Investments and International Operations: Questions

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.
٤. 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.
©McGraw-Hill Companies, Inc., 2005

Solutions Manual, Chapter 15 123
9. Unrealized holding gains and losses are not reported on the standard income
statement for available-for-sale securities. Unrealized gains and losses for these
securities are reported in the stockholders’ equity section of the balance sheet.
(They can also be reported either in a separate comprehensive income statement or
in a combined statement of comprehensive income.)
10. The equity method is used when the investor has a “significant influence” over the
investee corporation; i.e., generally when the investor owns 20% or more of the
investee's voting stock. The equity method with consolidation is used when the
investor has a “controlling influence” over the investee.
11. A company prepares consolidated statements if the company has control over a
subsidiary as a result of owning more than 50% of the subsidiary's voting stock.
12A. Two major challenges in accounting for international operations include (1)
accounting for sales and purchases that are denominated in a foreign currency, and
(2) preparing consolidated financial statements with a foreign subsidiary.
13A. If the foreign exchange rate falls from $1.40 to $1.30 during the time the U.S.
company holds a receivable that is denominated in the foreign currency, the U.S.
company will incur an exchange loss. The foreign currency unit is worth $1.40 at the
time of sale but is worth only $1.30 at the time it is paid to the U.S. company; hence,
a loss of $0.10 is incurred for each foreign currency unit owed to the U.S. company.
14A. No. If a sales agreement requires a foreign customer to pay U.S. dollars to the United
States seller, the U.S. company is not exposed to the risk of exchange losses or
gains.
15. Krispy Kreme reports “Accumulated other comprehensive income” for February 2,
2003, which is a comprehensive loss of $1,486,000. On February 3, 2002, Krispy
Kreme had comprehensive income of $456,000.
16. Tastykake’s financial statements, including its balance sheet, are all labeled as being
consolidated statements.
١٧. Harley-Davidson’s return on total assets as of December 31, 2002, is ($ 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...................................................................... 500

Dividend Revenue ......................................... 500
Received dividend of $1 per share.

124 Fundamental Accounting Principles, 17th Edition
١. 2005
Dec. 31 Unrealized Loss—Equity.......................................... 6,000
Market Adjustment—Available-for-Sale (ST) ... 6,000
To reflect an unrealized loss in market value
of the available-for-sale securities’ portfolio.
٢. 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 ........ 2,000
Short-Term Investments—AFS ........................ 50,000
To record sale of one-half of the available-for-sale
securities. (Cost = $100,000 x 1/2)
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.... 25
Short-Term Investments—AFS (Lov) .......... 2,700
To record sale of available-for-sale securities.

May 9 Short-Term Investments—AFS (X&O) .................... 20,400

Cash................................................................ 20,400
Purchased 400 shares at $50 plus $400 fee.
June 2 Cash...................................................................... 11,020

Gain on Sale of Short-Term Investments.... 820
Short-Term Investments—AFS (X&O) ......... 10,200
To record sale of available-for-sale securities. The
original cost is $20,400 x200/400 =$10,200
Dec. 31 Unrealized Loss – Equity* ...................................... 1,000

Market Adjustment—Available-for-Sale (ST) ... 1,000
To reflect an unrealized loss in market value of
available-for-sale securities.
Number Cost Market Total Unrealized

As of of per Total Value per Market Loss
Dec. 31 Shares share Cost share Value (Market-Cost)
X&O 200 $51 $10,200 $46 $9,200 $1,000*
True: c, e, f, g,
1. Interest revenue (or interest earned)

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

July 31 Cash ................................................................... 900

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

Interest Revenue......................................... 750
Record interest earned ($900 x 5/6).

Valuation Method: The (fair) market value method is used to account for this
investment in long-term equity securities (AFS portfolio).
2005
May 20 Long-Term Investments—AFS (TKR) ............. 750,000
Cash ............................................................. 750,000
Record purchase of securities.
2006
Aug. 5 Cash ................................................................... 475,000
Long-Term Investments—AFS (TKR)*...... 375,000
Gain on Sale of Long-Term Investment.... 100,000
Record sale of securities. *(½ x $750,000)
Nov. 1 Cash .................................................................. 50,000

Long-Term Investment—TKR.................... 50,000
Received cash dividends ($125,000 x 40%).
Dec. 31 Long-Term Investments—TKR........................ 220,000

Earnings from Investment (TKR) .............. 220,000
Record equity in investee earnings
($550,000 x 40%).

1.
Dec. 31 Unrealized Loss⎯Equity ........................................ 6,000
Market Adjustment—Available-for-Sale (LT) ... 6,000
Record change in value of securities.
2. Each of the accounts used in the entry for (1) would be reported on the
balance sheet. The unrealized loss of $6,000 is a reduction in equity.
When the Market Adjustment account contains a credit balance as
shown here, it serves as a contra asset account. This results in the
reporting of the asset (long-term investment) at its market value.

Net income
Return on total assets =
Average total assets
This ratio provides information to evaluate a company's profitability
(efficiency) in using its available assets.
Return on Total Assets = Profit margin x Total asset turnover

Net income Net income Net sales
= x
Average total assets Net sales Average total assets
Component analysis is useful as it allows the determination of whether the

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

Quick Study 15-13A (10 minutes)
Date of Sale
Accounts Receivable .................................... 16,000
Sales ......................................................... 16,000
Record credit sale in value of pounds (10,000
pounds x 1.60).
Date of Payment
Cash ................................................................ 15,000
Foreign Exchange Loss ................................ 1,000
Accounts Receivable .............................. 16,000
Cash received on account (£10,000 x 1.50).
Quick Study 15-14A (10 minutes)
Mar. 1 Account Receivable—Hamac ....................... 13,622

Sales ......................................................... 13,622
Record credit sale in value of ringgits (20,000
ringgits x $0.6811).
Mar. 31 Cash ................................................................ 13,970

Foreign Exchange Gain .......................... 348
Accounts Receivable—Hamac ............... 13,622
Cash received on account (20,000 ringgits x
$0.6985).

EXERCISES
Exercise 15-1 (25 minutes)
a.
Feb. 15 Short-Term Investments—HTM (FTR) .................... 100,000
Cash................................................................ 100,000
Purchased 90-day, 8% debt securities.
b.
Mar. 22 Short-Term Investments—Trading (FIX) ........... 21,150
Cash................................................................ 21,150
Purchased 700 shares of stock for
(700 x $30) + $150 brokerage fee.
c.
May 16 Cash...................................................................... 102,000
Short-Term Investments—HTM (FTR) ......... 100,000
Interest Revenue ........................................... 2,000
Collected proceeds of debt securities
with interest of $100,000 x .08 x 90/360.
d.
Aug. 1 Short-Term Investments—AFS (Better Buy) .... 60,000
Cash................................................................ 60,000
Purchased 6-month, 10% debt securities.
e.
Sept. 1 Cash...................................................................... 700
Dividend Revenue ......................................... 700
Received dividend on stock (700 x $1.00).
f.
Oct. 8 Cash* .................................................................... 13,860
Short-Term Investments—Trading (FIX)** .... 10,575
Gain on Sale of Short-Term Investments......... 3,285
Sold 350 shares of stock.
* [(350 x $40) - $140] **($21,150/2)
g.
Oct. 30 Cash ........................................................................... 1,500
Interest Revenue ........................................... 1,500
Received cash interest payment
($60,000 x .10 x 90/360).

1.
2005
Dec. 31 Market Adjustment—Trading ............................ 10,000
Unrealized Gain—Income............................ 10,000
To reflect an unrealized gain in market values
of trading securities.
٢. The accounts in part (1) are reported on different financial statements.

i. The $10,000 debit balance in the Market Adjustment—Trading
account is an adjunct asset account in the balance sheet. It increases
the balance of the Short-Term Investment—Trading account to the
securities’ market value of $66,000.
ii. The Unrealized Gain of $10,000 is reported in the Other Revenues and
Gains section of the income statement.
3.
2006
Jan. 3 Cash .................................................................... 30,000
Gain on Sale of Short-Term Investments .. 2,000
Short-Term Investments—Trading* ........... 28,000
To record sale of trading securities.
*($56,000 x ½)

Unrealized
Available-for-Sale Portfolio Cost Market Gain (Loss)
Vicks Corporation bonds payable ..................... $ 79,600 $ 90,600
Pace Corporation notes payable........................ 60,600 52,900
Lake Lugano Company common stock............. 85,500 82,100
$225,700 $225,600 $ (100)
Dec. 31 Unrealized Loss—Equity.............................................. 100

Market Adjustment—AFS (ST) ........................ 100
To reflect unrealized loss.

2005
(a) Feb. 15 Short-Term Investments—HTM (A.G.) ................. 150,000
Cash ............................................................. 150,000
Purchased 120-day, 10% notes.
(b) Mar. 22 Long-Term Investments—AFS (Fran) .................. 17,750

Cash ............................................................. 17,750
Purchased 700 shares of Fran common
stock ([700 x $25] + $250).
(c) June15 Cash ................................................................... 155,000

Short-Term Investments—HTM (A.G.) ........... 150,000
Interest Revenue......................................... 5,000
Collected proceeds of 10% notes
($150,000 x 10% x 120/360).
(d) July 30 Short-Term Investments—Trading (MP3) ............. 50,000

Cash ............................................................. 50,000
Purchased 8% notes, due Jan. 30, 2006.
(e) Sept. 1 Cash ................................................................... 350

Dividend Revenue ...................................... 350
Received dividend on Fran shares
(700 x $0.50).
(f) Oct. 8 Cash*.................................................................. 11,025

Long-Term Investments—AFS (Fran)** ......... 8,875
Gain on Sale of L-T Investments............... 2,150
Sold 350 shares of Fran stock.
*([350 x $32] - $175) **($17,750/2)
(g) Oct. 30 Cash ................................................................... 1,000

Interest Revenue......................................... 1,000
Received interest payment on 8% notes
($50,000 x .08 x 3/12).

Computation of Market Adjustment

Cost Market Unrealized
Value Gain (Loss)
Nintendo Co. common stock ................... $ 68,900 $ 75,300
Atlantic Richfield Co. bonds payable ..... 24,500 22,800
Kellogg Company notes payable ............ 50,000 47,200
McDonald's Corp. common stock ........... 91,400 86,600
$234,800 $231,900 $ (2,900)
Dec. 31 Unrealized Loss—Equity ........................................ 2,900

Market Adjustment—AFS (ST) .......................... 2,900
Record market value adjustment for securities
($234,800 - $231,900).
Dec. 31 Market Adjustment—AFS (LT)........................... 12,078

Unrealized Loss—Equity ............................. 6,927
Unrealized Gain—Equity.............................. 5,151
Record market (fair) value of AFS securities.
Computation of Market Adjustment

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

2003
Dec. 31 Unrealized Loss—Equity ...................................... 11,440
Market Adjustment—AFS (LT)........................... 11,440
Record market value of securities
($374,000 - $362,560).
2004
Dec. 31 Market Adjustment—AFS (LT)* ............................ 37,740
Unrealized Loss—Equity ................................ 11,440
Unrealized Gain—Equity................................. 26,300
Record market value of securities.
* $453,200 - $426,900 = $26,300 net gain
($11,440 prior loss + $37,740 current period gain).
2005
Dec. 31 Market Adjustment—AFS (LT)* ............................ 79,450
* $686,450 - $580,700 = $105,750 net gain
($26,300 prior gain +$79,450 current period gain).
2006
Dec. 31 Unrealized Loss—Equity ...................................... 96,700
Unrealized Gain—Equity....................................... 105,750
Market Adjustment—AFS (LT)* ........................ 202,450
* $875,500 - $778,800 = $96,700 net loss
($105,750 prior gain + $202,450 current period loss).

Classification of Investments in Securities
a. The Beeman Company bonds are a long-term investment in held-to-

maturity debt securities.
b. The Baybridge stock is a long-term investment in equity securities

where the investor has a significant influence over the investee.
c. The Carrollton stock is a long-term investment in available-for-sale

equity securities.
d. The Newtech stock is a long-term investment in available-for-sale

equity securities.
e. Since the Flockhart stock is marketable and is held as an investment of

cash available for operations, it is a current asset.
Market Adjustment entry at Dec. 31, 2005

Dec. 31 Market Adjustment—AFS (LT)................................. 11,575
Unrealized Gain⎯Equity .................................... 11,575
Record market value of securities ($265,050 - $276,625).
Long-term AFS securities Cost Market Value

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

2005
Jan. 2 Long-Term Investments—Bushtex*......................... 207,480
Cash .................................................................. 207,480
Record purchase of investment ($204,000 + $3,480).
* Kash’s investment equals 33 1/3% of Bushtex’s stock (30,000/90,000).
Kash should use the equity method to account for its investment.
Sept. 1 Cash ........................................................................ 93,000

Long-Term Investments—Bushtex .................... 93,000
Record receipt of cash dividend (30,000 x $3.10).
Dec. 31 Long-Term Investments—Bushtex .......................... 208,300

Earnings from Long-Term Investment .......... 208,300
Record equity in investee earnings ($624,900/3).
2006
June 1 Cash ........................................................................ 108,000
Long-Term Investments—Bushtex .................... 108,000
Record receipt of cash dividend (30,000 x $3.60).
Dec. 31 Long-Term Investments—Bushtex .......................... 233,250

Earnings from Long-Term Investment .......... 233,250
Record equity in investee earnings ($699,750/3).
Dec. 31 Cash ........................................................................ 162,500

Gain on Sale of Investments .......................... 13,157
Long-Term Investments—Bushtex*................... 149,343
Record sale of investment.
* Book value (Bushtex stock) at 12/31/2006:

Original cost.............................................................................. $207,480
Less 2005 dividends................................................................. (93,000)
Plus share of 2005 earnings .................................................... 208,300
Less 2006 dividends................................................................. (108,000)
Plus share of 2006 earnings .................................................... 233,250
Book value at date of sale ....................................................... $448,030
Book value of shares sold ($448,030 x [10,000/30,000]) ........... $149,343†
†
Rounded to nearest dollar.

2005 return on total assets 2006 return on total assets

$36,400 $58,300
= 14.3% = 10.9%
($190,000 + $320,000)/2 ($320,000 + $750,000)/2
Wright Industries appears to be less efficient in the use of its total assets in
2006 than in 2005 as suggested by the decline in return on total assets
from 14.3% to 10.9%. However, without additional information, it is not
possible to determine whether Wright is within the normal range as
compared to similar companies. In addition, conditions may exist that
explain the apparent decline in efficiency between 2005 and 2006. For
example, Wright may have increased its investment in plant assets in 2006
in anticipation of increased production and sales in 2007. Or, its
competitors’ returns may have fallen even more than that of Wright’s
returns.
Exercise 15-11A (25 minutes)
2005
Dec. 16 Accounts Receivable⎯Bronson Ltd. ........ 25,905
Sales ....................................................... 25,905
Record credit sales (17,000 x $1.5238).
Dec. 31 Foreign Exchange Loss*............................. 422

Accounts Receivable⎯Bronson Ltd ... 422
Record year-end adjustment.
*Original measure = (17,000 x $1.5238) = $25,905
Year-end measure = (17,000 x $1.4990) = 25,483
Loss for the period = $ 422
2006
Jan. 15 Cash (17,000 x $1.5156) .............................. 25,765
Accounts Receivable⎯Bronson Ltd. .. 24,483
Foreign Exchange Gain* ....................... 282
Record cash receipt on account.
*Year-end measure = (17,000 x $1.4990) = $25,483
Final measure = (17,000 x $1.5156) = 25,765
Gain for the period = $ 282

Exercise 15-12A (25 minutes)
Quarter ended June 30, 2005

May 8 recorded amount (800,000 x $0.1984) ...................... $158,720
June 30 balance sheet amount (800,000 x $0.2013)........... 161,040
Unrealized gain reported on income statement ................ $ 2,320
Quarter ended September 30, 2005

June 30 balance sheet amount ............................................ $161,040
Sept. 30 balance sheet amount (800,000 x $0.2029) .......... 162,320
Unrealized gain reported on income statement ................. $ 1,280
Quarter ended December 31, 2005

Sept. 30 balance sheet amount............................................ $162,320
Dec. 31 balance sheet amount (800,000 x $0.1996) ........... 159,680
Unrealized loss reported on income statement ................. $ 2,640
Quarter ended March 31, 2006

Dec. 31 balance sheet amount ............................................ $159,680
Feb. 10, 2003, amount received (800,000 x $0.2047) ......... 163,760
Unrealized gain reported on income statement ................. $ 4,080
Note — The combined net gain for all four quarters equals:
$5,040 ($2,320 + $1,280 - $2,640 + $4,080).
This amount also equals the difference between the number of dollars finally
received ($163,760) and the initial measure of the account receivable ($158,720).
In addition, this amount equals the number of pesos (800,000) owed by the
customer times the change in the exchange rate ($0.0063) between the beginning
rate ($0.1984) and the ending rate ($0.2047).

PROBLEM SET A
Problem 15-1A (60 minutes)
Part 1
2005
Jan. 20 Short-Term Investments—Trading (Ford).............. 32,525
Cash.............................................................. 32,525
Purchased Ford Motor Co.
shares [(900 x $36.00) + $125].
Feb. 9 Short-Term Investments—Trading (Lucent) .... 44,200

Cash.............................................................. 44,200
Purchased Lucent shares
[(4,400 x $10) + $200].
Oct. 12 Short-Term Investments—Trading (Z-Seven) ... 4,100

Cash.............................................................. 4,100
Purchased Z-Seven shares
[(500 x $8) + $100].
2006
Apr. 15 Cash.................................................................... 34,915
Gain on Sale of Short-Term Investments.. 2,390
Short-Term Investments—Trading (Ford) ... 32,525
Sold Ford Motor shares
[(900 x $39.00) - $185].
July 5 Cash.................................................................... 5,025

Gain on Sale of Short-Term Investments.. 925
Short-Term Investments—Trading (Z-Seven) . 4,100
Sold Z-Seven shares [(500 x $10.25) - $100].
22 Short-Term Investments—Trading (Hunt) ......... 24,225

Cash.............................................................. 24,225
Purchased Hunt shares
[(800 x $30.00) + $225].
Aug. 19 Short-Term Investments—Trading (D.Karan).... 12,100

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

Problem 15-1A (Concluded)
2007
Feb. 27 Short-Term Investments—Trading (HCA) .............. 75,020
Cash.............................................................. 75,020
Purchased HCA shares
[(3,400 x $22.00) + $220].
Mar. 3 Cash.................................................................... 19,875

Loss on Sale of Short-Term Investments .............. 4,350
Short-Term Investments—Trading (Hunt) ... 24,225
Sold Hunt shares [(800 x $25.00) - $125].
June 21 Cash.................................................................... 35,020

Loss on Sale of Short-Term Investments ....... 9,180
Short-Term Investments—Trading (Lucent) .. 44,200
Sold Lucent shares [(4,400 x $8.00) - $180].
30 Short-Term Investments—Trading (B&D) ......... 47,695

Cash.............................................................. 47,695
Purchased Black & Decker shares
[(1,000 x $47.50) + $195].
Nov. 1 Cash.................................................................... 21,792

Gain on Sale of Short-Term Investments.. 9,692
Short-Term Investments—Trading (D.Karan) .. 12,100
Sold Donna Karan shares
[(1,000 x $22) - $208].
Part 2 (Adjusting entry at Dec. 31, 2007)
Dec. 31 Market Adjustment—Trading*................................. 2,385

Unrealized Gain—Income ................................. 2,385
* Market adjustment computations

Trading securities’ Share Price Market Unrealized
portfolio Shares at 12/31/07 Value Cost Gain (Loss)
HCA ....................... 3,400 $24.00 $ 81,600 $ 75,020 $ 6,580
Black and Decker .... 1,000 $43.50 43,500 47,695 (4,195)
Totals..................... $125,100 $122,715 $ 2,385

Part 1
2005
Apr. 16 Short-Term Investments—AFS (Gem) ................ 194,360
Cash ..................................................................... 194,360
Purchased 8,000 shares of Gem
[(8,000 x $24.25) + $360].
May. 1 Short-Term Investments—AFS (T-bills) .............. 200,000

Cash................................................................ 200,000
Purchased U.S. Treasury bills.
July 7 Short-Term Investments—AFS (Pepsi) ............... 197,350

Cash................................................................ 197,350
Purchased 4,000 shares of PepsiCo
[(4,000 x $49.25) + $350].
20 Short-Term Investments—AFS (Xerox)............... 33,910

Cash................................................................ 33,910
Purchased 2,000 shares of Xerox
[(2,000 x $16.75) + $410].
Aug. 3 Cash...................................................................... 203,000

Short-Term Investments—AFS (T-bills) ........ 200,000
Interest Revenue ................................................. 3,000
Proceeds of U.S. Treasury bills
($200,000 x .06 x 3/12).
15 Cash ........................................................................... 6,800

Dividend Revenue ......................................... 6,800
Received dividends on Gem (8,000 x $0.85).
28 Cash*.......................................................................... 119,550
Short-Term Investments—AFS (Gem)** ........ 97,180
Gain on Sale of Short-Term Investments.... 22,370
Sold 4,000 shares of Gem.
*(4,000 x $30) - $450 **($194,360 x 4,000/8,000)
Oct. 1 Cash ........................................................................... 7,600

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

Received dividends on Gem (4,000 x $1.05).
31 Cash...................................................................... 5,200
Received dividends on PepsiCo (4,000 x$1.30).

Problem 15-2A (Continued)
Part 2
Comparison of Cost and Market Values for AFS Portfolio
Unrealized
Cost Market Gain (Loss)
a
Gem Co. (4,000 x $24.25) + 180 ............. $ 97,180
4,000 x $26.50 ......................... $106,000
PepsiCo (4,000 x $49.25) + 350b............. 197,350
4,000 x $46.50 ......................... 186,000
Xerox (2,000 x $16.75) + 410c ............. 33,910
2,000 x $13.75 ......................... 27,500
$328,440 $319,500 $8,940
a
Brokerage fee attached to remaining 4,000 shares: $360 x (8,000 sh –4,000 sh.)/ 8,000 sh.= $180.
b
Brokerage fee attached to remaining 4,000 shares: Entire $350 (none sold).
c
Brokerage fee attached to remaining 2,000 shares: Entire $410 (none sold).
Part 3
Dec. 31 Unrealized Loss⎯Equity.............................................. 8,940

Market Adjustment—AFS (ST) ......................... 8,940
To reflect an unrealized loss in market values of
Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $328,440 and show a subtraction of $8,940
for the market adjustment. This yields $319,500 as the net market value for
these securities reported in the current assets section. An alternative
presentation is to list these securities at the market value of $319,500 with
a note disclosure of the cost.
Part 5
(a) Income statement
(i) Interest Revenue, $3,000
(ii) Dividend Revenue, $23,800 [$6,800 + $7,600 + $4,200 + $5,200]
(iii) Gain on Sale of Short-Term Investments, $22,370
(iv) Net effect on income is $49,170
(b) Equity section of Balance sheet

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

Part 1
2005
Jan. 20 Long-Term Investments—AFS (J&J) ..................... 17,465
Cash .................................................................. 17,465
Purchased Johnson & Johnson
shares [(900 x $18.75) + $590].
Feb. 9 Long-Term Investments—AFS (Sony).................... 105,714

Cash .................................................................. 105,714
Purchased Sony shares
[(2,200 x $46.88) + $2,578].
June 12 Long-Term Investments—AFS (Mattel) .................. 28,582

Cash .................................................................. 28,582
Purchased Mattel shares
[(500 x $55.50) + $832].
Dec. 31 Unrealized Loss⎯Equity ...................................... 18,994

Market Adjustment—AFS (LT)*......................... 18,994
Annual adjustment to market values.
* Cost Market
J & J ................ $ 17,465 $ 18,342
Sony................ 105,714 85,800
Mattel .............. 28,582 28,625
Total ................ $151,761 $132,767
J & J: 900 x $20.38 = $18,342

Sony: 2,200 x $39.00 = $85,800
Mattel: 500 x $57.25 = $28,625
Mkt. Adj.: $151,761 - $132,767 = $18,994

2006
Apr. 15 Cash .......................................................................... 18,890
Gain on Sale of Investments ............................ 1,425
Long-Term Investments—AFS (J&J) ................. 17,465
Sold Johnson & Johnson shares
[(900 x $21.75) - $685].
July 5 Cash .......................................................................... 24,074

Loss on Sale of Investments .................................. 4,508
Long-Term Investments—AFS (Mattel) .............. 28,582
Sold Mattel shares [(500 x $49.13) - $491].
July 22 Long-Term Investments—AFS (Sara Lee)................. 59,740

Cash .................................................................... 59,740
Purchased Sara Lee shares
[(1,600 x $36.25) + $1,740].
Aug. 19 Long-Term Investments—AFS (Eastman Kodak) ....... 51,660

Cash .................................................................... 51,660
Purchased Eastman Kodak shares
[(1,800 x $28.00) + $1,260].
Dec. 31 Unrealized Loss⎯Equity ........................................ 12,670

Market Adjustment—AFS (LT)*........................... 12,670
* Cost Market
Kodak................. $ 51,660 $ 57,150
Sara Lee............. 59,740 48,000
Sony ................... 105,714 80,300
Total ................... $217,114 $185,450
Kodak: 1,800 x $31.75 = $57,150
Sara Lee: 1,600 x $30.00 = $48,000
Sony: 2,200 x $36.50 = $80,300
$217,115 - $185,450 = $31,664
Market Adjustment account:

Required balance ..... $31,664 Cr.
Unadjusted balance.. 18,994 Cr.
Required change...… $12,670 Cr.

2007
Feb. 27 Long-Term Investments—AFS (Microsoft) .............. 81,948
Cash ................................................................. 81,948
Purchased Microsoft shares
[(3,400 x $23.63) + $1,606].
June 21 Cash ....................................................................... 85,360

Loss on Sale of Investments .............................. 20,354
Long-Term Investments—AFS (Sony) ............. 105,714
Sold Sony shares [(2,200 x $40.00) - $2,640].
June 30 Long-Term Investments—AFS (Black & Decker) ...... 58,995

Cash ................................................................. 58,995
Purchased Black & Decker shares
[(1,200 x $47.50) + $1,995].
Aug. 3 Cash ....................................................................... 48,250

Loss on Sale of Investments ............................... 11,490
Long-Term Investments—AFS (Sara Lee)......... 59,740
Sold Sara Lee shares
[(1,600 x $31.25) - $1,750].
Nov. 1 Cash ....................................................................... 74,641

Gain on Sale of Investments ......................... 22,981
Long-Term Investments—AFS (E. Kodak) ........ 51,660
Sold Eastman Kodak shares
[(1,800 x $42.75) - $2,309].
Dec. 31 Market Adjustment—AFS (LT)*.............................. 53,721

Unrealized Loss—Equity ................................ 31,664
* Cost Market
Black & Decker.................. $ 58,995 $ 67,800
Microsoft............................ 81,948 95,200
Total ................................... $140,943 $163,000
Black & Decker: 1,200 x $56.50 = $67,800
Microsoft: 3,400 x $28.00 = $95,200
$163,000 - $140,943 = $22,057 (market exceeds cost)
Required balance ............ $22,057 Dr.
Unadjusted balance ........ 31,664 Cr.
Required change............. $53,721 Dr.

Part 2
12/31/2005 12/31/2006 12/31/2007
Long-Term AFS Securities (cost)................. $151,761 $217,114 $140,943
Market Adjustment ................................... (18,994) (31,664) 22,057

Long-Term AFS Securities (market) ............ $132,767 $185,450 $163,000
Part 3
2005 2006 2007
Realized gains (losses)
Sale of Johnson & Johnson shares ...... $ 1,425
Sale of Mattel shares............................... (4,508)
Sale of Sara Lee shares .......................... $(11,490)
Sale of Sony shares ................................ (20,354)
Sale of Eastman Kodak shares .............. _______ _______ 22,981
Total realized gain (loss) .......................... $ 0 $( 3,083) $ (8,863)
Unrealized gains (losses) at year-end* ... $(18,994) $(31,664) $ 22,057

* Equals the balance of the Market Adjustment account.

Part 1
Available-for-sale securities on December 31, 2005
Security Cost Market Value
7,000 shares of Company B common stock....... $ 159,375 $ 162,750
35,000 shares of Company C common stock....... 1,325,500 1,220,625
9,000 shares of Company X common stock ....... 256,625 236,250
17,000 shares of Company Z common stock ....... 540,700 557,600
$2,282,200 $2,177,225
Disclosure
The portfolio of available-for-sale securities would be reported on the
December 31, 2005, balance sheet at its market value of $2,177,225.
Part 2
Dec. 31 Market Adjustment—AFS* ................................... 40,000
Unrealized Gain—Equity................................ 40,000
Adjustment to market for AFS securities..
* December 31, 2004, available-for-sale securities

Cost Market Value
$1,070,600 $ 980,000
318,750 308,000
1,325,500 1,281,875
$2,714,850 $2,569,875
December 31, 2005, adjustment to the Market Adjustment account:

$2,714,850 - $2,569,875 = $144,975 Cr. balance on Dec. 31, 2004
$2,282,200 - $2,177,225 = 104,975 Cr. balance required on Dec. 31, 2005
$ 40,000 Dr. to adjust cost to market value
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2005 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2005 realized gains (losses)

Stock Sold Cost Sale Gain (Loss)
7,000 shares of Company B stock .......... $ 159,375 $ 155,275 $ ( 4,100)
80,000 shares of Company A stock ........ 1,070,600 1,025,900 (44,700)
Realized gain (loss) ................................. $(48,800)

Part 1
1. Journal entries (assuming significant influence)
2005
Jan. 5 Long-Term Investments—Kildaire ..................... 780,000
Cash ............................................................ 780,000
Purchased Kildaire shares.
Oct. 23 Cash .................................................................. 48,000

Long-Term Investments—Kildaire ............... 48,000
Received cash dividend (30,000 x $1.60).
Dec. 31 Long-Term Investments—Kildaire ..................... 116,400

Earnings from Long-Term Investment .... 116,400
($582,000 x 20%).
2006
Oct. 15 Cash .................................................................. 39,000
Long-Term Investments—Kildaire ............... 39,000
Record cash dividend (30,000 x $1.30).
Dec. 31 Long-Term Investments—Kildaire ..................... 147,600

($738,000 x 20%).
2007
Jan. 2 Cash .................................................................. 947,000
Loss on Sale of Investments ......................... 10,000
Long-Term Investments—Kildaire* ............. 957,000
Sold Kildaire shares.
* Investment carrying value, January 2, 2007
Original cost ........................................... $780,000
Less 2005 dividends .............................. (48,000)
Plus 2005 earnings ................................ 116,400
Less 2006 dividends .............................. (39,000)
Plus 2006 earnings ................................ 147,600
Carrying value at date of sale............... $957,000

2. Carrying value per share, January 1, 2007 (see computations in part 1)

$957,000 / 30,000 shares = $31.90
3. Change in Pillar's equity due to stock investment

Earnings from Kildaire (2005)......................... $116,400
Earnings from Kildaire (2006)......................... 147,600
Loss on sale of investments .......................... (10,000)
Net increase ..................................................... $254,000
Part 2
1. Journal entries (assuming NO significant influence)
2005
Jan. 5 Long-Term Investments—AFS (Kildaire) .......... 780,000
Cash ............................................................ 780,000
Purchased Kildaire shares.
Oct. 23 Cash .................................................................. 48,000

Dividend Revenue ..................................... 48,000
Dec. 31 Market Adjustment—AFS (LT)* ...................... 52,500

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

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

2007
Jan. 2 Cash .................................................................. 947,000
Long-Term Investments—AFS (Kildaire) .... 780,000
Gain on Sale of Investments .................... 167,000
Sold Kildaire shares.
Jan. 2 Unrealized Gain—Equity................................. 133,500

Market Adjustment—AFS (LT)...................... 133,500
To remove market adjustment and related
accounts ($52,500 + $81,000 = $133,500).
2. Investment cost per share, January 1, 2007 (see computations in part 1)

$780,000 / 30,000 shares = $26
3. Change in Pillar's equity due to stock investment

Dividend Revenue (2005) ............................... $ 48,000
Dividend Revenue (2006) ............................... 39,000
Gain on sale of investments.......................... 167,000
Net increase .................................................... $254,000

Problem 15-6AA (60 minutes)
Part 1
2005
Apr. 8 Cash .................................................................... 7,938
Sales ............................................................. 7,938
July 21 Accounts Receivable⎯Sumito......................... 14,400
Sales ............................................................. 14,400
(1,500,000 x $0.0096)
Oct. 14 Accounts Receivable⎯Smithers ..................... 28,844
Sales ............................................................. 28,844
(19,000 x $1.5181)
Nov. 18 Cash .................................................................... 13,650
Foreign Exchange Loss .................................... 750
Accounts Receivable⎯Sumito................... 14,400
(1,500,000 x $0.0091)
Dec. 20 Accounts Receivable⎯Hamid Albar................ 11,648
Sales ............................................................. 11,648
(17,000 x $0.6852)
Dec. 31 Accounts Receivable⎯Smithers. .................... 103
Foreign Exchange Gain * ............................ 103
Gain for the period ……………………... = $ 103
Dec. 31 Foreign Exchange Loss*................................... 76

Accounts Receivable⎯Hamid Albar.......... 76
Loss for the period ................. =$ 76
2006
Jan. 12 Cash*................................................................... 29,097
Accounts Receivable⎯Smithers**............. 28,947
Foreign Exchange Gain .............................. 150
*(19,000 x $1.5314) **($28,844 + $103)
Jan. 19 Cash*................................................................... 11,511
Foreign Exchange Loss .................................... 61
Accounts Receivable⎯Hamid Albar**....... 11,572
*(17,000 x $0.6771) **($11,648 - $76)

Problem 15-6AA (Continued)
Part 2
Foreign exchange loss reported on the 2005 income statement

November 18 ...................................... $(750)
December 31....................................... 103
December 31....................................... (76)
Total $(723)
Part 3
To reduce the risk of foreign exchange gain or loss, Roundtree could

attempt to negotiate foreign customer sales that are denominated in U.S.
dollars. To accomplish this, Roundtree might be willing to offer favorable
terms, such as price discounts or longer credit terms. Another possibility
that may be of limited potential is for Roundtree to make credit purchases
denominated in foreign currencies, planning the purchases so that the
payables in foreign currencies match the foreign currency receivables in
time and amount.
NOTE: A few students may also understand Roundtree's opportunity for

hedging. This involves selling foreign currency futures to be delivered at
the time the receivables from foreign customers will be collected.

PROBLEM SET B
Problem 15-1B (60 minutes)
Part 1
2005
Mar. 10 Short-Term Investments—Trading (AOL)............. 71,753
Cash ............................................................. 71,753
Purchased AOL shares
[(1,200 x $59.15) + $773].
May 7 Short-Term Investments—Trading (MTV) ......... 92,053

Cash ............................................................. 92,053
Purchased MTV shares
[(2,500 x $36.25) + $1,428].
Sept. 1 Short-Term Investments—Trading (UPS) ......... 34,975

Cash ............................................................. 34,975
Purchased UPS shares
[(600 x $57.25) + $625].
2006
Apr. 26 Cash ................................................................... 85,225
Loss on Sale of Short-Term Investments ....... 6,828
Short-Term Investments—Trading (MTV) ... 92,053
Sold MTV shares [(2,500 x $34.50) - $1,025].
27 Cash ................................................................... 35,406

Gain on Sale of Short-Term Investments . 431
Short-Term Investments—Trading (UPS) ... 34,975
Sold UPS shares [(600 x $60.50) - $894].
June 2 Short-Term Investments—Trading (SPW) ............ 311,225

Cash ............................................................. 311,225
Purchased SPW shares
[(1,800 x $172.00) + $1,625].
14 Short-Term Investments—Trading (W-M) ......... 23,154

Cash ............................................................. 23,154
Purchased Wal-Mart shares
[(450 x $50.25) + $541.50].

Problem 15-1B (Concluded)
2007
Jan. 28 Short-Term Investments—Trading (Pepsi) ..... 44,445
Cash ........................................................... 44,445
Purchased PepsiCo shares [(1,000 x $43.00)
+ $1,445].
31 Cash ................................................................. 301,380

Loss on Sale of Short-Term Investments ..... 9,845
Short-Term Investments—Trading (SPW) ... 311,225
Sold SPW shares [(1,800 x $168) - $1,020].
Aug. 22 Cash ................................................................. 66,860

Loss on Sale of S-T Investments................... 4,893
Short-Term Investments—Trading (AOL) ... 71,753
Sold AOL shares [(1,200 x $56.75) - $1,240].
Sept. 3 Short-Term Investments—Trading (Voda) ...... 31,215

Cash ........................................................... 31,215
Purchased Vodaphone shares
[(750 x $40.50) + $840].
Oct. 9 Cash ................................................................. 23,577

Gain on Sale of Short-Term Investments ..... 423
Short-Term Investments—Trading (W-M)..... 23,154
Sold Wal-Mart shares
[(450 x $53.75) - $610.50].
Part 2 (Adjusting entry at Dec. 31, 2007)
Dec. 31 Unrealized Loss—Income .................................... 6,910

Market Adjustment—Trading* ................. 6,910
To reflect an unrealized loss in market
values of trading securities.

Trading Securities’ Share Price Market Unrealized
Portfolio Shares at 12/31/07 Value Cost Gain (Loss)
PepsiCo ................ 1,000 $41.00 $41,000 $44,445 $(3,445)
Vodaphone ............ 750 $37.00 27,750 31,215 (3,465)
Totals ................... $68,750 $75,660 $(6,910)

Part 1
Feb. 6 Short-Term Investments—AFS (Nokia) .......... 71,625
Cash ........................................................... 71,625
Purchased 1,700 shares of Nokia
[(1,700 x $41.25) + $1,500].
15 Short-Term Investments—AFS (T-bills) .......... 10,000

Cash ........................................................... 10,000
Purchased U.S. Treasury bills.
Apr. 7 Short-Term Investments—AFS (Dell) ............. 24,327

Cash ........................................................... 24,327
Purchased 600 shares of Dell
[(600 x $39.50) + $627].
June 2 Short-Term Investments—AFS (Merck) .......... 92,570

Cash ........................................................... 92,570
Purchased 1,250 shares of Merck
[(1,250 x $72.50) + $1,945].
30 Cash .................................................................. 323
Dividend Revenue ........................................ 323
Received dividends on Nokia stock
(1,700 x $0.19).
Aug. 11 Cash* ................................................................ 19,025

Gain on Sale of Short-Term Investments ... 1,119
Short-Term Investments—AFS (Nokia)**... 17,906
Sold 425 shares of Nokia. (rounded)
* [(425 x $46.00) - $525] **($71,625 x 425/1,700)
16 Cash ................................................................. 10,300

Short-Term Investments—AFS (T-bills) ....... 10,000
Interest Revenue*......................................... 300
Proceeds of U.S. Treasury bills.
*($10,000 x .06 x 6/12)
24 Cash ................................................................. 60
Received dividends on Dell stock
(600 x $0.10).
Nov. 9 Cash .................................................................. 255

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

Received dividends on Dell stock
(600 x $0.15).

Part 2
Comparison of Cost and Market Values of AFS Portfolio
Unrealized
Cost Market Gain (Loss)
a
Nokia (1,275 x $41.25) + $1,125 ......... $ 53,719
1,275 x $40.25 (rounded)......... $ 51,319
Dell ( 600 x $39.50) + $627b ............ 24,327
600 x $41.00 .......................... 24,600
Merck (1,250 x $72.50) + $1,945c ......... 92,570
1,250 x $59.00 .......................... 73,750
$170,616 $149,669 $20,947
a
Brokerage fee attached to remaining 1,275 shares: $1,500 x (1,700 sh.– 425 sh.)/ 1,700 sh. = $1,125.
b
Brokerage fee attached to remaining 600 shares: Entire $627 (none sold).
c
Brokerage fee attached to remaining 1,250 shares: Entire $1,945 (none sold).
Part 3
Dec. 31 Unrealized Loss—Equity............................................ 20,947
Market Adjustment—AFS (ST)......................... 20,947
To reflect an unrealized loss in market values of
Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $ 170,616 and show a subtraction of $20,947
for the market adjustment. This yields $149,669 as the net market value for
these securities reported in the current assets section. An alternative
presentation is to list these securities at the market value of $149,669 with
a note disclosure of the cost.
Part 5
(a) Income statement
(i) Interest Revenue, $300
(ii) Dividend Revenue, $728 [$323 + $60 + $255 + $90]
(iii) Gain on Sale of Short-Term Investments, $1,119
(iv) Net effect on income is $2,147
(b) Equity section of Balance sheet

(i) Subtraction from equity of Unrealized Loss—Equity, $20,947
(ii) Increase to equity from the $2,147 increase in income
(iii) Net effect on equity is a decrease of $18,800

Part 1
2005
Mar. 10 Long-Term Investments—AFS (Apple) .............. 81,795
Cash ............................................................... 81,795
Purchased Apple shares
[(2,400 x $33.25) + $1,995].
May 7 Long-Term Investments—AFS (Ford) ................ 90,125

Cash ............................................................... 90,125
Purchased Ford shares
[(5,000 x $17.50) + $2,625].
Sept. 1 Long-Term Investments—AFS (Polaroid) .......... 59,976

Cash ............................................................... 59,976
Purchased Polaroid shares
[(1,200 x $49.00) + $1,176].
Dec. 31 Market Adjustment—AFS (LT)*........................... 404

Unrealized Gain—Equity............................... 404
Annual adjustment to fair values.
* Cost Market
Apple .......... $ 81,795 $ 85,200
Ford ............ 90,125 85,000
Polaroid...... 59,976 62,100
Total............ $231,896 $232,300
Apple: 2,400 x $35.50 = $85,200

Ford: 5,000 x $17.00 = 85,000
Polaroid: 1,200 x $51.75 = 62,100
$232,300 - $231,896 = $404

Problem 15-3B (Continued)
2006
Apr. 26 Cash .................................................................. 79,663
Loss on Sale of Investments .......................... 10,462
Long-Term Investments—AFS (Ford) ....... 90,125
Sold Ford shares [(5,000 x $16.38) -
$2,237].
June 2 Long-Term Investments—AFS (Duracell)........ 70,280

Cash ............................................................ 70,280
Purchased Duracell shares
[(3,600 x $18.88) + $2,312].
June 14 Long-Term Investments—AFS (Sears)............ 22,591

Cash ........................................................... 22,591
Purchased Sears shares
[(900 x $24.50) + $541].
Nov. 27 Cash ................................................................. 60,728

Gain on Sale of Investments .................... 752
Long-Term Investments—AFS (Polaroid) ... 59,976
Sold Polaroid shares
[1,200 x $52.00) - $1,672].
Dec. 31 Unrealized Loss—Equity ................................ 1,670

Market Adjustment—AFS (LT)* .................. 1,670
* Cost Market
Apple........... $ 81,795 $ 85,200
Duracell....... 70,280 64,800
Sears ........... 22,591 23,400
Total ............ $174,666 $ 173,400
Apple: 2,400 x $35.50 = $85,200
Duracell: 3,600 x $18.00 = $64,800
Sears: 900 x $26.00 = $23,400
$174,666 - $173,400 = $1,266

Required balance ..... $1,266 Cr.
Unadjusted balance.. 404 Dr.
Required change ...... $1,670 Cr.

2007
Jan. 28 Long-Term Investments—AFS (Coca-Cola) ....... 85,280
Cash .............................................................. 85,280
Purchased Coca-Cola shares
[(2,000 x $41.00) + $3,280].
Aug. 22 Cash .................................................................... 69,061

Loss on Sale of Investments ............................. 12,734
Long-Term Investments—AFS (Apple) ........ 81,795
Sold Apple shares [(2,400 x $29.75) - $2,339].
Sept. 3 Long-Term Investments—AFS (Motorola).......... 44,370

Cash ............................................................... 44,370
Purchased Motorola shares
[(1,500 x $29) + $870].
Oct. 9 Cash .................................................................... 24,131

Gain on Sale of Investments ...................... 1,540
Long-Term Investments—AFS (Sears)......... 22,591
Sold Sears shares [(900 x $27.50) - $619].
Oct. 31 Cash .................................................................... 56,104

Loss on Sale of Investments ............................ 14,176
Long-Term Investments—AFS (Duracell)..... 70,280
Sold Duracell shares
[(3,600 x $16.00) - $1,496].
Dec. 31 Unrealized Loss⎯Equity ................................... 3,384

Market Adjustment—AFS (LT)*...................... 3,384
* Cost Market
Coca-Cola ....................... $ 85,280 $ 92,000
Motorola .......................... 44,370 33,000
Total................................. $129,650 $125,000
Coca-Cola: 2,000 x $46.00 = $92,000
Motorola: 1,500 x $22.00 = $33,000
$129,650 - $125,000 = $4,650
Required balance ...... $4,650 Cr.
Unadjusted balance .. 1,266 Cr.
Required change ....... $3,384 Cr.

Part 2
12/31/2005 12/31/2006 12/31/2007
Long-Term AFS Securities (cost)............. $231,896 $174,666 $129,650
Market Adjustment ............................... 404 (1,266) (4,650)

Long-Term AFS Securities (market) ........ $232,300 $173,400 $125,000
Part 3
2005 2006 2007
Realized gains (losses)
Sale of Ford shares .............................. $(10,462)
Sale of Polaroid shares........................ 752
Sale of Duracell shares........................ $(14,176)
Sale of Apple shares ............................ (12,734)
Sale of Sears shares ............................ ____ _______ 1,540
Total realized gain (loss) ....................... $ 0 $ (9,710) $(25,370)
Unrealized gains (losses) at year-end .. $404 $ (1,266) $ (4,650)

Part 1
Available-for-sale securities on December 31, 2005
Security Cost Market Value
45,000 shares of Company R common stock........ $1,118,250 $1,136,250
12,750 shares of Company S common stock ........ 462,570 420,750
85,000 shares of Company V common stock ........ 272,250 269,875
10,000 shares of Company X common stock ........ 99,840 91,250
$1,952,910 $1,918,125
Disclosure
The portfolio of available-for-sale securities would be reported on the
December 31, 2005, balance sheet at its fair market value of $1,918,125.
Part 2
Dec. 31 Unrealized Loss⎯Equity ..................................... 34,785
Unrealized Gain⎯Equity...................................... 58,745
Market Adjustment—AFS (LT)*........................ 93,530
*December 31, 2004, available-for-sale securities:
Cost Market Value
$1,118,250 $1,198,125
616,760 586,500
294,470 303,600
$2,029,480 $2,088,225
December 31, 2005, adjustment to the Market Adjustment account:

$2,088,225 - $2,029,480 = $58,745 Dr. balance on Dec. 31, 2004
$1,952,910 - $1,918,125 = 34,785 Cr. balance required on Dec. 31, 2005
$93,530 Cr. to adjust cost to market value
Part 3
Only gains or losses realized on the sale of available-for-sale securities
appear on the 2005 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.
Year 2005 realized gain (loss)

Stock Sold Cost Sale Gain (Loss)
4,250 shares of Company S stock ...... $154,190 $142,110 $(12,080)
22,000 shares of Company T stock ...... 294,470 308,100 13,630
Realized gain (loss) ............................... $ 1,550

Part 1
1. Journal entries (assuming significant influence)
2005
Jan. 5 Long-Term Investments—Bloch .................... 187,500
Cash ............................................................ 187,500
Purchased Bloch shares.
Aug. 1 Cash .................................................................. 14,250

Long-Term Investments—Bloch.................... 14,250
Dec. 31 Long-Term Investments—Bloch .................... 23,000

Record equity in investee’s earnings
($92,000 x 25%).
2006
Aug. 1 Cash .................................................................. 18,750
Long-Term Investments—Bloch .............. 18,750
Record cash dividend (15,000 x $1.25).
Dec. 31 Long-Term Investments (Bloch) .................... 19,000

Record equity in investee’s earnings
($76,000 x 25%).
2007
Jan. 8 Cash .................................................................. 204,750
Long-Term Investments—Bloch*............. 196,500
Sold Bloch shares.
*Investment carrying value at Jan. 7, 2007
Original cost ...................................... $187,500
Less 2005 dividends ......................... (14,250)
Plus 2005 earnings ........................... 23,000
Less 2006 dividends ......................... (18,750)
Plus 2006 earnings ........................... 19,000
Carrying value at date of sale .......... $196,500

2. Carrying value per share (see computations in part 1)

$196,500 / 15,000 shares = $13.10
3. Change in Bengal's equity

Earnings from Bloch-2005 .............................. $23,000
Earnings from Bloch-2006 .............................. 19,000
Gain on sale of investments........................... 8,250
Net increase ..................................................... $50,250
Part 2
1. Journal entries (assuming NO significant influence)

2005
Jan. 5 Long-Term Investments—AFS (Bloch).......... 187,500
Cash ............................................................ 187,500
Purchased Bloch shares.
Aug. 1 Cash .................................................................. 14,250


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

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

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

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

$203,250 - $187,500 = $15,750
$15,750 - $6,000 = $9,750
2007
Jan. 8 Cash .................................................................. 204,750
Long-Term Investments—AFS (Bloch).... 187,500
Sold Bloch shares.
Jan. 8 Unrealized Gain—Equity................................. 15,750

Market Adjustment—AFS (LT)* ................. 15,750
To remove market adjustment and
related accounts.
*$9,750 + $6,000 = $15,750
2. Investment cost per share, January 7, 2007

$187,500 / 15,000 shares = $12.50
3. Change in Bengal's equity

Dividend Revenue-2005 .................................. $14,250
Dividend Revenue-2006 .................................. 18,750
Gain on sale of investments........................... 17,250
Net increase ..................................................... $50,250

Problem 15-6BA (60 minutes)
Part 1
2005
May 26 Accounts Receivable—Fuji ............................ 61,100
Sales ........................................................... 61,100
(6,500,000 x $0.0094)
June 1 Cash .................................................................. 72,613
Sales ........................................................... 72,613
July 25 Cash*................................................................. 58,500
Foreign Exchange Loss .................................. 2,600
Accounts Receivable—Fuji ...................... 61,100
*(6,500,000 x $0.0090)
Oct. 15 Accounts Receivable—Martinez Brothers .... 49,982
Sales ........................................................... 49,982
(373,000 x $0.1340)
Dec. 6 Accounts Receivable—Chi-Ying .................... 47,795
Sales ........................................................... 47,795
(242,000 x $0.1975)
Dec. 31 Accounts Receivable--Martinez Brothers ..... 8,206
Foreign Exchange Gain* ........................... 8,206
Gain for the period ...............……………. = $ 8,206
Dec. 31 Accounts Receivable—Chi-Ying .................... 605
Foreign Exchange Gain* ........................... 605
Gain for the period .............……………... = $ 605
2006
Jan. 5 Cash*................................................................. 49,852
Accounts Receivable—Chi-Ying** ........... 48,400
Foreign Exchange Gain ............................ 1,452
*(242,000 x $0.2060) **($47,795 + $605)
Jan. 13 Cash*................................................................. 52,966

Foreign Exchange Loss .................................. 5,222
Accounts Receivable—Martinez Bros** .... 58,188
* (373,000 x $0.1420) ** ($49,982 + $8,206)

Problem 15-6BA (Concluded)
Part 2
Foreign exchange gain reported on 2005 income statement

July 25.................................................. $(2,600)
December 31........................................ 8,206
December 31........................................ 605
Total ..................................................... $ 6,211
Part 3
To reduce the risk of foreign exchange gain or loss, Datamix could attempt
to negotiate foreign customer sales that are denominated in U.S. dollars.
To accomplish this, Datamix may be willing to offer favorable terms, such
as price discounts or longer credit terms. Another possibility that may be
of limited potential is for Datamix to make credit purchases denominated in
foreign currencies, planning the purchases so that the payables in foreign
currency match the foreign currency receivables in time and amount.
NOTE: A few students may also understand the company’s opportunity for
hedging. This involves selling foreign currency futures to be delivered at
the time the receivables from foreign customers will be collected.

Serial Problem
Serial Problem, Success Systems (35 minutes)
Part 1
2005
April 16 Short-Term Investments—Trading (J&J).............. 11,240
Cash ............................................................. 11,240
Purchased Johnson & Johnson shares
[(200 x $55) + $240].
30 Short-Term Investments—Trading (Starbucks) ... 2,520

Cash ............................................................. 2,520
Purchased Starbucks shares
[(100 x $24) + $120].
Part 2 Adjusting entry at June 30, 2005
June 30 Market Adjustment—Trading* ........................... 340

Unrealized Gain—Income............................. 340

Trading securities’ Share Price Market Unrealized
portfolio Shares at 6/30/05 Value Cost Gain (Loss)
J & J ...................... 200 $60 $12,000 $11,240 $ 760
Starbucks .............. 100 $21 2,100 2,520 (420)
Totals .................... $14,100 $13,760 $ 340

Reporting in Action — BTN 15-1
١. Yes, Krispy Kreme’s financial statements are consolidated. The

statements are labeled as consolidated in all the financial statement
headings.
2. Krispy Kreme’s comprehensive loss for the year ended February 2,

2003, is $1,942,000. The comprehensive loss amount is reported on
Krispy Kreme’s consolidated statement of shareholders’ equity.
3. Yes. Its consolidated statement of shareholders' equity includes a

Foreign Currency Translation Adjustment column.
4. The return on total assets for the year ended February 2, 2003, ($
thousands) follows
$33,478 / [($410,487 + $255,376) / 2] = 10.06%
5. Answer depends on the annual report information obtained.

Comparative Analysis — BTN 15-2
١. Krispy Kreme’s return on total assets

Current Year: $33,478 / [($410,487 + $255,376)/2] = 10.1%
One Year Prior: $26,378/ [($255,376 + $171,493)/2] = 12.4%
Tastykake’s return on total assets

Current Year: $2,000 / [($116,560 +116,137)/ 2] = 1.7%
One Year Prior: $6,320/ [($116,137 + $112,192)/2)] = 5.5%
2. Return on total assets = Profit margin x Total asset turnover

Krispy Kreme’s component analysis of return on total assets*
Current Year
10.1% = $33,478/$491,549 x $491,549/[($410,897 + $255,376)/2]
10.1% = 6.8% x 1.48
One Year Prior

12.4% = $26,378/$394,354 x $394,354/[($255,376 + $171,493)/2]
12.4% = 6.7% x 1.85
*(Some difference due to rounding).
Tastykake’s component analysis of total return on assets

Current Year
1.7% = $2,000/$162,263 x $162,263/[($116,560 + $116,137)/2]
1.7% = 1.2% x 1.39
One Year Prior

5.5% = $6,320/$166,245 x $166,245/[($116,137 + $112,192)/2]
5.5% = 3.8% x 1.46
3. Current Year Analysis: Krispy Kreme has a higher return on total

assets versus Tastykake (10.1% vs. 1.7%), a higher profit margin (6.8%
vs. 1.2%), and a higher total asset turnover (1.48 vs. 1.39).
One Year Prior Analysis: Krispy Kreme has a higher return on total
assets versus Tastykake (12.4% vs. 5.5%), a higher profit margin (6.7%
vs. 3.8%), and a higher total asset turnover (1.85 vs. 1.46).
This comparative analysis shows that Tastykake must improve on both

components; but it especially must increase its profit margin.

Ethics Challenge — BTN 15-3
1. Kendra’s bonus is not contingent on the classification of available-for-

sale versus held-to-maturity. Designation of the bonds as available-for-
sale 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. Also, if the bonds are designated as held-to-maturity debt
securities then there will be no recognition of their loss in market value
over the past year in net income (and neither in equity).
2. Generally, Kendra must classify its debt securities as either short or

long term and as available-for-sale or held-to-maturity. Since the bonds
are 10-year bonds they should be classified as long-term investments
unless management intends to sell them within the current year or
operating cycle. Since the problem states that management probably
will not hold the bonds for the full ten years the correct classification is
available-for-sale. So, if management does not intend to sell within the
current year or operating cycle the correct classification is: long term
available-for-sale debt securities.
3. The 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.

Communicating in Practice — BTN 15-4
TO: Abel Terrio

FROM: (Your Name)
SUBJECT: Sale of Blackhawk Common Stock
The $6,000 loss on the sale of Blackhawk common stock is correctly

stated. Jackson Company owned 40% of the outstanding shares, and
therefore accounts for the investment according to the equity method.
Under the equity method, investments are reported at the investor's cost
plus its share in the undistributed earnings accumulated by the investee
since the stock was purchased. At sale, the book value of the investment is
compared to the net proceeds to determine gain or loss.
During year 2005, the income statement showed earnings from all
investments of $126,000. This amount included $81,000 from the
investment in Blackhawk (Blackhawk’s 2005 net income of $202,500 x 40%),
which was debited to the Long-Term Investments—Blackhawk account.
This increased the book value of the investment to $581,000. When sold,
the net proceeds of $575,000 was compared to the book value of $581,000
and the result was the $6,000 loss.
Please call me if you have any questions.
Taking It to the Net — BTN 15-5
($ millions for Parts 1 through 4)

١. At June 30, 2002 ................................ $38,652
At June 30, 2001 ................................ $31,600
٢. Commercial paper; U.S. government and agency securities; Corporate

notes and bonds; Municipal securities; and Certificates of Deposit.
٣. Gains = $816; and Losses = $(558).
٤. Market value is greater. Specifically: Cost is $38,451; and Market Value

is $38,652.

Teamwork in Action — BTN 15-6
There is no specific solution to this activity. The instructor should serve as

a facilitator during this learning reinforcement activity.
Business Week Activity — BTN 15-7
١. Typically, accountants focus on and report historical data. Investors

usually desire future-oriented information about companies they are
interested in evaluating.
٢. “Marking-to-market” means that the assets and liabilities are to be

shown on a company’s financial statements at their current market
values. Each reporting period, asset and liabilities are to be adjusted
from previously reported values to reflect the most current value.
٣. Ideas to curb fraud and facilitate mark-to-market accounting include:

a. Marking can be performed by outsiders who do not have a vested
interest in making the numbers look good.
b. The assumptions that went into estimating the values could be
publicized and audited.
c. A range of possible asset values could be published which would
serve to highlight the uncertain nature of the data.
٤. Economists argue that marking-to-market results in “asymmetrical”

balance sheets. That is, financial assets on the balance sheet can
fluctuate and show both increases and decreases in current values.
However, non-financial assets (such as inventories, plant assets, and
goodwill) can be marked down in value but not increased in value
should they appreciate.
Accountants believe that the non-mark-up in value rule is a good

precaution in that it prevents unjustified markups of non-financial
assets. Accountants also argue that CEOs will be sure to alert investors
if key assets have increased in value, even if such increases are not
allowed to be explicitly reported on the balance sheet.
5. The best argument for mark-to-market accounting is that it helps society

allocate capital more efficiently by improving financial understanding.

Entrepreneurial Decision — BTN 15-8
1.
Email Composition—
To: Andy Iglesias

From: Ralph Cruz’s assistant
Re: Understanding realized and unrealized gains and losses
A realized gain or loss occurs when a security is actually sold for more or
less than what it had cost to purchase it. An unrealized gain or loss occurs
when a security’s market value differs from what it had cost to purchase it—
unrealized implies that the security is not yet sold and, thus, any realized gain
or loss might be substantially different. Unrealized gains or losses are often
referred to as “paper losses” as one is just comparing what the shares are
currently valued at in the market compared to the cost at which they were
originally purchased.
٢. Any unrealized gains or losses on the available-for-sale securities will

not affect Iglesias Company’s income statement. Unrealized gains or
losses on AFS securities are reported in the equity section of the
balance sheet, as part of “other comprehensive income.”
3.
Email Composition—
To: Gloria Perez

From: Ralph Cruz’s assistant
Re: Comparing long-term stock investments to CDs
There are several possible advantages to investing in long-term stock

investments in comparison to CDs. You can better control the timing of cash
investments in stocks. That is, you can sell the stocks at any time per your
discretion at typically lower costs that you can with CDs. In the case of CDs,
the bank fixes the length of the investment. Your investment in long-term
stocks gives you opportunity to earn returns (substantially) in excess of the
rates of returns on the CDs.
There are also potential disadvantages of investing in long-term stock vis-à-

vis CDs. Stock investments absorb trading costs. Stock investments also
can decline in market value over time—indeed, they potentially could lose
their entire value. More generally, 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).

Hitting the Road— BTN 15-9A
Exchange rates can be found at businesses that specialize in foreign

currency exchange. Also, American Express offices abroad exchange
currencies for cardholders and post foreign exchange rates. Typically,
railroad stations and airports also post foreign exchange rates and offer
currency exchange services.
Global Decision— BTN 15-10
١. Grupo Bimbo (millions of pesos)
Return on total assets = Net Income / Average Total Assets
Current Year: 1,002.7 / [(31,718.6 + 23,781.3)/2] = 3.6%

Prior Year: 1,682.0 / [(23,781.3 + 25,035.1)/2] = 6.9%
Return on total assets = Profit margin x Total asset turnover
Current Year
3.6% = 1,002.7/41,373.3 x 41,373.3/[(31,718.6 + 23,781.3)/2]
3.6% = 2.4% x 1.49
One Year Prior

6.9% = 1,682.0/34,968.1 x 34,968.1/[(23,781.3 + 25,035.1)/2]
6.9% = 4.8% x 1.43
2. Current Year Analysis: Krispy Kreme has a higher return on total

assets (10.1% vs. 3.6% and 1.7%), and higher profit margin (6.8% vs.
2.4% and 1.2%). However, Grupo Bimbo has a slightly higher total asset
turnover (1.49 vs. 1.48 and 1.39).
One Year Prior Analysis: Krispy Kreme has a higher return on total
assets (12.4% vs. 6.9% and 5.5%), higher profit margin (6.7% vs. 4.8%
and 3.8%), and higher total asset turnover (1.85 vs. 1.46 and 1.43).
Overall, Krispy Kreme is the superior performer. Both Grupo Bimbo

and Tastykake should focus on improving a lower than normal profit
margin.


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Chapter 15

Investments and International Operations

©McGraw-Hill Companies, Inc., 2005

Apr. 18 Short-Term Investments—Trading (XLT) ................ 22,650

May 30 Cash...................................................................... 500

©McGraw-Hill Companies, Inc., 2005

٢. Both accounts in part (1) are reported on the balance sheet.

Quick Study 15-3 (10 minutes)

May 7 Short-Term Investments—AFS (Lov) ...................... 2,700

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

©McGraw-Hill Companies, Inc., 2005

May 9 Short-Term Investments—AFS (X&O) .................... 20,400

June 2 Cash...................................................................... 11,020

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

Number Cost Market Total Unrealized

Quick Study 15-5 (10 minutes)

Quick Study 15-6 (10 minutes)

1. Interest revenue (or interest earned)

©McGraw-Hill Companies, Inc., 2005

July 31 Cash ................................................................... 900

Dec. 31 Interest Receivable........................................... 750

Quick Study 15-8 (10 minutes)

Quick Study 15-9 (10 minutes)

Nov. 1 Cash .................................................................. 50,000

Dec. 31 Long-Term Investments—TKR........................ 220,000

©McGraw-Hill Companies, Inc., 2005

Quick Study 15-11 (10 minutes)

Quick Study 15-12 (10 minutes)

Return on Total Assets = Profit margin x Total asset turnover

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

©McGraw-Hill Companies, Inc., 2005

Quick Study 15-14A (10 minutes)

Mar. 1 Account Receivable—Hamac ....................... 13,622

Mar. 31 Cash ................................................................ 13,970

©McGraw-Hill Companies, Inc., 2005

©McGraw-Hill Companies, Inc., 2005

٢. The accounts in part (1) are reported on different financial statements.

Exercise 15-3 (15 minutes)

Dec. 31 Unrealized Loss—Equity.............................................. 100

©McGraw-Hill Companies, Inc., 2005

(b) Mar. 22 Long-Term Investments—AFS (Fran) .................. 17,750

(c) June15 Cash ................................................................... 155,000

(d) July 30 Short-Term Investments—Trading (MP3) ............. 50,000

(e) Sept. 1 Cash ................................................................... 350

(f) Oct. 8 Cash*.................................................................. 11,025

(g) Oct. 30 Cash ................................................................... 1,000

©McGraw-Hill Companies, Inc., 2005

Computation of Market Adjustment

Dec. 31 Unrealized Loss—Equity ........................................ 2,900

Exercise 15-6 (15 minutes)

Dec. 31 Market Adjustment—AFS (LT)........................... 12,078

Computation of Market Adjustment

©McGraw-Hill Companies, Inc., 2005

©McGraw-Hill Companies, Inc., 2005

Classification of Investments in Securities

a. The Beeman Company bonds are a long-term investment in held-to-

b. The Baybridge stock is a long-term investment in equity securities

c. The Carrollton stock is a long-term investment in available-for-sale

d. The Newtech stock is a long-term investment in available-for-sale

e. Since the Flockhart stock is marketable and is held as an investment of

Market Adjustment entry at Dec. 31, 2005

Long-term AFS securities Cost Market Value

©McGraw-Hill Companies, Inc., 2005