Ch10 Harrison 8e GE SM

Chapter 10
Long-Term Investments &

International Operations
Short Exercises
(10-15 min.) S 10-1

1.
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2010
Apr. 10 Long-Term Investment (400 × $22)…....... 8,800
Cash……………………………………….. 8,800
July 22 Cash (400 × $1.26)………………………….. 504

Dividend Revenue………………………. 504
Dec. 31 Unrealized Loss on Investments……....... 3,600

Allowance to Adjust Investment
to Market ($8,800 − $5,200)……………. 3,600
2.
ASSETS
Total current assets…………………………………........ $ XXX
Long-term available-for-sale investments,
at market value……………………………………........ 5,200
SHAREHOLDERS’ EQUITY
Share capital……………………………………………….. $ XXX
Retained earnings………………………………………… XXX
Accumulated other comprehensive income:
Unrealized (loss) on investments…………………… (3,600)
808 Financial Accounting 8/e Solutions Manual

(5-10 min.) S 10-2
1.
Journal
2011
May 21 Cash (400 × $27)……………………… 10,800
Long-Term Investment…………… 8,800
Gain on Sale of Investment……… 2,000
2. This gain on sale of investment is a realized gain. The

loss recorded at December 31, 2010 was unrealized
because it resulted from a change in the investment’s
market value, not from the sale of the investment.
Chapter 10 Long-Term Investments and International 809

Operations
(10-15 min.) S 10-3
1. Equity method is appropriate because the investor (Fall
Motors) holds a 40% investment in the investee company
(Yuza).
2.
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Millions
a. Long-Term Investment………………………….. 420
Cash……………………………………………... 420
To purchase equity-method investment.
b. Long-Term Investment ($50 × .40)……………. 20

Equity-Method Investment Revenue………. 20
To record investment revenue.
c. Cash ($25 × .40)………………………………….. 10

Long-Term Investment………………………. 10
To receive cash dividend on equity-method
investment.
3.
Long-Term Investment
(Amounts in millions)
Purchase 420 Dividends received 10
Net income 20
Balance 430

(5 min.) S 10-4
Millions
Sale proceeds…………………………………………... $ 155
− Carrying amount of the investment ($430 / 2)…….. (215)
= (Loss) on sale of investment………………………… $ (60)
(10 min.) S 10-5

1. A parent company is a corporation that owns a significant
interest in another company (typically more than 50%)
sufficient to influence and control said company. A
subsidiary company is a company that is controlled by
another corporation.
2. Consolidated financial statements combine the balance

sheets, income statements, and cash-flow statements of a
parent company with those of its subsidiaries as if the
parent and its subsidiaries were one company.
3. The parent company’s name appears on the consolidated

financial statements. To consolidate, the parent company
must have control and influence over the subsidiary
(typically by owning more than 50% of the subsidiary’s
shares).
Operations
(10 min.) S 10-6
1. Goodwill is an intangible asset. Goodwill is the excess of
the purchase price to acquire a subsidiary company over
the sum of the market value of the subsidiary’s net assets
(assets minus liabilities). Only the parent company reports
the goodwill. Goodwill appears as an intangible asset on
the consolidated balance sheet.
2. Minority interest is the portion of a subsidiary’s shares that

is not owned by the parent company. The parent company
reports Minority Interest on its consolidated balance sheet
among the liabilities.

(10-15 min.) S 10-7
1. Paid $1,144,000 ($1,100,000 × 1.04)
Will collect $1,100,000 at maturity
2. Annual cash interest = $66,000 ($1,100,000 × .06)
3. Annual interest revenue will be less than the amount of

cash interest received each year because the investor
bought the bonds at a premium. But the investor will collect
only the face amount of the bonds at maturity. The
difference between the purchase price paid and the face
amount collected is a reduction in interest revenue over the
life of the bonds.
4. Cash interest received each year…………………... $66,000

$1,144,000 − $1,100,000
− Amortization = (8,800)
5 years
= Annual interest revenue…………………………... $57,200

Operations
(10 min.) S 10-8
Journal
2010
a. June 30 Long-Term Investment in Bonds
($1,100,000 × 1.04)………………………... 1,144,000
Cash……………………………….…….. 1,144,000
To purchase bond investment.
b. Dec. 31 Cash ($1,100,000 × .06 × 6/12)………….. 33,000

Interest Revenue………………………. 33,000
To receive semiannual interest.
c. 31 Interest Revenue…………………………. 4,400

Long-Term Investment in Bonds
[($1,144,000 − $1,100,000) / 5 × 6/12]. 4,400
To amortize bond investment.
2015
d. Jan. 2 Cash……………………………………....... 1,100,000
Long-Term Investment in Bonds…… 1,100,000
To receive face value at maturity.

(5-10 min.) S 10-9
Journal
Sept. 12 Accounts Receivable

(500,000 rubles × $0.36)…………………….. 180,000
Sales Revenue…………………………….. 180,000
Sale on account.
Oct. 18 Cash (250,000 rubles × $0.33)……………… 82,500

Foreign-Currency Transaction Loss…....... 7,500
Accounts Receivable ($180,000 × 1/2)… 90,000
Collection on account.
Nov. 15 Cash (250,000 rubles × $0.39)……………… 97,500

Accounts Receivable ($180,000 × 1/2)… 90,000
Foreign-Currency Transaction Gain...... 7,500

Operations
(10 min.) S 10-10
Journal
Apr. 24 Cash (1,100,000 pesos × $0.089)………… 97,900

Accounts Receivable
(1,100,000 pesos × (0.086)………….. 94,600
Foreign-Currency Transaction Gain…. 3,300
Oct. 25 Accounts Payable

(28,000 Swiss francs × $0.82)…................ 22,960
Foreign-Currency Transaction Loss……. 1,400
Cash (28,000 Swiss francs × $0.87)….. 24,360
Payment on account.
Currency Strengthened Weakened
Dollar X
Peso X
Dollar X
Swiss franc X

(5 min.) S 10-11
1. A. Operating
B. Investing — Most closely related to this chapter.
C. Financing
2. Purchase of investment (or acquisition of other companies)
Sale of investment (or sale of other companies)

Operations
(10 min.) S 10-12
DATE: Early in 2012
TO: The ABC Company Shareholders
FROM: Chief Executive Officer
RE: Investing Activities During 2011

ABC Company financed its 2011 investments in the following ways.
ABC sold off $461 million of its investments, and then used that
money, plus an additional $14 million to purchase new investments.
We had a positive cash flow of $100 million from disposing of some

property, plant, and equipment. Additional inflow of $143 million came
from selling and other investment activities.
As you can see, there was not much change in borrowing (financing),
as ABC used a large portion of the money from operations to cover the
additional costs of purchasing plant, property, and equipment for $782
million and other acquisitions.
Because of the large increase from the previous year in net positive
cash flow from operations, ABC was able to invest in the additional
assets and investments without additional borrowing.

Student responses may vary

Exercises
Group A
(10-15 min.) E 10-13A
Journal
a. Long-Term Investment (470 × $31)……….. 14,570

Cash………………………………………... 14,570
b. Cash (470 × $1.70)………………………… 799

Dividend Revenue……………………….. 799
c. Allowance to Adjust Investment to Market

[470 × ($31 − $36)]…………………………… 2,350
Unrealized Gain on Investment……….. 2,350
d. Cash (470 × $22)……………………………... 10,340

Loss on Sale of Investment………………... 4,230
Long-Term Investment………………….. 14,570

Operations
(15-25 min.) E 10-14A
Req. 1
Shares Cost Current Market Value
Stockholm (3,400 × $35) = $119,000 (3400 × $28.375) = $ 96,475
London ( 660 × $46.5) = 30,690 ( 660 × $48.25) = 31,845
Glasgow (1,200 × $74) = 88,800 (1,200 × $68.75) = 82,500
Total………………………………… $238,490 ……………………….. 210,820
Req. 2
Dec. 31 Unrealized Loss on Investment

($238,490 − $210,820)……………….. 27,670
to Market………………………….. 27,670
Req. 3
Income Statement (partial):
Other comprehensive income:

Unrealized (loss) on investments……….……... $ (27,670)
Balance Sheet (partial):
ASSETS
Long-term investments, at market value………… $210,820
Unrealized (loss) on investments…………………. $ (27,670)

(10-15 min.) E 10-15A
Journal
a. Long-Term Investment…………………….. 1,500,000

Cash………………………………………… 1,500,000
Purchased equity-method investment.
b. Long-Term Investment ($670,000 × .25)…. 167,500

Equity-Method Investment Revenue….. 167,500
c. Cash ($400,000 × .25)……………………… 100,000

Long-Term Investment………………… 100,000
To receive cash dividend on equity-method investment.
Ending balance in the investment account:

$1,567,500 ($1,500,000 + $167,500 − $100,000)

Operations
(10-15 min.) E 10-16A
Long-Term Investment in Payton Software
a. Purchase 1,500,000 c. Dividends 100,000
b. Net income 167,500
Balance 1,567,500
Sale of investment for cash of............ $1,100,000

Carrying amount of investment.......... (1,055,000)
Gain on sale of investment................. $ 45,000

(15-20 min.) E 10-17A
Req. 1
The equity method is appropriate for a 30% investment in

another company’s share capital. Equity method is used for
20-50% investments.
Req. 2
Balance sheet (partial):

ASSETS
Long-term investments, at equity………………….. $612,500*
Income statement (partial):

Other revenue
Equity-method investment revenue………………... $ 60,000
_____
*Explanation:
Cost 590,000
Share of net income Share of dividends
($200,000 × 0.30) 60,000 ($125,000 × .30) 37,500
Balance 612,500

Operations
(20-25 min.) E 10-18A
Req. 1 (consolidation work sheet and balance sheet)
Cressida ELIMINATION CONSOLIDATED
ASSETS XYZ, Inc. Corp. DEBIT CREDIT BALANCE SHEET
Cash 51,000 18,000 69,000
Accounts receivable, net 85,000 58,000 143,000
Note receivable from XYZ — 40,000 (b) 40,000 —
Inventory 57,000 81,000 138,000
Investment in Cressida 103,000 — (a)103,000 —
Plant assets, net 291,000 96,000 387,000
Other assets 22,000 9,000 31,000
Total 609,000 302,000 768,000
LIABILITIES AND
Accounts payable 46,000 29,000 75,000
Notes payable 147,000 35,000 (b) 40,000 142,000
Other liabilities 79,000 135,000 214,000
Share capital 113,000 81,000 (a) 81,000 113,000
Retained earnings 224,000 22,000 (a) 22,000 _______ 224,000
Total 609,000 302,000 143,000 143,000 768,000
Req. 2
The shareholders’ equity of the consolidated entity is $337,000 ($113,000 + $224,000).

(15-20 min.) E 10-19A
Req. 1
Newtex should use the amortized-cost method.
Req. 2
Journal
Sept. 30 Long-Term Investment in Bonds
($30,000 × .98)…………………………………… 29,400
Cash…………………………………………… 29,400
Dec. 31 Interest Receivable

($30,000 × .08 × 3/12)…………………………. 600
Interest Revenue……………………………. 600
To accrue interest revenue.
31 Long-Term Investment in Bonds

[($30,000 − $29,400) / 60 months]
× 3 months………………………………............ 30
Req. 3
Balance sheet (partial)
ASSETS
Current:
Interest receivable……………………………………. $ 600
Long-term:
Investment in bonds ($29,400 + $30)……………… $29,430
Chapter 10 Long-Term Investments & International Operations 825

(10-20 min.) E 10-20A
Req. 1
Journal
Sept. 9 Inventory……………………………………………. 6,800

Accounts Payable (800,000 yen × $.0085)… 6,800
Oct. 18 Accounts Payable…………………………………. 6,800

Cash (800,000 yen × $.0084)…………………. 6,720
Foreign-Currency Transaction Gain……….. 80
22 Accounts Receivable (50,000 euros × $1.25)… 62,500

Sales Revenue…………………………………. 62,500
28 Cash (50,000 euros × $1.21)……………………... 60,500

Foreign-Currency Transaction Loss…………… 2,000
Accounts Receivable…………………………. 62,500
Req. 2
On September 10, Computer City wanted the dollar to

strengthen in order to pay Sony with yen that cost fewer
dollars. That was what happened, and Computer City had a
foreign-currency transaction gain.
On October 23, Computer City wanted the euro to
strengthen in order to receive euros that were worth more in
dollars. The euro however weakened against the dollar, and
Computer City had a foreign-currency transaction loss on
the collection.

(10-15 min.) E 10-21A
Spanish Subsidiary:
EXCHANGE
EUROS RATE DOLLARS
Assets €800,000 $1.38 $1,104,000
Liabilities 550,000 1.38 $759,000

Shareholders’ equity:
Share capital 70,000 1.01 70,700
Retained earnings 180,000 1.18 212,400
Accumulated other
comprehensive income:
Foreign-currency
translation reserve 61,900
800,000 $1,104,000
During this period, the euro grew stronger against the dollar.
The strengthening euro produced the positive translation
adjustment.

(15-20 min.) E 10-22A
Sugar Land Donuts

Statement of Cash Flows (partial)
Fiscal Year 2010
Millions
Cash flows from investing activities:
Capital expenditures............................................ $(10.0)
Sale of property, plant, and equipment.............. 6.9
Sale of other businesses..................................... 1.7
Purchase of long-term investments................... (11.5)
Sale of investments.............................................. 2.6
Net cash (used) in investing activities............ $(10.3)
Based on Sugar Land’s investing activities, it appears that

the company is growing. Acquisitions of long-term assets
and investments are greater than the sales of long-term
assets and other businesses.

(20-25 min.) E 10-23A
Journal Entry
Cash………………………………………… 3,117,000
Notes Receivable……………………… 3,117,000
Short-Term Investments………………... 3,465,000

Cash……………………………………... 3,465,000
Cash………………………………………… 1,599,000
Accumulated Depreciation……………... 3,701,000
Equipment……………………………… 5,300,000
Cash………………………………………… 487,000
Investments……………………………. 470,000
Gain on Sale of Investment…………. 17,000
Property and Equipment………………... 1,741,000

Cash……………………………………... 1,741,000

Exercises
Group B
(10-15 min.) E 10-24B
Journal
a. Long-Term Investment (460 × $30)……….. 13.800

Cash………………………………………... 13,800
b. Cash (460 × $1.20)………………………… 552

Dividend Revenue……………………….. 552
c. Allowance to Adjust Investment to Market

[460 × ($30 − $39)]…………………………… 4,140
Unrealized Gain on Investment……….. 4,140
d. Cash (460 × $21)……………………………... 9,660

Loss on Sale of Investment………………... 4,140
Long-Term Investment………………….. 13,800

(15-25 min.) E 10-25B
Req. 1
Shares Cost Current Market Value
Canada (3,800 × $38) = $144,400 (3,800 × $29.125) = $110,675
Chile ( 640 × $47.25) = 30,240 ( 640 × $49.25) = 31,520
Milan (1,500 × $77) = 115,500 (1,500 × $69.50) = 104,250
Total………………………………… $290,140 ……………………….. 246,445
Req. 2
Dec. 31 Unrealized Loss on Investment

($290,140 − $246,445)……………….. 43,695
to Market………………………….. 43,695
Req. 3
Income Statement (partial):

Unrealized (loss) on investments……….……... $ (43,695)
Balance Sheet (partial):
ASSETS
Long-term investments, at market value………… $246,445
Unrealized (loss) on investments…………………. $ (43,695)

(10-15 min.) E 10-26B
Journal
a. Long-Term Investment………………………... 1,200,000

Cash…………………………………………… 1,200,000
Purchased equity-method investment.
b. Long-Term Investment ($650,000 × .35)……. 227,500

Equity-Method Investment Revenue……. 227,500
c. Cash ($440,000 × .35)………………………….. 154,000

Long-Term Investment…………………….. 154,000
To receive cash dividend on equity-method investment.
Ending balance in the investment account:

$1,273,500 ($1,200,000 + $227,500 − $154,000)

(10-15 min.) E 10-27B
Long-Term Investment in Smith Software

a. Purchase 1,200,000 c. Dividends 154,000
b. Net income 227,500
Balance 1,273,500
Sale of investment for cash of............ $3,000,000

Carrying amount of investment.......... (1,273,500)
Gain on sale of investment................. $1,726,500

(15-20 min.) E 10-28B
Req. 1
The equity method is appropriate for a 20% investment in

another company’s share capital. Equity method is used for
20-50% investments.
Req. 2
Balance sheet (partial):

ASSETS
Long-term investments, at equity………………….. $583,000*

Other revenue
Equity-method investment revenue………………... $ 44,000
_____
*Explanation:
Cost 560,000
Share of net income Share of dividends
($220,000 × 0.20) 44,000 ($105,000 × .20) 21,000
Balance 583,000

E10-29B
Req. 1 (consolidation work sheet and balance sheet)
Hamlet ELIMINATION CONSOLIDATED
ASSETS Gamma, Inc. Corp. DEBIT CREDIT BALANCE SHEET
Cash 50,000 19,000 69,000
Note receivable from Gamma — 43,000 (b) 43,000 —
Inventory 55,000 78,000 133,000
Investment in Hamlet Corp. 93,000 — (a)93,000 —
Plant assets, net 284,000 90,000 374,000
Other assets 24,000 5,000 29,000
Total 585,000 289,000 738,000
LIABILITIES AND
Notes payable 154,000 31,000 (b) 43,000 142,000
Share capital 111,000 78,000 (a) 78,000 111,000
Total 585,000 289,000 136,000 136,000 738,000
Req. 2
The shareholders’ equity of the consolidated entity is $304,000 ($111,000 + $193,000).

(15-20 min.) E 10-30B
Req. 1
Baytex should use the amortized-cost method.
Req. 2
Journal
Sept. 30 Long-Term Investment in Bonds
($40,000 × .96)…………………………………… 38,400
Cash…………………………………………… 38,400
Dec. 31 Interest Receivable

($40,000 × .075 × 3/12)…………………………. 750
31 Long-Term Investment in Bonds

[($40,000 − $38,400) / 60 months]
× 3 months………………………………............ 80
Req. 3
Balance sheet (partial)
ASSETS
Current:
Interest receivable……………………………………. $ 750
Long-term:
Investment in bonds ($38,400 + $80)……………… $38,480

(10-20 min.) E 10-31B
Req. 1
Journal
July 17 Inventory……………………………………………. 6,160

Accounts Payable (700,000 yen × $.0088)… 6,160
Aug. 16 Accounts Payable…………………………………. 6,160

Cash 700,000 yen × $.0079)…………………. 5,530
Foreign-Currency Transaction Gain……….. 630
19 Accounts Receivable (20,000 euros × $1.19)… 23,800

Sales Revenue…………………………………. 23,800
30 Cash (20,000 euros × $1.12)……………………... 22,400

Foreign-Currency Transaction Loss…………… 1,400
Accounts Receivable…………………………. 23,800
Req. 2
On July 18, Tech Know Stores wanted the dollar to

strengthen in order to pay Toshikar with yen that cost fewer
dollars. That was what happened, and Tech Know had a
foreign-currency transaction gain.
On Aug 20, Tech Know wanted the euro to strengthen in

order to receive euros that were worth more in dollars. The
euro weakened against the dollar, and Tech Know had a
foreign-currency transaction loss on the collection.

(10-15 min.) E 10-32B
Spanish Subsidiary:
EXCHANGE
EUROS RATE DOLLARS
Assets €700,000 $1.31 $917,000
Liabilities 500,000 1.31 $655,000

Share capital 65,000 1.07 69,550
Retained earnings 135,000 1.19 160,650
Accumulated other
Foreign-currency
translation adjustment 31,800
700,000 $917,000
During this period, the euro grew stronger against the dollar.
The strengthening euro produced the positive translation
adjustment.

(15-20 min.) E 10-33B
Frosted Donuts
Statement of Cash Flows (partial)
Fiscal Year 2010
Millions
Cash flows from investing activities:
Capital expenditures............................................ $(10.9)
Sale of property, plant, and equipment.............. 7.2
Sale of other businesses..................................... 1.8
Purchase of long-term investments................... (11.4)
Sale of investments.............................................. 2.2
Net cash (used) in investing activities............ $(11.1)
Based on Frosted’s investing activities, it appears that the

company is growing. Acquisitions of long-term assets and
investments are greater than the sales of long-term assets
and other businesses.

(20-25 min.) E 10-34B
Journal Entry
Cash………………………………………… 3,113,000
Notes Receivable……………………… 3,113,000
Short-Term Investments………………... 3,453,000

Cash……………………………………... 3,453,000
Cash………………………………………… 1,529,000
Accumulated Depreciation……………... 3,671,000
Equipment……………………………… 5,200,000
Cash………………………………………… 498,000
Investments……………………………. 490,000
Gain on Sale of Investment…………. 8,000
Property and Equipment………………... 1,720,000

Cash……………………………………... 1,720,000

Challenge Exercises
(15-20 min.) E 10-35

Req. 1
a. Consolidation b. Available for sale c. Equity
Req. 2
Chat Now’s net income for 2010:
a. Increased by $230,400 (₤120,000 × $1.92).
b. Increased by $23,000.
c. Increased by $225,000 ($500,000 × .45).
Req. 3
b. Long-term investments, at market value

($1,500,000 − $400,000)………………………… $1,100,000
c. Long-term investment, at equity

[$500,000 + .45 ($500,000 − $25,000)…………. $713,750

(20 min.) E 10-36
Req. 1
The two components of accumulated other comprehensive

income are:
1. Unrealized gains (losses) on available-for-sale

investments.
2. Foreign-currency translation adjustments.
Req. 2
An unrealized gain (loss) on available-for-sale investments

produces a positive (negative) balance.
A foreign-currency translation adjustment is positive when the

net assets of a foreign subsidiary are translated into more
dollars than the shareholder’s equity (total assets less total
liabilities translated at today’s dollars exceed shareholders’
equity translated at the time of purchase/period over which
income was earned).
The foreign-currency translation adjustment is negative when

the shareholder’s equities of a foreign subsidiary are
translated into more dollars than the net assets.
(continued) E 10-36
Req. 3
Millions
Accumulated other comprehensive (loss) at
December 31, 2010………………………………………. $(54)
Foreign-currency translation adjustment……………….. 24
Unrealized loss on available-for-sale investments……. (11)
Accumulated other comprehensive (loss) at
December 31, 2011……………………………………….. $(41)

Quiz
Q10-37 a [(1,200 × $74) + (150 × $13) + (700 × $26) =
$108,950]
Q10-38 c [(1,200 x $2.10) + (150 x $1.40) + (700 x $4) =
$3,290]
Q10-39 Cash (1,200 × $73)……… 87,600
Long-Term Investments
(1,200 × $60)………………….. 72,000
Gain on Sale of Investments. 15,600
Q10-40 a
Q10-41 a
Q10-42 c
Q10-43 c ($80,000 × .05) = $4,000
Q10-44 c [($80,000 × .05) − ($80,000 x 7%) / 5 = $2,880]
Q10-45 c (¥100,000 × $0.0088 = $880)
Q10-46 b
Q10-47 a
Q10-48 a

Problems
Group A
(20-30 min.) P 10-49A

Req. 1
Current market value is used to account for the available-for-

sale investment in Columbus because the investor expects to
sell the shares at its market value. Market value is clearly
relevant to the investors’ decisions about this investment.
Market value is not used for the 30% investment in Woburn

because the investor holds the shares to influence the
operations of the investee company, not to sell the shares.
Woburn should be accounted for using the equity-method
investment.

(continued) P 10-49A
Req. 2
Balance sheet:
ASSETS
Total current assets...................................................... $ XXX
Available for sale investments, at market value......... 30,000
Long-term investments, at equity................................ 531,950*
Property, plant, and equipment, net............................ XXX
Share capital.................................................................. $ XXX
Retained earnings......................................................... XXX
Unrealized (loss) on available for sale investments
[$30,000 − (900 × $41.00)].......................................... (6,900)
Income statement:
Income from operations............................................... $ XXX
Other revenue:
Equity-method investment revenue ($580,000 × .30) 174,000
Dividend revenue (900 × $.38)................................... 342
Net income..................................................................... XXX
Unrealized gain (loss) on investment....................... (6,900)
_____
*Long-Term Investment in Woburn Shares
Purchase 380,000
Net income Dividends received
($580,000 × .30) 174,000 (17,500 × $1.26) 22,050
Balance 531,950

(45-60 min.) P 10-50A
Req. 1
Journal
Mar. 16 Long-Term Investments (1,400 × $13.00)…… 18,200

Cash…………………………………………… 18,200
Purchased available for sale investment.
May 21 Cash (1,400 × $1.75)………………………… 2,450

Dividend Revenue…………………………… 2,450
Received cash dividend.
Aug. 17 Cash……………………………………………….. 86,000

Long-Term Investments in Rockaway 86,000
Received cash dividend on equity-method
investment.
Dec. 31 Long-Term Investments in Rockaway

($520,000 × .21)………………………………….. 109,200
Equity-Method Investment Revenue…….. 109,200
31 Allowance to Adjust Investment to Market

($26,600 − $18,200)……………………………… 8,400
Unrealized Gain on Investment…………… 8,400
Adjusted investment to market value.

Req. 2
Long-Term Investment in Rockaway Software

Jan. 1 Balance 612,000 Aug. 17 Dividends 86,000
Dec. 31 Net income 109,200
Dec. 31 Balance 635,200
Req. 3
Total current assets……………………………………. $ XXX

Available for sale investments, at market value….. 26,600
Long-term investment in affiliates, at equity……… 635,200

(20-30 min.) P 10-51A
Req. 1
Debt ratio of Fixed Total liabilities $65.1

= = = 0.726
considered alone Total assets $89.7
Req. 2
Consolidated
Fixed FMCC Eliminations Totals
− 14.1
Total assets………………….. $89.7 $170.7 − 1.2 $245.1
Total liabilities………………. $65.1 $156.6 − 1.2 $220.5

Total shareholders’ equity… 24.6 14.1 − 14.1 24.6
Total liabilities and equity… $89.7 $170.7 − 15.3 − 15.3 $245.1
Req. 3
Consolidated debt Total liabilities $220.5

= = = 0.900
ratio of Fixed Total assets $245.1
Consolidation of the finance subsidiary increased Fixed’s

reported debt ratio from 0.726 to 0.900. Companies would
prefer to report a lower debt ratio, so they would prefer not to
consolidate the financial statements of their financing
subsidiaries because that makes their debt ratio appear too
high.

(35-45 min.) P 10-52A
Rose, Inc.
Consolidation Work Sheet
September 30, 2010
ELIMINATION CONSOLIDATED
ASSETS ROSE MOUNTAIN DEBIT CREDIT AMOUNTS
Cash 60,000 59,000 119,000
Note receivable from Mountain 175,000 — (b) 175,000 0
Inventory 305,000 458,000 763,000
Investment in Mountain 453,000 — (a) 453,000 0
Plant assets, net 403,000 524,000 927,000
Total 1,590,000 1,127,000 2,089,000
LIABILITIES AND
Notes payable 410,000 312,000 (b) 175,000 547,000
Share capital 556,000 268,000 (a) 268,000 556,000
Total 1,590,000 1,127,000 628,000 628,000 2,089,000

(45-60 min.) P 10-53A
Req. 1
Journal
2010
Jan. 1 Long-Term Investment in Bonds
($2,400,000 × 1.10)................................2,640,000
Cash................................................. 2,640,000
July 1 Cash ($2,400,000 × .04 × 6/12)… 48,000

Interest Revenue............................. 48,000
1 Interest Revenue.................................. 30,000

[($2,640,000 − $2,400,000) / 48*]
× 6.................................................... 30,000
To amortize bond premium on a straight line basis.
Oct. 31 Interest Receivable

($2,400,000 × .04 × 4/12)...................... 32,000

[($2,640,000 − $2,400,000) / 48*]
× 4......................................................... 20,000
_____
*Amortization period: 48 months, from Jan. 1, 2010 to Jan. 1, 2014

Req. 2
Balance sheet at October 31, 2010:

Current assets:
Interest receivable………………………………... $ 32,000
Long-term investments in bonds
($2,640,000 − $30,000 − $20,000)………………. 2,590,000
Property, plant, and equipment, net…………….. XXX,XXX
Income statement for the year ended October 31, 2010:

Other revenues:
Interest revenue ($48,000 − $30,000 + $32,000 − $20,000)... $30,000

(30-40 min.) P 10-54A
Req. 1
Journal
May 1 Accounts Receivable ((65,000 × $1.32)….. 85,800

Sales Revenue…………………………… 85,800
10 Supplies………………………………………. 45,430
Accounts Payable (C$59,000 × $.77)… 45,430
17 Accounts Receivable (₤134,000 × $1.97).. 263,980

Sales Revenue…………………………… 263,980
22 Cash ((65,000 × $1.35)……………………… 87,750

Accounts Receivable…………………… 85,800
June 18 Accounts Payable…………………………… 45,430

Cash (C$59,000 × $.76)…………………. 44,840
Foreign-Currency Transaction Gain…. 590
24 Cash (₤134,000 × $1.94)……………………. 259,960

Foreign-Currency Transaction Loss…….. 4,020

Other revenue and expense:
Foreign-currency transaction (loss), net…… (1480)

Req. 2
This problem demonstrates that the final amount of a cash

receipt or cash payment on an international transaction may
differ from the initial dollar amount of the transaction. You
can learn the need to hedge receivable and payable positions
denominated in foreign currencies. This will help to minimize
foreign-currency transaction losses.

(20-25 min.) P 10-55A
Req. 1
This situation will generate a positive translation adjustment,

which is like a gain. The gain occurs because the yen’s
current exchange rate, which is used to translate the
subsidiary’s net assets, is greater than the historical
exchange rates at which Folgate invested in the Japanese
subsidiary.
EXCHANGE
YEN RATE DOLLARS
Assets 480,000,000 $.01100 $5,280,000
Liabilities 115,000,000 .01100 $ 1,265,000

Share capital 40,000,000 0.0095 380,000
Retained earnings 325,000,000 0.0100 3,250,000
Accumulated other
Foreign-currency
480,000,000 $5,280,000

Req. 2
The translation adjustment “belongs” to Fogate, the parent

company. Therefore, the translation adjustment will be
reported on Fogate’s consolidated balance sheet.

Problems
Group B
(20-30 min.) P 10-56B

Current market value is used to account for the available-for-
sale investment in Brentwood because the investor expects to
sell the shares at its market value. Market value is clearly
relevant to the investors’ decisions about this investment.
Market value is not used for the 40% investment in Bangkok

because the investor holds the shares to influence the
operations of the investee company, not to sell the shares.
Bangkok should be accounted for using the equity-method
investment.

(continued) P 10-56B
Req. 2
Balance sheet:
ASSETS
Total current assets................................................. $ XXX
Available for sale investments, at market value. . . 30,300
Long-term investments, at equity........................... 519,432*
Property, plant, and equipment, net....................... XXX
Share capital............................................................. $ XXX
Retained earnings.................................................... XXX
Unrealized (loss) on available for sale investments
[(900 × $42.00) − $30,300]..................................... (7,500)
Income statement:
Income from operations........................................... $ XXX
Other revenue:
Equity-method investment revenue ($530,000 × .40) 212,000
Dividend revenue (900 × $.33).............................. 297
Net income................................................................ XXX
Unrealized (loss) on investment.......................... (7,500)
_____
*Long-Term Investment in Brentwood Shares
Purchase 330,000
Net income Dividends received
($530,000 × .40) 212,000 (18,200 × $1.24) 22,568
Balance 519,432

(45-60 min.) P 10-57B
Req. 1
Journal
Mar. 16 Long-Term Investments (1,600 × $12.75)..... 20,400

Cash........................................................... 20,400
Purchased available for sale investment.
May 21 Cash (1,600 × $1.50)....................................... 2,400

Dividend Revenue..................................... 2,400
Received cash dividend.
Aug. 17 Cash................................................................ 85,000

Long-Term Investments in NEW Software 85,000
Received cash dividend on equity-method
investment.
Dec. 31 Long-Term Investments in NEW Software

($500,000 × .23).............................................. 115,000
Equity-Method Investment Revenue....... 115,000
31 Allowance to Adjust Investment to Market

($26,100 − $20,400) 5,700
Unrealized Gain on Investment............... 5,700
Adjusted investment to market value.

Req. 2
Long-Term Investments in New Software

Jan. 1 Balance 616,000 Aug. 17 Dividends 85,000
Dec. 31 Net income 115,000
Dec. 31 Balance 646,000
Req. 3
Total current assets………………………………… $ XXX

Available for sale investments, at market value. 26,100
Long-term investments in affiliates, at equity…. 646,000

(20-30 min.) P 10-58B
Req. 1
Debt ratio of Space Total liabilities $65.7

= = = 0.734
considered alone Total assets $89.5
Req. 2
Consolidated
Space SMCC Eliminations Totals
− 1.7
Total assets.......................... $89.5 $170.8 − 14.7 $243.9

Total liabilities...................... $65.7 $156.1 − 1.7 $220.1
Total shareholders’ equity. . 23.8 14.7 − 14.7 23.8
Total liabilities and equity... $89.5 $170.8 − 16.4 − 16.4 $243.9
Req. 3
Consolidated debt Total liabilities $220.1

= = = 0.902
ratio of Space Total assets $243.9
Consolidation of the finance subsidiary increased Space’s

debt ratio from 0.734 to 0.902. Companies would prefer to
report a lower debt ratio, so they would prefer not to
consolidate the financial statements of their financing
subsidiaries because that makes their debt ratio appear too
high.
I
(35-45 min.) P 10-59B
Req. 1
Ronney Corp.
Consolidation Work Sheet
September 30, 2010
ELIMINATIONS CONSOLIDATED
ASSETS RONNEY DINETTE DEBIT CREDIT AMOUNTS
Cash 54,000 52,000 106,000
Note receivable from Dinette 192,000 — (b) 192,000 0
Inventory 278,000 452,000 730,000
Investment in Dinette 346,000 — (a)346,000 0
Plant assets, net 397,000 457,000 854,000
Total 1,462,000 1,050,000 1,974,000
LIABILITIES AND
Notes payable 399,000 329,000 (b) 192,000 536,000
Share capital 577,000 259,000 (a) 259,000 577,000
Total 1,462,000 1,050,000 234,000 538,000 1,974,000

(45-60 min.) P 10-60B
Req. 1
Journal
2010
Jan. 1 Long-Term Investment in Bonds
($2,700,000 × 1.18)................................3,186,000
Cash................................................. 3,186,000
July. 1 Cash ($2,700,000 × .08 × 6/12)… 108,000


[($3,186,000 − $2,700,000) / 48*]
× 6.......................................................... 60,750
To amortize bond premium on a straight line basis.
Oct. 31 Interest Receivable

($2,700,000 × .08 × 4/12)...................... 72,000

[($3,186,000 − $2,700,000) / 48*]
× 4.......................................................... 40,500
_____
*Amortization period: 48 months, from January 1, 2010
Operations
to January 1, 2014.

Req. 2
Balance sheet at October 31, 2010:

Current assets:
Interest receivable………………………………... $ 72,000
Long-term investments in bonds
($3,186,000 − $60,750 − $40,500 …………........ 3,084,750
Property, plant, and equipment, net…………….. XXX,XXX
Income statement for the year ended October 31, 2010:

Other revenues:
Interest revenue ($108,000 − $60,750 + $72,000 − $40,500) $78,750

Operations
(30-40 min.) P 10-61B
Req. 1
Journal
May 1 Accounts Receivable ((60,000 × $1.38)….. 82,800

Sales Revenue…………………………… 82,800
10 Supplies………………………………………. 44,460
Accounts Payable (C$57,000 × $.78)… 44,460
17 Accounts Receivable (₤148,000 × $1.94).. 287,120

Sales Revenue…………………………… 287,120
22 Cash ((60,000 × $1.41)……………………… 84,600

June 18 Accounts Payable…………………………… 44,460

Cash (C$57,000 × $.77)…………………. 43,890
Foreign-Currency Transaction Gain…. 570
24 Cash (₤148,000 × $1.91)……………………. 282,680

Foreign-Currency Transaction Loss…….. 4,440

Other revenue and expense:
Foreign-currency transaction (loss), net
($1,200 + $570 − $4,440)………………………………… $(2,070)

Req. 2
This problem demonstrates that the final amount of a cash

receipt or cash payment on an international transaction may
differ from the initial dollar amount of the transaction. You can
learn the need to hedge receivable and payable positions
denominated in foreign currencies. This will help to minimize
foreign-currency transaction losses.

Operations
(20-25 min.) P 10-62B
Req. 1
This situation will generate a positive translation adjustment,

which is like a gain. The gain occurs because the euro’s
current exchange rate, which is used to translate the
subsidiary’s net assets, is greater than the historical
exchange rates at which Mason invested in the Japanese
subsidiary.
EXCHANGE
YEN RATE DOLLARS
Assets 410,000,000 $0.0090 $3,690,000
Liabilities 100,000,000 0.0090 $900,000

Share capital 18,000,000 0.0075 135,000
Retained earnings 292,000,000 0.0088 2,569,600
Accumulated other
Foreign-currency
410,000,000 $3,690,000

Req. 2
The translation adjustment “belongs” to Mason, the parent

company. Therefore, the translation adjustment will be
reported on Mason’s consolidated balance sheet.

Operations
(
Decision Cases
(15-20 min.) Decision Case 1
1. The parentheses signify losses (similar to expenses).
2. These items are contra elements of shareholders’ equity.
3. These items are not included in net income or in retained

earnings.
For 2010, Infografix reported net income of $1.8 billion ($26.6

− $24.8).
4. These items should probably not scare you away from

investing in Infografix shares. After all, the foreign-currency
translation adjustment and the unrealized loss on
investments haven’t been realized yet. There is still time for
the unrealized losses to turn into gains.
Student responses will vary.

(20-30 min.) Decision Case 2
1. The Ohio Office Systems investment cannot be used to

generate the needed income because the appropriate way to
account for this investment is either the equity method or the
consolidation method since Ohio Office Systems is 50%
owned (depending on the degree of influence and control
Barham has over Ohio Office Systems).
Under both methods, dividends received from
associates/subsidiaries are not accounted for as income. In
the equity method, dividends received are recorded as
decrease in the investment carrying amount. For the
consolidation method, subsidiary-parent dividends are
eliminated.
2. The bond investment cannot be used to generate the needed

income because a sale of the bonds would increase net
income by only $6,200, computed below, as opposed to
income shortfall of almost $75,000:
Sale price of the bond investment………………….. $380,000

Less: Commission to sell ($380,000 × .01)……. (3,800)
Amortized carrying amount of the
bond investment
[$250,000 + ($400,000 − $250,000) × 8/10] (370,000)
Gain on sale of the bond investment……………….. $ 6,200

Operations
3. The Microsoft shares can be used to generate the needed
income, as follows:
Sale price of the investment in Microsoft shares

(5,000 × $53)………………………………………. $265,000
Less: Cost of the Microsoft shares
(5,000 × $37)……………………………………… 185,000
Gain on sale of the Microsoft shares…………… $ 80,000
Recommendation: Sell the Microsoft shares.
Cathy should note that by selling the Microsoft shares Barham

ostentatiously met its earnings target for the year (it would be
income projects by just above $5,000), a part of that income will
come from the sale of the Microsoft shares (which is a non-
recurring income item).
More discerning investors may choose to exclude Barham’s

non-recurring income and make their investment decisions
based on recurring income from operating activities.

Ethical Issue
Req. 1
The issue: Should Cohen have used his power to influence

Web Talk to pay a large cash dividend when they have to
borrow to do so?
Req. 2 and Req. 3
The stakeholders are Cohen, other shareholders of Media One,

Web Talk, its shareholders.
The immediate economic consequences of the decision for

Web Talk to pay a large dividend to Cohen are positive, to the
detriment of Web Talk and its other shareholders because Web
Talk had to borrow in order to finance the dividends and will
incur interest expenses that it may ill afford given the prevailing
recession.
There is apparently nothing illegal about this action. Cohen is

acting within his authority to influence Web Talk to pay large
cash dividends. The board of directors has the authority to
declare and pay dividends.

Operations
The ethics of Cohen’s actions are questionable. As the
president of Media One, Cohen is responsible for stewardship
of company resources, including its investment in Web Talk. As
a member of Web Talk’s board of directors, Cohen is also
responsible for the careful stewardship of Web Talk’s
resources. It appears that Cohen is using his position to pad
his own bonus, even if it hurts Web Talk. His actions could also
hurt Web Talk’s creditors if Web Talk fails to pay its debts,
especially because of the need to borrow in order to pay the
dividend.
Req. 4
Student responses will vary on this. Discuss the pros and
cons.
Req. 5
Under the equity method, investor (Media One) income is
increased when the investee company (Web Talk) earns
income. Receipts of dividends have no effect on investor
income (revenue) under the equity method.
Under the market value method, receipts of dividends increase

investor income (revenue). In this case, Cohen is manipulating
Media One’s income — and his own bonus — by having Web
Talk pay high dividends to Media One.
Operations
Investment income under the equity method depends on the
investee company’s net income, which in turn depends on
many factors beyond the investor’s control. Therefore, it is
more difficult for the investor company to manipulate its
income — and for Cohen to manipulate his bonus — under the
equity method than under the market-value method.

Focus on Financials: Nokia Corporation
(15-20 min.)
Req. 1
Available for sale investments are accounted for at fair value

where possible, except in the case of technology related
investments in private equity shares and unlisted funds for
which the fair value cannot be measured reliably. In these
cases they are carried at cost less impairment.
Adjustments for impairment are recognised as a loss in the

period in which they occur and removed from equity. Should
the fair value increases after an impairment has taken place,
the loss is reversed, with the amount of the reversal included in
the profit and loss accounts.
Req. 2
Nokia uses the euro as its presentational currency. Foreign
exchange gains/losses as well as fair value changes are
reported under financial income and expenses.
Note 10 shows that Nokia loss $595 million on the revaluation
of balance sheet items while gaining $432 million on foreign
exchange derivatives.

Operations
The impact of this activity is reflected on the income statement
(Consolidated Profit and Loss Accounts).
Req. 3
The presence of translation differences on the consolidated

statement of changes in shareholder equity implies Nokia owns
foreign subsidiaries.
Req. 4
If the euro is stronger, there will be negative translation

differences and vice versa. The translation differences reported
on the Statement of Changes in Shareholders’ Equity are -163
million in 2007 and 342 million in 2008. Thus we can infer that
the Euro was stronger in 2007 but weaker in 2008.
Req. 5
In 2008, Nokia recorded 504 million translation net gain in its

consolidated statement of changes in shareholder equity.
Req. 6
The equity method is used to account for investments in other

companies. We use the method when we own anywhere
between 20-50% of the investee’s stocks. Nokia recognised 6
million in income from associated companies in 2008.

What happened is that Nokia increased its stake in Symbian
from 47.9 to 100%. This means that Symbian no longer qualified
to be accounted for by the equity method because the stake
was in excess of 50%. Hence Nokia removed the amount from
the investment in associated companies account.
Journal Entry:
DR Investments in Associated Companies 6

CR Share of results in associated companies 6
Req. 7
Investments in Associated Companies
$325 (opening balance)
24 (a) 239 (b)
6 (d) 8 (c)
6 (e)
6 (f)
$96 (ending balance)

Operations
Group Project
(2 – 3 hours)
Student responses will vary.

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Chapter 10

Long-Term Investments &

(10-15 min.) S 10-1

July 22 Cash (400 × $1.26)………………………….. 504

Dec. 31 Unrealized Loss on Investments……....... 3,600

808 Financial Accounting 8/e Solutions Manual

2. This gain on sale of investment is a realized gain. The

Chapter 10 Long-Term Investments and International 809

b. Long-Term Investment ($50 × .40)……………. 20

c. Cash ($25 × .40)………………………………….. 10

810 Financial Accounting 8/e Solutions Manual

(10 min.) S 10-5

2. Consolidated financial statements combine the balance

3. The parent company’s name appears on the consolidated

2. Minority interest is the portion of a subsidiary’s shares that

812 Financial Accounting 8/e Solutions Manual

2. Annual cash interest = $66,000 ($1,100,000 × .06)

3. Annual interest revenue will be less than the amount of

4. Cash interest received each year…………………... $66,000

Chapter 10 Long-Term Investments and International 813

b. Dec. 31 Cash ($1,100,000 × .06 × 6/12)………….. 33,000

c. 31 Interest Revenue…………………………. 4,400

814 Financial Accounting 8/e Solutions Manual

Sept. 12 Accounts Receivable

Oct. 18 Cash (250,000 rubles × $0.33)……………… 82,500

Nov. 15 Cash (250,000 rubles × $0.39)……………… 97,500

Chapter 10 Long-Term Investments and International 815

Apr. 24 Cash (1,100,000 pesos × $0.089)………… 97,900

Oct. 25 Accounts Payable

Currency Strengthened Weakened

816 Financial Accounting 8/e Solutions Manual

Chapter 10 Long-Term Investments and International 817

We had a positive cash flow of $100 million from disposing of some

818 Financial Accounting 8/e Solutions Manual

a. Long-Term Investment (470 × $31)……….. 14,570

b. Cash (470 × $1.70)………………………… 799

c. Allowance to Adjust Investment to Market

d. Cash (470 × $22)……………………………... 10,340

Chapter 10 Long-Term Investments and International 819

Shares Cost Current Market Value

Stockholm (3,400 × $35) = $119,000 (3400 × $28.375) = $ 96,475

London ( 660 × $46.5) = 30,690 ( 660 × $48.25) = 31,845

Glasgow (1,200 × $74) = 88,800 (1,200 × $68.75) = 82,500

Total………………………………… $238,490 ……………………….. 210,820

Dec. 31 Unrealized Loss on Investment

Income Statement (partial):

Other comprehensive income:

Balance Sheet (partial):

820 Financial Accounting 8/e Solutions Manual

a. Long-Term Investment…………………….. 1,500,000

b. Long-Term Investment ($670,000 × .25)…. 167,500

c. Cash ($400,000 × .25)……………………… 100,000

Ending balance in the investment account:

Chapter 10 Long-Term Investments and International 821

Sale of investment for cash of............ $1,100,000

822 Financial Accounting 8/e Solutions Manual

The equity method is appropriate for a 30% investment in

Balance sheet (partial):

Income statement (partial):

Chapter 10 Long-Term Investments and International 823

824 Financial Accounting 8/e Solutions Manual

Newtex should use the amortized-cost method.

Dec. 31 Interest Receivable

31 Long-Term Investment in Bonds