 Solutions Manual.. 5......31 Cash.200 Dividend Revenue...............................30).......... 5......

. 8..... 2005 144 Fundamental Accounting Principles...500 with a note disclosure of the cost.000 x $16...... 197.....910 2.... $ 97.75...... This yields $319.000 x $24. Inc..000 x $49......200] (iii) Gain on Sale of Short-Term Investments......Problem 15-2A (Continued) Part 2 Comparison of Cost and Market Values for AFS Portfolio Cost Gem Co...000 shares: Entire $410 (none sold).500 $8..000 (ii) Dividend Revenue. 8...... Brokerage fee attached to remaining 2.. 31 Unrealized Loss Equity...75) + 410c.... 33......800 [$6......500 $319.....000 x $46....000 sh –4....940 To reflect an unrealized loss in market values of available-for-sale securities.....180 4... 17th Edition .25) + 350b......440 and show a subtraction of $8..50.000 x $13.600 + $4.940 for the market adjustment..... Brokerage fee attached to remaining 4...440 Unrealized Gain (Loss) $106.000 186.)/ 8..200 + $5.370 (iv) Net effect on income is $49....000 x $26...= $180.... PepsiCo Xerox a b c Market a (4. An alternative presentation is to list these securities at the market value of $319.....230 ©McGraw-Hill Companies...940 (ii) Increase to equity from the $49...940 Market Adjustment—AFS (ST)....000 shares: $360 x (8..........000 shares: Entire $350 (none sold).. $8..500 as the net market value for these securities reported in the current assets section.50....000 27. (4.25) + 180 .170 (b) Equity section of Balance sheet (i) Subtraction from equity due to the Unrealized Loss............350 4. $328. Part 5 (a) Income statement (i) Interest Revenue.... (2..940 Brokerage fee attached to remaining 4..... $23.. Part 4 The balance sheet would report the cost of these short-term investments in available-for-sale securities at $328..000 sh.........000 sh... Part 3 Dec... $3.170 increase in income (iii) Net effect on equity is $40.... $22......800 + $7.........

.......200 x $46.625 Mkt......465 Purchased Johnson & Johnson shares [(900 x $18......465 Cash...800 Mattel: 500 x $57...... 20 Long-Term Investments—AFS (J&J)....... 17.............75) + $590].......761 ................................ 31 18..........714 Purchased Sony shares [(2.........994 Annual adjustment to market values............994 ©McGraw-Hill Companies.........342 85.. 105......342 Sony: 2....200 x $39.........Problem 15-3A (50 minutes) Part 1 2005 Jan..800 28.................714 Cash.. Feb.. * Cost J&J $ 17........ 17........761 Market $ 18.....................578]....$132.. Market Adjustment—AFS (LT)*.......767 J & J: 900 x $20...... Chapter 15 145 . 28..........................50) + $832]........... 28...582 Total....767 = $18.................... 105........... $151.25 = $28..........00 = $85........88) + $2............. 18............... Adj..........38 = $18..714 Mattel..... 28.... Dec.. June 12 Long-Term Investments—AFS (Mattel)...............................465 Sony..........994 Unrealized Loss Equity.... Inc....... 9 Long-Term Investments—AFS (Sony)..........................................: $151......... 105... 2005 Solutions Manual.....582 Cash.....582 Purchased Mattel shares [(500 x $55...........625 $132............

.............75 = $57.............114 Market $ 57..........000 Sony: 2... 59..........................664 Market Adjustment account: Required balance ...........................................................00 = $48...... 24............. $31..600 x $30......714 Total......50 = $80......00) + $1...115 ................... ©McGraw-Hill Companies..............… $12..... 15 Cash.260]...........994 Cr... Dec...............25) + $1.... July 22 Long-Term Investments—AFS (Sara Lee)..$217........$491].600 x $36......... Unadjusted balance. 17th Edition .. * Cost Kodak $ 51...000 80....................................150 48.......... 12..... 1.... 105.............................660 Purchased Eastman Kodak shares [(1..............300 $185.........150 Sara Lee: 1. 4....508 Long-Term Investments—AFS (Mattel)..........740 Sony.......13) ..75) ........... 18..............660 Cash...................... 18..670 Annual adjustment to market values.660 Sara Lee......................890 Gain on Sale of Investments........074 Loss on Sale of Investments.............. 2005 146 Fundamental Accounting Principles........450 Kodak: 1.. 59.....................................200 x $36.740 Cash.....582 Sold Mattel shares [(500 x $49. Required change.. 31 12..... Inc.$685].800 x $28.... 51............................... Market Adjustment—AFS (LT)*..................... 28..............425 Long-Term Investments—AFS (J&J).............................670 Cr........740 Purchased Sara Lee shares [(1........ 51.... 17...........740].... July 5 Cash.............450 = $31.... 59........................300 $217...........Problem 15-3A (Continued) 2006 Apr.664 Cr..........................$185......... 19 Long-Term Investments—AFS (Eastman Kodak)...465 Sold Johnson & Johnson shares [(900 x $21.670 Unrealized Loss Equity... Aug................800 x $31......

........... Nov........................ 48............ 11.......................00 = $95....63) + $1. 58..........$2...... $140.. 53.........400 x $28........309]......... 85.....995]............ $ 58.... June 30 Long-Term Investments—AFS (Black & Decker)..995 Purchased Black & Decker shares [(1.490 Long-Term Investments—AFS (Sara Lee)...721 Unrealized Loss—Equity...........................................50 = $67..360 Loss on Sale of Investments .000 Black & Decker: 1........75) ................. 81..714 Sold Sony shares [(2............................200 x $40...606].....25) ............................. 20..640]................400 x $23............................. 22..... June 21 Cash ..................................................... 27 Long-Term Investments—AFS (Microsoft)...600 x $31........... 31.....943 Market $ 67.. 81...750]..664 Unrealized Gain—Equity.................948 Purchased Microsoft shares [(3.. 3 Cash ............660 Sold Eastman Kodak shares [(1.......................948 Cash ......... 51.......... 74............ 2005 Solutions Manual....$140..........................800 95............354 Long-Term Investments—AFS (Sony). 59................................ 81.................................. * Cost Black & Decker.......... ©McGraw-Hill Companies.................. 22...............057 Dr.... Dec..200 $163.. 31 Market Adjustment—AFS (LT)*..... 58..........105............057 (market exceeds cost) Market Adjustment account: Required balance..........057 Annual adjustment to market values..$2.........641 Gain on Sale of Investments ..............740 Sold Sara Lee shares [(1.. Kodak)...................................... Aug........ 1 Cash .....................200 x $56........200 $163...... Inc............................50) + $1...............981 Long-Term Investments—AFS (E...250 Loss on Sale of Investments ............$1............995 Microsoft.........................................200 x $47.......000 .995 Cash .........948 Total......................800 Microsoft: 3..00) ..... Chapter 15 147 .........943 = $22.......................................Problem 15-3A (Continued) 2007 Feb.........800 x $42.................. $22...

.. ©McGraw-Hill Companies.. 31. Inc. 17th Edition . Required change.... 2005 148 Fundamental Accounting Principles... $53..721 Dr....664 Cr.Unadjusted balance.........

.$132..........664) $ 22.... Sale of Sony shares.... Sale of Eastman Kodak shares.863) Unrealized gains (losses) at year-end*............ $ 0 $ 1...................490) (20..............508) $(11.... Sale of Mattel shares...994) $(31.......943 (31.............$151.....767 $217..... 2005 Solutions Manual......... _______ Total realized gain (loss)............... ©McGraw-Hill Companies...057 * Equals the balance of the Market Adjustment account..... (18....425 (4.761 Market Adjustment.057 $185..994) Long-Term AFS Securities (market)..664) 22..........083) $ (8...................981 $( 3.. $(18...... Sale of Sara Lee shares. Inc.........354) _______ 22....000 2006 2007 Part 3 2005 Realized gains (losses) Sale of Johnson & Johnson shares.... Chapter 15 149 ...........Problem 15-3A (Concluded) Part 2 12/31/2005 12/31/2006 12/31/2007 Long-Term AFS Securities (cost).........114 $140......................450 $163..

.625 17..850 $2...... Year 2005 realized gains (losses) Stock Sold Cost Sale Gain (Loss) 7.. 31..225..... 17th Edition ...$2......975 Cr.. balance required on Dec..200 .850 .625 236. 40....000 shares of Company B stock..000 shares of Company C common stock.200 Market Value $ 162.177..... 2005.600 $ 980.... 1. 2005 150 Fundamental Accounting Principles.. 31. 540......500 9.......... 40. balance sheet at its market value of $2...500 1.....000 Dr..375 $ 155.750 1......325..177...225 Disclosure The portfolio of available-for-sale securities would be reported on the December 31......Problem 15-4A (40 minutes) Part 1 Available-for-sale securities on December 31.000 318.220.875 = $144....225 = 104.282...... Inc..070... available-for-sale securities Cost Market Value $1....... balance on Dec.875 $2. 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...714..000 shares of Company Z common stock.375 35.... 2005.000 1.177.000 Unrealized Gain—Equity. 256..... 2005 Security Cost 7......875 December 31.000 Adjustment to market for AFS securities...000 shares of Company B common stock.........975 Cr.... 2005 $ 40.100) ©McGraw-Hill Companies....325.275 $ ( 4...............281.282........ 2004..... 31 Market Adjustment—AFS*. * December 31. Part 2 Dec.$2.$ 159. $ 159...714...250 557.... 2004 $2......750 308.700 $2....000 shares of Company X common stock....569....569.. adjustment to the Market Adjustment account: $2....600 $2. Unrealized gains or losses appear in the equity section of the balance sheet.....

600 Realized gain (loss) ..1....... Inc. 2005 Solutions Manual..070..700) $(48..800) ©McGraw-Hill Companies.....900 (44.000 shares of Company A stock. Chapter 15 151 .........80.... 1....025.................

...... Inc. 147...... 780.................000 x 20%)............... 116.............60). 2 Cash......000) Plus 2005 earnings.000 x $1............................................. 39...... 48...........................................................000 Loss on Sale of Investments...............................................000) Plus 2006 earnings..........................000 ©McGraw-Hill Companies.............. 48................................000 Received cash dividend (30......000 Long-Term Investments—Kildaire*......... 15 Cash.....000 Sold Kildaire shares........000 Cash... Dec.... $780.............. January 2.............................................................Problem 15-5A (30 minutes) Part 1 1.. 2007 Original cost............... 147.......... 780............. 39.. 31 Long-Term Investments—Kildaire................ 116............................ 2007 Jan......... 116.............. (39...................30).. 31 Long-Term Investments—Kildaire........600 Record equity in investee earnings ($738............... 147... (48.400 Earnings from Long-Term Investment..000 Long-Term Investments—Kildaire............................. 10..600 Carrying value at date of sale...................000 Long-Term Investments—Kildaire.................. Journal entries (assuming significant influence) 2005 Jan.........000 Less 2005 dividends..................000 Record cash dividend (30................................. Oct...... $957... 957................ 947................................. 2006 Oct........ 23 Cash.....................000 x $1.............................................. Dec...... * Investment carrying value.........600 Earnings from Long-Term Investment................400 Less 2006 dividends..............000 Purchased Kildaire shares.... 17th Edition ...........................400 Record equity in investee earnings ($582.................................. 5 Long-Term Investments—Kildaire..... 2005 152 Fundamental Accounting Principles..................000 x 20%)...

.....000 Part 2 1.............. Journal entries (assuming NO significant influence) 2005 Jan................. 2007 (see computations in part 1) $957.... Dec.000 x $1............000 = $52................ 39.. January 1.......................... 780................ $254........... 48............. 147.........000 Received cash dividends (30....................... 2005 Solutions Manual.........000 Record market adjustment..000 = $133.000 Cash............500 $832............. 780..........000 Dividend Revenue.....................................$780.....................................................500 ...................500 Unrealized Gain—Equity.................................................... Inc.......000 Purchased Kildaire shares.................................000 Received cash dividend (30.........500 Record market adjustment..... 15 Cash............90 3. 31 Market Adjustment—AFS (LT)*................................ 81...500 $913..................000 x $1.........000 x $27...................500 ......000 ©McGraw-Hill Companies.................75 = $832............................. 81...... 48..... *30....000) Net increase........000 Unrealized Gain—Equity......$52.. Oct...................... 52.....500 $133... 23 Cash........... 5 Long-Term Investments—AFS (Kildaire).......500 . *30....400 Earnings from Kildaire (2006).........000 Dividend Revenue....000 x $30.............. $116..$780.............000 / 30.500 = $81...................... 39. (10... Carrying value per share..... Change in Pillar's equity due to stock investment Earnings from Kildaire (2005)....30)........500 2006 Oct..... Dec........................................Problem 15-5A (Continued) 2......................600 Loss on sale of investments............... Chapter 15 153 ............... 31 Market Adjustment—AFS (LT)*..............45 = $913. 52...60).....000 shares = $31...

.......500 + $81.......000 Dividend Revenue (2006).................. $ 48...............000 Gain on Sale of Investments.............. Change in Pillar's equity due to stock investment Dividend Revenue (2005)....... 39... Jan...........Problem 15-5A (Concluded) 2007 Jan.................................000 / 30.000 Gain on sale of investments...000 shares = $26 3.. 2.........................500 To remove market adjustment and related accounts ($52. Inc................. Investment cost per share......... 167.......................... 2 Cash..... $254.. 133...........167....... 947.....................780................ 2007 (see computations in part 1) $780.000 = $133...... 2 Unrealized Gain—Equity.........000 Long-Term Investments—AFS (Kildaire).............................. 133...................... 2005 154 Fundamental Accounting Principles....... 17th Edition .. January 1.................000 Sold Kildaire shares.........000 Net increase..........................500)...........................500 Market Adjustment—AFS (LT)..................000 ©McGraw-Hill Companies...

....................................................844 + $103) Cash*.648 = 11............................ *Original measure = (19........400 (1..........5314) **($28................................5181) Year-end measure = (19.......000 x $0..6852) Year-end measure = (17.................000 x $0................ 76 Accounts Receivable Hamid Albar....................................... 11.. 20 11.............. 28....................................... 11........844 Accounts Receivable Smithers...................... 18 Cash.......... Foreign Exchange Gain *..... 13..........500....Problem 15-6AA (60 minutes) Part 1 2005 Apr......000 x $0........... 7.......500..............................................5235) Gain for the period ……………………............. 61 Accounts Receivable Hamid Albar**...............5181) Nov...........................................400 (1...... 14.511 Foreign Exchange Loss...............648 ...000 x $1.............................. 19 = $28................................ 12 Jan................................6807) Loss for the period ............ 31 103 Accounts Receivable Smithers............ 750 Accounts Receivable Sumito....................844 (19..000 x $0..572 =$ 76 Cash*................................ Sales.................................. 29...................................648 Accounts Receivable Hamid Albar............................... 150 *(19............. 7....... 11.............000 x $0............572 *(17.........400 Accounts Receivable Sumito......................................... Dec................000 x $0.097 Accounts Receivable Smithers**.......... 14. 28................... *Original measure = (17....................$76) ©McGraw-Hill Companies........ Inc............................. 31 2006 Jan................. Chapter 15 155 ...................................... 8 Cash....6852) Dec...... 103 76 = $11............................................................................................844 = 28.................000 x $1..0091) Dec.............................650 Foreign Exchange Loss............938 July 21 14...............0096) Oct...............947 = $ 103 Foreign Exchange Loss*.......6771) **($11............................000 x $1...........................000 x $1........... Sales.......... 14 28...938 Sales..947 Foreign Exchange Gain.................. 2005 Solutions Manual...............648 (17.............. Sales..............

..... such as price discounts or longer credit terms............... December 31........ planning the purchases so that the payables in foreign currencies match the foreign currency receivables in time and amount....Problem 15-6AA (Continued) Part 2 Foreign exchange loss reported on the 2005 income statement November 18. Roundtree could attempt to negotiate foreign customer sales that are denominated in U.......... dollars.... To accomplish this.... Inc.............. Another possibility that may be of limited potential is for Roundtree to make credit purchases denominated in foreign currencies.... NOTE: A few students may also understand Roundtree's opportunity for hedging..................... 17th Edition ......... ©McGraw-Hill Companies....S..... Roundtree might be willing to offer favorable terms... December 31.......... 2005 156 Fundamental Accounting Principles. Total $(750) 103 (76) $(723) Part 3 To reduce the risk of foreign exchange gain or loss....... This involves selling foreign currency futures to be delivered at the time the receivables from foreign customers will be collected.......

..625]. 92...25) + $541.............PROBLEM SET B Problem 15-1B (60 minutes) Part 1 2005 Mar..........25) + $1...................25) + $625]........... May 7 Short-Term Investments—Trading (MTV)..........50].......154 23..... Loss on Sale of Short-Term Investments.. 35. 14 Short-Term Investments—Trading (W-M)....053 Sold MTV shares [(2...800 x $172... 34............975 Sold UPS shares [(600 x $60...... 10 Short-Term Investments—Trading (AOL).....................50) ........ Sept........................828 92.. ............................... 85...........500 x $36..500 x $34....$1..975 Purchased UPS shares [(600 x $57.... Short-Term Investments—Trading (UPS)......... 2005 Solutions Manual...... 71..........................................225 Purchased SPW shares [(1...00) + $1........ Gain on Sale of Short-Term Investments.$894].......... Cash. 311................154 Purchased Wal-Mart shares [(450 x $50.......428]...................053 Purchased MTV shares [(2.225 Cash.. June 2 Short-Term Investments—Trading (SPW)...... 23.......225 6........... 311............025].......... ©McGraw-Hill Companies.753 71... Cash......... Cash............................................200 x $59......... Chapter 15 157 .............406 431 34.....50) ... 26 Cash....... 2006 Apr.. 1 Short-Term Investments—Trading (UPS)...... Cash.. Short-Term Investments—Trading (MTV)..........753 Purchased AOL shares [(1.......... Inc........15) + $773].053 92............ 27 Cash........................975 34........

................. 6. 9...... 44......... * Market adjustment computations ©McGraw-Hill Companies............ 44... Inc.........75) ....... Short-Term Investments—Trading (W-M).$1................154 Gain on Sale of Short-Term Investments........ 4............. 31 Unrealized Loss—Income.............. Market Adjustment—Trading*.................... 31.....753 Sold AOL shares [(1........................ 66.....200 x $56... 23..... 301..............020].............................50].. 17th Edition .......Problem 15-1B (Concluded) 2007 Jan.. Aug............$610...........75) ...........845 Short-Term Investments—Trading (SPW)........ 28 Short-Term Investments—Trading (Pepsi)......................... 9 Cash.. 31....910 To reflect an unrealized loss in market values of trading securities................. 2005 158 Fundamental Accounting Principles......$1......... 311..445 Cash.860 Loss on Sale of S-T Investments....... Sold Wal-Mart shares [(450 x $53.. Sept... 22 Cash.....380 Loss on Sale of Short-Term Investments.215 Purchased Vodaphone shares [(750 x $40........... Oct...225 Sold SPW shares [(1............ 71.............00) + $1.......215 Cash.......800 x $168) ........ 31 Cash................50) + $840]..........000 x $43..893 Short-Term Investments—Trading (AOL).445].. Part 2 (Adjusting entry at Dec. 31. 3 Short-Term Investments—Trading (Voda)...240].... 2007) Dec..577 423 23..910 6.............445 Purchased PepsiCo shares [(1..............................................

. 750 Totals $41...660 Unrealized G a i n ( L o s s ) $(3...000 Vodaphone. Inc...000 $44....00 $37.465) $(6... 2005 Solutions Manual.750 31...Trading Securities’ Share Price Market Portfolio Shares a t Cost 1 2 / 3 1 / 0 7 PepsiCo 1. Chapter 15 159 ..215 $68...445) (3..750 $75..00 $41..910) ©McGraw-Hill Companies.445 27....

............... 9 Cash Dividend Revenue...625 x 425/1.............. Dividend Revenue.................................25) + $1...625 71..... *($10............ 24....... 71. Gain on Sale of Short-Term Investments.............. 2005 160 Fundamental Accounting Principles.....$525] **($71...... Treasury bills................. 11 Cash*.250 shares of Merck [(1.. Interest Revenue*................ Cash. 30 Cash Dividend Revenue..000 10....19)....................... 60 60 Received dividends on Dell stock (600 x $0....906 Sold 425 shares of Nokia............570 Purchased 1. (rounded) * [(425 x $46............. 6 Short-Term Investments—AFS (Nokia)........... 255 255 Received dividends on Nokia stock (1.....50) + $1............ Inc. Short-Term Investments—AFS (T-bills).......00) .000 300 Proceeds of U.............570 92....... 17th Edition .....327 24.......10)............................ 10......... Cash...06 x 6/12) 24 Cash.........119 17..........50) + $627].............. June 2 Short-Term Investments—AFS (Merck)..................Problem 15-2B (40 minutes) Part 1 Feb...700 shares of Nokia [(1............................500]. Cash.....275 x $0...... Short-Term Investments—AFS (Nokia)**......700 x $0.......000 x ......... 323 323 Received dividends on Nokia stock (1....700 x $41...........................327 Purchased 600 shares of Dell [(600 x $39......... 10.........300 10....................... Treasury bills.............20)........S........S.... ©McGraw-Hill Companies........... Apr....700) 16 Cash..................................250 x $72...............625 Purchased 1..................... 92..... 19... Cash.......... Aug..........000 Purchased U.................025 1......945]..... Nov............... 7 Short-Term Investments—AFS (Dell).......... 15 Short-Term Investments—AFS (T-bills)...................

......700 sh..... Part 3 Dec. = $1.00.. Part 5 (a) Income statement (i) Interest Revenue........25 (rounded).600 92... Inc........947 To reflect an unrealized loss in market values of available-for-sale securities.147 (b) Equity section of Balance sheet ©McGraw-Hill Companies. $1.125a..Dec...........669 as the net market value for these securities reported in the current assets section........250 x $72......947 20.......... $300 (ii) Dividend Revenue.. Chapter 15 161 .....945c......)/ 1.. 90 Received dividends on Dell stock (600 x $0.......50) + $1. 20.....250 shares: Entire $1....... An alternative presentation is to list these securities at the market value of $149.275 x $40..... Market Adjustment—AFS (ST)..570 $170....... ( 600 x $39.15)...– 425 sh...125... 18 Cash 90 Dividend Revenue........669 $20..275 shares: $1......00.......250 x $59.... Problem 15-2B (Concluded) Part 2 Comparison of Cost and Market Values of AFS Portfolio (1.945 (none sold). 2005 Solutions Manual.... $728 [$323 + $60 + $255 + $90] (iii) Gain on Sale of Short-Term Investments..................... Brokerage fee attached to remaining 600 shares: Entire $627 (none sold)....616 and show a subtraction of $20.... Part 4 The balance sheet would report the cost of these short-term investments in available-for-sale securities at $ 170.. Brokerage fee attached to remaining 1.700 sh... 31 Unrealized Loss—Equity. 1..119 (iv) Net effect on income is $2....750 $149....319 24...50) + $627b....947 for the market adjustment...25) + $1.....327 24... (1.... This yields $149..... 600 x $41.......275 x $41........ 1.. Nokia Dell Merck Cost $ 53....669 with a note disclosure of the cost...947 Brokerage fee attached to remaining 1.....616 a b c Unrealized Market Gain (Loss) 73..500 x (1......719 $ 51....

Inc.(i) Subtraction from equity of Unrealized Loss—Equity.147 increase in income (iii) Net effect on equity is a decrease of $18. $20. 17th Edition .947 (ii) Increase to equity from the $2.. 2005 162 Fundamental Accounting Principles.800 ©McGraw-Hill Companies.

... 90.00 = 85..............896 404 Market $ 85.....200 Ford: 5...... 90......................$231......50 = $85............200 85.... 404 Unrealized Gain—Equity.............50) + $2....976 $231...00) + $1.................. 59.........976 Cash....000 Polaroid: 1. 10 Long-Term Investments—AFS (Apple)................75 = 62......................200 x $49...... Ford.... 81..........300 .........625].995]......................... Chapter 15 163 ..100 $232...........000 62.....Problem 15-3B (60 minutes) Part 1 2005 Mar. Inc.................................896 = $404 ©McGraw-Hill Companies................... Dec. 1 Long-Term Investments—AFS (Polaroid)....400 x $33. Annual adjustment to fair values..... 59...... 81..976 Purchased Polaroid shares [(1. * Apple...... Cost $ 81.25) + $1............125 59.......................... May 7 Long-Term Investments—AFS (Ford)....300 Apple: 2...125 Purchased Ford shares [(5...... Sept................ Total.......................125 Cash....795 Purchased Apple shares [(2...........000 x $17..... Polaroid.......400 x $35.............100 $232...200 x $51..............176]..........795 Cash............795 90........................................ 31 Market Adjustment—AFS (LT)*.....000 x $17... 2005 Solutions Manual.....................

................800 23...666 1........................591 Purchased Sears shares [(900 x $24...... Cost $ 81...................... Total.............. $1.................... $1...............728 Gain on Sale of Investments..... 2005 164 Fundamental Accounting Principles..... 26 Cash.... Unadjusted balance...........000 x $16.............. 752 Long-Term Investments—AFS (Polaroid).... Annual adjustment to fair values.125 Sold Ford shares [(5.. 31 Unrealized Loss—Equity..........88) + $2......670 Market Adjustment—AFS (LT)*.200 x $52... 27 Cash ........................................................................... Sears......................................... * Apple..266 Cr.... Inc..........$1. 60.......591 $174...800 Sears: 900 x $26......... 10............ 17th Edition ......00 = $64...200 Duracell: 3............400 $ 173..........................................50) + $541].....312]............400 x $35.............200 64.......Problem 15-3B (Continued) 2006 Apr..00) . 1....38) $2. 22...............280 Purchased Duracell shares [(3...................670 Market $ 85.... 404 Dr..............280 22.. June 14 Long-Term Investments—AFS (Sears). 90..... June 2 Long-Term Investments—AFS (Duracell).............................670 Cr..... Dec...................976 Sold Polaroid shares [1.............. 59...... Required change .....400 $174..........00 = $23..$173....50 = $85........600 x $18.... 70.462 Long-Term Investments—AFS (Ford)...................400 Apple: 2......795 70.............237]...................600 x $18.......... 70.591 Cash .........280 Cash.663 Loss on Sale of Investments.. 22... Nov. Duracell............. ©McGraw-Hill Companies..............672].266 Market Adjustment account: Required balance .............666 ......400 = $1............................. 79......

...... 31 Cash ......................00 = $92...$2.............................................. Oct...............280]......000 = $4...........................280 Purchased Coca-Cola shares [(2.......591 Sold Sears shares [(900 x $27. 9 Cash ...................................................500 x $22............... 2005 Solutions Manual.........370 Cash...000 $125.....650 Market Adjustment account: Required balance. 44............... Market Adjustment—AFS (LT)*....... 3 Long-Term Investments—AFS (Motorola).......540 Long-Term Investments—AFS (Sears). 44..............$125.000 x $41.. 22.......400 x $29....061 Loss on Sale of Investments....... ©McGraw-Hill Companies........ $4... 22 Cash ....... 56.................................... 1...... $ 85...................................280 Motorola.795 Sold Apple shares [(2. 85..280 Sold Duracell shares [(3............384 Market $ 92........................................................... Sept..280 Cash .......000 $129...650 Coca-Cola: Motorola: 3...............................................................................734 Long-Term Investments—AFS (Apple). 81.....$1....... 69...................... 24..................... Inc.........................................000 x $46.000 2...................... Annual adjustment to fair values.500 x $29) + $870].. Chapter 15 165 .........................................$619].. $129......600 x $16...... * Cost Coca-Cola........ 12..... Dec..........75) ..104 Loss on Sale of Investments ..................650 ......................................000 33........370 Purchased Motorola shares [(1.......................00) ......370 Total.496]...... 31 3................... Oct......... 14.. 28 Long-Term Investments—AFS (Coca-Cola).... 70..... 44.....50) ........00) + $3............... 85.....000 1..176 Long-Term Investments—AFS (Duracell).00 = $33................339]......Problem 15-3B (Continued) 2007 Jan..131 Gain on Sale of Investments ............650 Cr........................ Aug........384 Unrealized Loss Equity...

............... Problem 15-3B (Concluded) Part 2 12/31/2005 Long-Term AFS Securities (cost)........... Inc....... Sale of Duracell shares............. $(10...... .....896 Market Adjustment..... 1........370) Unrealized gains (losses) at year-end.. $232.........266) (4..734) 1. Sale of Apple shares......... Sale of Polaroid shares..... 17th Edition .....176) (12.650) $173...............Unadjusted balance.....400 $125....................666 $129. Sale of Sears shares................ ........... 404 Long-Term AFS Securities (market).. ........ $231...266 Cr............... Total realized gain (loss)...650 (1.650) ©McGraw-Hill Companies.....300 12/31/2006 12/31/2007 $174..............710) $(14..462) 752 ____ $ 0 _______ $ (9... $3....266) $ (4.540 $(25.......384 Cr..... 2005 166 Fundamental Accounting Principles....000 2006 2007 Part 3 2005 Realized gains (losses) Sale of Ford shares. $404 $ (1. Required change............

......... 2005 $93......470 303... 2005 Security Cost Market Value 45.952..029..910 ..029....080) 13....530 *December 31.....088.530 Cr..918....750 85. 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.. 2005 Solutions Manual....000 shares of Company V common stock......000 shares of Company X common stock.745 Dr............... 31.088.. available-for-sale securities: Cost Market Value $1........ 31 34..785 Cr.. 58.190 22. 2004... 2005.... 2005.Problem 15-4B (40 minutes) Part 1 Available-for-sale securities on December 31.........136.118.. balance on Dec...125 Disclosure The portfolio of available-for-sale securities would be reported on the December 31.....250 $1......480 $2...000 shares of Company R common stock. 294....600 $2..............250 269...100 Gain (Loss) $(12.500 294......918.. 93....$2..110 308.952........250 $1..... $1.225 December 31.....118.000 shares of Company T stock......... Part 2 Dec..480 =$58.470 Sale $142...918....875 10..... Chapter 15 167 .......... 99.....250 shares of Company S stock..750 shares of Company S common stock.760 586... adjustment to the Market Adjustment account: $2.745 Unrealized Gain Equity........... Market Adjustment—AFS (LT)*.225 ..$1.. 462.250 12..$154.........910 $1.... balance required on Dec.. Year 2005 realized gain (loss) Stock Sold Cost 4. 2004 $1. Inc...125 = 34.250 $1.... 31...840 91......125... Unrealized gains or losses appear in the equity section of the balance sheet. balance sheet at its fair market value of $1. 272....125 616....570 420....198.630 ©McGraw-Hill Companies..785 Unrealized Loss Equity..

.550 ©McGraw-Hill Companies....... 2005 168 Fundamental Accounting Principles.. $ 1...............Realized gain (loss) .. 17th Edition ...... Inc.......

...................... 7......Problem 15-5B (50 minutes) Part 1 1.............. 19.................... 19...000 Less 2006 dividends....................................... *Investment carrying value at Jan.000 x 25%). 187................... 5 Long-Term Investments—Bloch...750 Record cash dividend (15...................................000 x 25%)............. 31 2007 Jan.....................................500 Gain on Sale of Investments...............196......... 2006 Aug...... 18. Dec......... 23...... (18...................$187.......................250 Long-Term Investments—Bloch.... 31 Long-Term Investments—Bloch.....25)....000 Record equity in investee’s earnings ($92........ Long-Term Investments (Bloch)... Cash......500 Cash...750) Plus 2006 earnings.........................................................................500 Less 2005 dividends............... 8........................95)........................ Chapter 15 169 ..................... 2005 Solutions Manual........................ 2007 Original cost...... 23........... Journal entries (assuming significant influence) 2005 Jan.....000 Earnings from Long-Term Investment.000 x $0..250 Received cash dividend (15........... 14................................................................................ (14........250) Plus 2005 earnings...........750 Long-Term Investments—Bloch*........................ 14............... Inc..... 23... 8 Cash.........000 Record equity in investee’s earnings ($76.. 19................... Aug........250 Sold Bloch shares.............$196...........187.......... 1 Cash................. 18.................................000 Carrying value at date of sale.500 ©McGraw-Hill Companies...............500 Purchased Bloch shares... 204.............750 Long-Term Investments—Bloch............000 x $1.................. 1 Dec........000 Earnings from Long-Term Investment....................................................

90 = $193..............$187..000 ©McGraw-Hill Companies...........................Problem 15-5B (Continued) 2..................................... 19........................................ Inc.10 3...................000 Earnings from Bloch-2006.........000 x $0....... 31 Market Adjustment—AFS (LT)*.........$23..........500 Cash...........250 Part 2 1.................................. Record market adjustment..................... 14.....250 Received cash dividend (15................... 6.......000 *15...... 17th Edition ............... Dec.500 / 15.500 Purchased Bloch shares... Carrying value per share (see computations in part 1) $196...... Change in Bengal's equity Earnings from Bloch-2005...........500 .................000 Unrealized Gain—Equity........... Journal entries (assuming NO significant influence) 2005 Jan...............250 Dividend Revenue.................187.......................................000 shares = $13....... 6..... 8.............000 Gain on sale of investments. 187...$50........95)........................................000 x $12... 1 Cash........... 2005 170 Fundamental Accounting Principles.....250 Net increase................500 = $6.. Aug...................... 5 Long-Term Investments—AFS (Bloch)........500 $193......... 14.

$187..... Change in Bengal's equity Dividend Revenue-2005........500 = $15........ Chapter 15 171 ........... 204.. Inc.......... Record market adjustment.... 18............................................ $14...........750 Unrealized Gain—Equity. $50......................... 18................187........................ Dec. 8 Cash.............000 x $13..750 2007 Jan................................750 $15... Unrealized Gain—Equity.............750 ..... *$9......750 Dividend Revenue....250 Dividend Revenue-2006.................750 To remove market adjustment and related accounts........... 9.................... 1 Cash............................500 / 15.......750 Received cash dividends (15......750 Long-Term Investments—AFS (Bloch).....50 3..250 Sold Bloch shares.................... 2007 $187....000 = $15............750 2.............. 17..................... 2005 Solutions Manual............ January 7... 8 Jan.........................750 Gain on sale of investments................................................ 15............000 shares = $12...............Problem 15-5B (Concluded) 2006 Aug.......25).. 18...........250 ©McGraw-Hill Companies.....000 = $9... 9............. 17. Investment cost per share......................55 = $203....750 + $6......................250 $203........500 Gain on Sale of Investments. 15.$6............. 31 Market Adjustment—AFS (LT)*...................................000 x $1.........250 .......250 Net increase....................750 Market Adjustment—AFS (LT)*............750 *15.......

.... 47.......... 6 Accounts Receivable—Chi-Ying......................1340) Dec..................0094) June 1 Cash.2060) **($47.0090) Oct................................ 47. 2005 172 Fundamental Accounting Principles............ 5................ 17th Edition ........................ 2.....................500 Foreign Exchange Loss..................000 x $0.. 72.......................................................100 (6................... 52............... 31 Accounts Receivable--Martinez Brothers................. 72........................... 8......... 49....222 ©McGraw-Hill Companies......................................000 x $0................. 49....................................................................1975) Dec............................982 (373......000 x $0.......... 1.................000 x $0....000 x $0............ 8................795 + $605) Jan...............…………….......613 Sales..... 48.............................1560) = 58...........……………............. 58.500...............206 Foreign Exchange Gain*......452 *(242...... 61... 15 Accounts Receivable—Martinez Brothers................................... 5 Cash*.....................Problem 15-6BA (60 minutes) Part 1 2005 May 26 Accounts Receivable—Fuji............. 49. 61...................... Inc...........982 Year-end measure = (373......................................1975) = $47........... = $ 605 2006 Jan................................795 Year-end measure = (242..................400 Gain for the period .2000) = 48.....................206 *Original measure = (373........................206 Dec........ 605 *Original measure = (242.........................188 Gain for the period .....400 Foreign Exchange Gain...................................................................................795 (242...............000 x $0. 61............................... 31 Accounts Receivable—Chi-Ying..000 x $0...............................................100 Sales........000 x $0..............795 Sales.852 Accounts Receivable—Chi-Ying**.......1340) = $49...................613 July 25 Cash*......................... 605 Foreign Exchange Gain*................................................................982 Sales..000 x $0.................966 Foreign Exchange Loss..600 Accounts Receivable—Fuji...........500.... = $ 8.......... 13 Cash*.......100 *(6..............................

58..188 * (373...1420) ** ($49.Accounts Receivable—Martinez Bros**.........000 x $0.982 + $8...206) ©McGraw-Hill Companies.. Inc... Chapter 15 173 ........ 2005 Solutions Manual.......

...... such as price discounts or longer credit terms.... $(2.600) December 31................................ To accomplish this......... 17th Edition .............................211 Part 3 To reduce the risk of foreign exchange gain or loss. This involves selling foreign currency futures to be delivered at the time the receivables from foreign customers will be collected.. ©McGraw-Hill Companies.S.. Another possibility that may be of limited potential is for Datamix to make credit purchases denominated in foreign currencies. Datamix could attempt to negotiate foreign customer sales that are denominated in U....... Datamix may be willing to offer favorable terms.. dollars................... $ 6..... 2005 174 Fundamental Accounting Principles.................... 605 Total.......................Problem 15-6BA (Concluded) Part 2 Foreign exchange gain reported on 2005 income statement July 25........... planning the purchases so that the payables in foreign currency match the foreign currency receivables in time and amount..................206 December 31... 8............ Inc. NOTE: A few students may also understand the company’s opportunity for hedging..

........000 $11......... Cash.................................100 2. Unrealized Gain—Income.....Serial Problem Serial Problem...... 11..............................520 $14............... * Market adjustment computations Trading securities’ Share Price Market portfolio Shares a t Cost Unrealized Gain (Loss) 6 / 3 0 / 0 5 J&J Starbucks Totals 200 100 $60 $21 $12..100 $13......... 2005 June 30 Market Adjustment—Trading*.... Chapter 15 175 .760 $ 760 (420) $ 340 ©McGraw-Hill Companies..520 2. 2........... 2005 Solutions Manual...240 11. 340 340 To reflect an unrealized gain in market values of trading securities................ Cash. Part 2 Adjusting entry at June 30......... Success Systems (35 minutes) Part 1 2005 April 16 Short-Term Investments—Trading (J&J).....240 Purchased Johnson & Johnson shares [(200 x $55) + $240]....240 2...............................520 Purchased Starbucks shares [(100 x $24) + $120].......... Inc.... 30 Short-Term Investments—Trading (Starbucks)...

942. 3. ($ thousands) follows $33. 17th Edition . The return on total assets for the year ended February 2. 2003. Krispy Kreme’s comprehensive loss for the year ended February 2.000. 2. 2005 176 Fundamental Accounting Principles. Yes.376) / 2] = 10..487 + $255. 4. The comprehensive loss amount is reported on Krispy Kreme’s consolidated statement of shareholders’ equity. 2003.06% 5. The statements are labeled as consolidated in all the financial statement headings. ©McGraw-Hill Companies. Its consolidated statement of shareholders' equity includes a Foreign Currency Translation Adjustment column. is $1.Reporting in Action — BTN 15-1 1. Krispy Kreme’s financial statements are consolidated. Answer depends on the annual report information obtained. Inc. Yes.478 / [($410.

5%).8%).192)/2] 5.263 x $162.1% = 6.7% = 1.560 + $116.245/[($116. 1.137 + $112.376)/2] = 10. ©McGraw-Hill Companies.137)/2] 1.7% = $2.7% x 1.8% x 1.39).5% 2.4% = 6. One Year Prior Analysis: Krispy Kreme has a higher return on total assets versus Tastykake (12.2%).48 One Year Prior 12.85 *(Some difference due to rounding).137)/ 2] = 1.5% = $6.1% = $33.354 x $394.493)/2] 12.7% vs.137 + $112.8% x 1.48 vs.1% vs. a higher profit margin (6.487 + $255.478/$491.7% One Year Prior: $6.46).7%).. Return on total assets = Profit margin x Total asset turnover Krispy Kreme’s component analysis of return on total assets* Current Year 10. Inc.376 + $171.8% vs.39 One Year Prior 5.85 vs.1% One Year Prior: $26. 2005 Solutions Manual. 1.549 x $491. This comparative analysis shows that Tastykake must improve on both components. Current Year Analysis: Krispy Kreme has a higher return on total assets versus Tastykake (10. and a higher total asset turnover (1.549/[($410.4% = $26.560 +116.378/ [($255. Chapter 15 177 .46 3.320/$166.000/$162.493)/2] = 12.263/[($116.Comparative Analysis — BTN 15-2 1. Krispy Kreme’s return on total assets Current Year: $33.378/$394.376 + $171. and a higher total asset turnover (1.478 / [($410.000 / [($116.376)/2] 10.354/[($255.245 x $166. 5.5% = 3.2% x 1. a higher profit margin (6. 1. 1.4% Tastykake’s return on total assets Current Year: $2. but it especially must increase its profit margin.897 + $255. 3.4% vs.320/ [($116. Tastykake’s component analysis of total return on assets Current Year 1.192)/2)] = 5.

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). Also. So. Designation of the bonds as available-forsale debt securities will require that an entry be made to recognize the unrealized holding loss on the bonds—but it will affect equity and not net income.. Inc. Since the problem states that management probably will not hold the bonds for the full ten years the correct classification is available-for-sale. 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. 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. Generally.Ethics Challenge — BTN 15-3 1. 17th Edition . Kendra’s bonus is not contingent on the classification of available-forsale versus held-to-maturity. Kendra must classify its debt securities as either short or long term and as available-for-sale or held-to-maturity. 3. 2. ©McGraw-Hill Companies. 2005 178 Fundamental Accounting Principles. The company’s auditors (internal and external) and/or its board of directors should serve as an effective check on Kendra’s accounting for the company’s long-term investments in securities.

. which was debited to the Long-Term Investments—Blackhawk account.. investments are reported at the investor's cost plus its share in the undistributed earnings accumulated by the investee since the stock was purchased...Communicating in Practice — BTN 15-4 TO: Abel Terrio FROM: (Your Name) SUBJECT: Sale of Blackhawk Common Stock The $6. Chapter 15 179 .S........... and therefore accounts for the investment according to the equity method..... This amount included $81.$31.... U.. Market value is greater. ©McGraw-Hill Companies.. Specifically: Cost is $38.000 from the investment in Blackhawk (Blackhawk’s 2005 net income of $202.$38... Gains = $816. Please call me if you have any questions... Taking It to the Net — BTN 15-5 ($ millions for Parts 1 through 4) 1..... Inc. 3... and Certificates of Deposit. Municipal securities.... 2005 Solutions Manual. 2001....000 loss on the sale of Blackhawk common stock is correctly stated. At sale.. Jackson Company owned 40% of the outstanding shares. 4.000.. Under the equity method.......000 was compared to the book value of $581.. 2002.. the book value of the investment is compared to the net proceeds to determine gain or loss........000. During year 2005. the income statement showed earnings from all investments of $126. the net proceeds of $575.....500 x 40%).000 loss..600 2. Corporate notes and bonds... At June 30.000 and the result was the $6. This increased the book value of the investment to $581..652. and Losses = $(558). Commercial paper.652 At June 30. and Market Value is $38.451. When sold. government and agency securities..

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. 2005 180 Fundamental Accounting Principles. 17th Edition . even if such increases are not allowed to be explicitly reported on the balance sheet. Each reporting period. b. c. 3. The instructor should serve as a facilitator during this learning reinforcement activity. Accountants also argue that CEOs will be sure to alert investors if key assets have increased in value. Inc. plant assets. Typically. financial assets on the balance sheet can fluctuate and show both increases and decreases in current values. That is. Economists argue that marking-to-market results in “asymmetrical” balance sheets. and goodwill) can be marked down in value but not increased in value should they appreciate. The best argument for mark-to-market accounting is that it helps society allocate capital more efficiently by improving financial understanding. accountants focus on and report historical data. ©McGraw-Hill Companies. asset and liabilities are to be adjusted from previously reported values to reflect the most current value. Accountants believe that the non-mark-up in value rule is a good precaution in that it prevents unjustified markups of non-financial assets. non-financial assets (such as inventories. 5. However. The assumptions that went into estimating the values could be publicized and audited.Teamwork in Action — BTN 15-6 There is no specific solution to this activity. 2. Business Week Activity — BTN 15-7 1. 4. Investors usually desire future-oriented information about companies they are interested in evaluating. “Marking-to-market” means that the assets and liabilities are to be shown on a company’s financial statements at their current market values.. A range of possible asset values could be published which would serve to highlight the uncertain nature of the data.

Your investment in long-term stocks gives you opportunity to earn returns (substantially) in excess of the rates of returns on the CDs. Stock investments also can decline in market value over time—indeed. An unrealized gain or loss occurs when a security’s market value differs from what it had cost to purchase it— unrealized implies that the security is not yet sold and. There are also potential disadvantages of investing in long-term stock vis-àvis CDs. the bank fixes the length of the investment. as part of “other comprehensive income. More generally. they potentially could lose their entire value. Inc.. Stock investments absorb trading costs. Any unrealized gains or losses on the available-for-sale securities will not affect Iglesias Company’s income statement. thus.Entrepreneurial Decision — BTN 15-8 1. any realized gain or loss might be substantially different. the decision to invest in long-term stock vis-à-vis CDs is the classic investment decision involving the trade-off between return and risk (higher expected returns carry higher risk). Unrealized gains or losses on AFS securities are reported in the equity section of the balance sheet. You can better control the timing of cash investments in stocks. 2. 2005 Solutions Manual. Chapter 15 181 . That is. Email Composition— To: From: Re: Gloria Perez Ralph Cruz’s assistant Comparing long-term stock investments to CDs There are several possible advantages to investing in long-term stock investments in comparison to CDs. ©McGraw-Hill Companies. 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.” 3. you can sell the stocks at any time per your discretion at typically lower costs that you can with CDs. Email Composition— To: From: Re: Andy Iglesias Ralph Cruz’s 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. In the case of CDs.

9% and 5.718.373.5%). 17th Edition . 3.3 + 25.39).Hitting the Road— BTN 15-9A Exchange rates can be found at businesses that specialize in foreign currency exchange.43). higher profit margin (6. Current Year Analysis: Krispy Kreme has a higher return on total assets (10.002.968.4% vs.3)/2] = 3. One Year Prior Analysis: Krispy Kreme has a higher return on total assets (12. Both Grupo Bimbo and Tastykake should focus on improving a lower than normal profit margin.6% and 1. Overall.781.48 and 1.8%). Inc. 1. 4.1)/2] = 4.3 x 41.46 and 1.002.8% x 1.3)/2] = 2.1 x 34.6% Prior Year: 1.7% vs. Also.43 2.49 vs. and higher total asset turnover (1.1% vs.035.4% and 1.7/41.9% 6.718.781. Krispy Kreme is the superior performer.2%). 1.8% and 3.9% = 1.682.682. 15-10 Grupo Bimbo (millions of pesos) Return on total assets = Net Income / Average Total Assets Current Year: 1.85 vs. However. railroad stations and airports also post foreign exchange rates and offer currency exchange services.8% vs.781.6% = 1. Global Decision— BTN 1. 2.6 + 23.1/[(23. and higher profit margin (6.7%).968. 6.373.035.9% Return on total assets = Profit margin x Total asset turnover Current Year 3.3 + 25. 2005 182 Fundamental Accounting Principles..3/[(31.0/34. Grupo Bimbo has a slightly higher total asset turnover (1.6% 3.6 + 23.0 / [(23.49 One Year Prior 6.781.1)/2] = 6.4% x 1.7 / [(31. American Express offices abroad exchange currencies for cardholders and post foreign exchange rates. Typically. ©McGraw-Hill Companies.