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
….......
8,800
Cash………………………………………..
July 22 Cash (400 × $1.26) 504

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

Investments…….......
Allowance to Adjust
Investment
to Market ($8,800 − $5,200) 3,60
……………. 0
2.
ASSETS
Total current $ XXX
Financial Accounting 8/e Solutions Manual 40
assets…………………………………........
Long-term available-for-sale investments,
at market 5,200
value……………………………………........
SHAREHOLDERS’ EQUITY
Share $ XXX
capital………………………………………………..
Retained XXX
earnings…………………………………………
Accumulated other comprehensive income:
Unrealized (loss) on (3,600)
investments……………………
41 Financial Accounting 8/e Solutions Manual

(5-10 min.) S 10-2
1.
Journal
2011
Ma 2 Cash (400 × $27) 10,80
y 1 ……………………… 0
Long-Term 8,800
Investment……………
Gain on Sale of 2,000
Investment………
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 42

(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
CREDI
ACCOUNT TITLES AND EXPLANATION DEBIT T
Millions
a. Long-Term 420
Investment…………………………..
420
Cash……………………………………………...
To purchase equity-method investment.
b. Long-Term Investment ($50 × .40) 20

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

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

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

(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 $66,000

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

(10 min.) S 10-8
Journal
2010
a. Jun 30 Long-Term Investment in Bonds
e
($1,100,000 × 1.04) 1,144,00
………………………... 0
Cash………………………………. 1,144,00
…….. 0
To purchase bond investment.
b. Dec. 31 Cash ($1,100,000 × .06 × 6/12) 33,00

………….. 0
Interest 33,00
Revenue………………………. 0
To receive semiannual interest.
c. 31 Interest 4,40
Revenue…………………………. 0
Long-Term Investment in Bonds
[($1,144,000 − $1,100,000) / 5 × 4,40
6/12]. 0
To amortize bond investment.
2015
d. Jan. 2 Cash……………………………………..... 1,100,00
.. 0
Long-Term Investment in 1,100,00
Bonds…… 0
To receive face value at maturity.

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

.
(500,000 rubles × $0.36) 180,00
…………………….. 0
Sales 180,00
Revenue…………………………….. 0
Sale on account.
Oct. 18 Cash (250,000 rubles × $0.33) 82,500

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

………………
Accounts Receivable 90,000
($180,000 × 1/2)…
Gain......

(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
…………..
Gain….
Oct. 25 Accounts Payable

(28,000 Swiss francs × $0.82) 22,960
…................
Loss…….
Cash (28,000 Swiss francs × 24,360
$0.87)…..
Payment on account.
Currency Strengthene Weakened

d
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)

(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) 14,57

……….. 0
14,57
Cash………………………………………... 0
b. Cash (470 × $1.70) 799

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

[470 × ($31 − $36)] 2,350
……………………………
Unrealized Gain on 2,350
Investment………..
d. Cash (470 × $22) 10,34

……………………………... 0
Loss on Sale of 4,230
Investment………………...
Long-Term 14,57
Investment………………….. 0

(15-25 min.) E 10-14A
Req. 1
Shares Cost Current Market Value
Stockholm (3,400 × $35) = $119,00 (3400 × = $

0 $28.375) 96,475
London ( 660 × = 30,690 ( 660 × = 31,845

$46.5) $48.25)
Glasgow (1,200 × $74) = 88,800 (1,200 × = 82,50

$68.75) 0
Total……………………………… $238,49 ………………………. 210,820

… 0 .
Req. 2
Dec. Unrealized Loss on Investment

31
($238,490 − $210,820) 27,67
……………….. 0
Allowance to Adjust
Investment
to 27,67
Market………………………….. 0
Req. 3
Income Statement (partial):

Other comprehensive income:
Unrealized (loss) on investments………. $
……... (27,670)
Balance Sheet (partial):
ASSETS
Long-term investments, at market $210,82
value………… 0
Accumulated other comprehensive
income:
Unrealized (loss) on $
investments…………………. (27,670)

(10-15 min.) E 10-15A
Journal
a. Long-Term 1,500,00
Investment…………………….. 0
Cash………………………………………… 1,500,000
Purchased equity-method
investment.
b. Long-Term Investment ($670,000 × . 167,500

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

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

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

(10-15 min.) E 10-16A
Long-Term Investment in Payton Software

a. Purchase 1,500,0 c. Dividends 100,000
00
b. Net income 167,500
Balance 1,567,50
0
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 $612,50
equity………………….. 0*
Income statement (partial):

Other revenue
Equity-method investment $
revenue………………... 60,000
_____
*Explanation:
Cost 590,00
0
Share of net Share of
income dividends

($200,000 × 60,000 ($125,000 × . 37,500
0.30) 30)
Balance 612,50
0

(20-25 min.) E 10-18A
Req. 1 (consolidation work sheet and balance sheet)
Cressid ELIMINATION CONSOLIDATE
a D
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)103,0 —
00
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) 142,000
40,000
Other liabilities 79,000 135,000 214,000

Share capital 113,000 81,000 (a) 113,000
81,000
Retained earnings 224,000 22,000 (a) _______ 224,000
22,000
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).
Chapter 10 Long-Term Investments and International Operations 64

(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
……………………………………
29,400
Cash……………………………………………
Dec. 31 Interest Receivable

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

[($30,000 − $29,400) / 60 months]
×3 30
months………………………………............
Interest 30
Revenue…………………………….
Req. 3
Balance sheet (partial)
ASSETS
Current:
Interest $ 600
receivable…………………………………….
Long-term:
Investment in bonds ($29,400 + $30) $29,430
………………
Chapter 10 Long-Term Investments & International 66

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

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

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

$1.25)…
Sales 62,500
Revenue………………………………….
28 Cash (50,000 euros × $1.21) 60,500

……………………...
Loss……………
Accounts 62,500
Receivable………………………….
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.

Operations
(10-15 min.) E 10-21A
Spanish Subsidiary:
EXCHANG
EUROS E DOLLARS
RATE
Assets €800,00 $1.38 $1,104,00
0 0
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 $1,104,00
0
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
Million
s
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.

Operations
(20-25 min.) E 10-23A
Journal Entry
Cash……………………………………… 3,117,00
… 0
Notes 3,117,00
Receivable……………………… 0
Short-Term 3,465,0
Investments………………... 00
3,465,0
Cash……………………………………... 00
Cash……………………………………… 1,599,0
… 00
Accumulated 3,701,00
Depreciation……………... 0
5,300,0
Equipment……………………………… 00
Cash……………………………………… 487,000
…
470,000
Investments…………………………….
Investment………….
Property and 1,741,00

Equipment………………... 0
1,741,00
Cash……………………………………... 0
Exercises
Group B
(10-15 min.) E 10-24B
Journal
a. Long-Term Investment (460 × $30) 13.80

……….. 0
13,80
Cash………………………………………...
0

Operations
b. Cash (460 × $1.20) 552
…………………………
Dividend 552
Revenue………………………..
c. Allowance to Adjust Investment to Market

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

……………………………...
Loss on Sale of 4,140
Investment………………...
Long-Term 13,80
Investment………………….. 0

(15-25 min.) E 10-25B
Req. 1
Shares Cost Current Market Value
Canada (3,800 × $38) = $144,40 (3,800 × = $110,67

0 $29.125) 5
Chile ( 640 × = 30,240 ( 640 × = 31,520

$47.25) $49.25)
Milan (1,500 × $77) = 115,50 (1,500 × = 104,250

0 $69.50)
Total……………………………… $290,14 ………………………. 246,445

… 0 .
Req. 2
Dec. Unrealized Loss on Investment

31
($290,140 − $246,445) 43,69
……………….. 5
Allowance to Adjust
Investment
to 43,69
Market………………………….. 5
Req. 3
Income Statement (partial):

Operations
Unrealized (loss) on investments………. $
……... (43,695)
Balance Sheet (partial):
ASSETS
Long-term investments, at market $246,44
value………… 5
Accumulated other comprehensive
income:
Unrealized (loss) on $
investments…………………. (43,695)
(10-15 min.) E 10-26B
Journal
a. Long-Term 1,200,00
Investment………………………... 0
1,200,00
Cash…………………………………………… 0
Purchased equity-method investment.
b. Long-Term Investment ($650,000 × . 227,500

35)…….
Revenue.....................................…….
c. Cash ($440,000 × .35) 154,000

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

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

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

a. Purchase 1,200,0 c. Dividends 154,000
00
b. Net income 227,500
Balance 1,273,50
0
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 $583,00
equity………………….. 0*

Other revenue
Equity-method investment $
revenue………………... 44,000
_____
*Explanation:
Cost 560,00
0
Share of net Share of
Operations
income dividends
($220,000 × 44,000 ($105,000 × . 21,000
0.20) 20)
Balance 583,00
0

E10-29B
Req. 1 (consolidation work sheet and balance sheet)

Hamlet ELIMINATION CONSOLIDATE
D
ASSETS Gamma, Corp. DEBIT CREDIT BALANCE
Inc. SHEET
Cash 50,000 19,000 69,000
Note receivable from — 43,000 (b) —
Gamma 43,000
Inventory 55,000 78,000 133,000
Investment in Hamlet Corp. 93,000 — (a)93,00 —
0
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) 142,000
43,000
Chapter 10 Long-Term Investments & International Operations 80

Share capital 111,000 78,000 (a) 111,000
78,000
15,000
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
……………………………………
38,400
Cash……………………………………………
Dec. 31 Interest Receivable

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

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

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

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

Payable………………………………….
Cash 700,000 yen × $.0079) 5,530
………………….
Gain……….. 0
19 Accounts Receivable (20,000 euros × 23,800

$1.19)…
Sales 23,800
Revenue………………………………….
30 Cash (20,000 euros × $1.12) 22,400

……………………...
Loss……………
Accounts 23,800
Receivable………………………….
Req. 2

Operations
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:
EXCHANG
EUROS E DOLLAR
RATE S
Assets €700,00 $1.31
$917,000
0
Liabilities 500,000 1.31

$655,00
0
Share capital 65,000 1.07
69,550

Retained earnings 135,000 1.19
160,650
Accumulated other
comprehensive
income:
Foreign-currency
translation 31,800
adjustment
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
Operations
Statement of Cash Flows (partial)
Fiscal Year 2010
Million
s
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……………………………………… 3,113,00
… 0
Notes 3,113,00
Receivable……………………… 0
Short-Term 3,453,0
Investments………………... 00
3,453,0
Cash……………………………………... 00
Cash……………………………………… 1,529,0
… 00
Accumulated 3,671,0
Depreciation……………... 00
5,200,0
Equipment……………………………… 00
Cash……………………………………… 498,000
…
490,000
Investments…………………………….
Investment………….
Property and 1,720,0

Operations
Equipment………………... 00
1,720,0
Cash……………………………………... 00
Challenge Exercises
(15-20 min.) E 10-35
Req. 1
a. b. Available for sale c. Equity

Consolidation
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) $1,100,0
………………………… 00
c. Long-term investment, at equity

[$500,000 + .45 ($500,000 − $25,000) $713,7
…………. 50

Operations
(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, $(54)
2010……………………………………….
Foreign-currency translation 24
adjustment………………..
Unrealized loss on available-for-sale (11)
investments…….
Accumulated other comprehensive (loss) at
December 31, $(41)
2011………………………………………..

Operations
Quiz
Q10- a [(1,200 × $74) + (150 × $13) + (700 × $26)

37 = $108,950]
Q10- c [(1,200 x $2.10) + (150 x $1.40) + (700 x
38 $4) =
$3,290]
Q10- Cash (1,200 × $73)……… 87,60
39 0
Long-Term Investments
(1,200 × $60)
………………….. 72,000
Gain on Sale of
Investments. 15,600
Q10- a
40
Q10- a
41
Q10- c
42
Q10- c ($80,000 × .05) = $4,000
43
Q10- c [($80,000 × .05) − ($80,000 x 7%) / 5 =
44 $2,880]
Q10- c (¥100,000 × $0.0088 = $880)
45
Q10- b
46
Q10- a
47
Q10- a
48

Operations
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 ($580,000 174,000
× .30)
Dividend revenue (900 × $.38)...................... 342
Net income....................................................... XXX
Unrealized gain (loss) on investment........... (6,900)
_____

Operations
*Long-Term Investment in Woburn Shares
Purchase 380,000
Net income Dividends
received
($580,000 × . 174,000 (17,500 × $1.26) 22,050
30)
Balance 531,950

(45-60 min.) P 10-50A
Req. 1
Journal
Mar. 16 Long-Term Investments (1,400 × 18,20

$13.00)…… 0
18,20
Cash…………………………………………… 0
Purchased available for sale
investment.
May 21 Cash (1,400 × $1.75) 2,45

………………………… 0
Dividend 2,45
Revenue…………………………… 0
Received cash dividend.
Aug. 17 Cash………………………………………………. 86,00

. 0
Long-Term Investments in 86,00
Rockaway 0
Received cash dividend on equity-method
investment.
Dec. 31 Long-Term Investments in Rockaway

($520,000 × .21) 109,20
………………………………….. 0
Revenue…….. 0

Operations
31 Allowance to Adjust Investment to

Market
($26,600 − $18,200) 8,40
……………………………… 0
Investment…………… 0
Adjusted investment to market value.

Req. 2
Long-Term Investment in Rockaway Software

Jan 1 Balance 612,00 Aug 17 Dividend 86,000
. 0. s
Dec 31 Net 109,20
. income 0
Dec 31 Balance 635,20
. 0
Req. 3
Total current $
assets……………………………………. XXX
Available for sale investments, at market 26,600
value…..
Long-term investment in affiliates, at 635,20
equity……… 0

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

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

liabilities……………….
Total shareholders’ 24.6 14.1 − 14.1 24.6
equity…
Total liabilities and $89.7 $170.7 − 15.3 − $245.1
equity… 15.3
Req. 3
Total $220. 0.90

= = =
liabilities 5 0

Consolidated Total assets $245.
debt ratio of 1
Fixed
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.

Operations
(35-45 min.) P 10-52A
Rose, Inc.
Consolidation Work Sheet
September 30, 2010
ELIMINATION CONSOLIDATE
D
ASSETS ROSE MOUNTAIN DEBIT CREDIT AMOUNTS
Cash 60,000 59,000 119,000
Note receivable from 175,000 — (b) 0
Mountain 175,000
Inventory 305,000 458,000 763,000
Investment in Mountain 453,000 — (a) 0
453,000
Plant assets, net 403,000 524,00 927,0
0 00
Total 1,590,000 1,127,00 2,089,00
0 0
LIABILITIES AND

Notes payable 410,000 312,000 (b) 547,000
175,000
Share capital 556,000 268,000 (a) 556,000
268,000
0 185,000 00
Total 1,590,000 1,127,00 628,000 628,000 2,089,0
0 00

(45-60 min.) P 10-53A
Req. 1
Journal
2010
Jan. 1Long-Term Investment in
Bonds
($2,400,000 × 1.10).....................2,640,00
0
Cash....................................... 2,640,00
0
July 1Cash ($2,400,000 × .04 × 6/12) 48,000

…
Interest Revenue................... 48,000
To receive semiannual
interest.
1Interest Revenue........................ 30,000

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

($2,400,000 × .04 × 4/12)............ 32,000
31Interest Revenue........................ 20,000

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

Operations
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) 2,590,00
………………. 0
Property, plant, and equipment, XXX,XXX
net……………..
Income statement for the year ended October 31,

2010:
Other revenues:
Interest revenue ($48,000 − $30,000 + $32,000 − $30,0
$20,000)... 00

(30-40 min.) P 10-54A
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDI
T
May 1 Accounts Receivable ((65,000 × 85,800

$1.32)…..
Sales 85,800
Revenue……………………………
10 Supplies…………………………………… 45,430
….
Accounts Payable (C$59,000 × 45,430
$.77)…
17 Accounts Receivable (₤134,000 × 263,98

$1.97).. 0
Sales 263,98
Revenue…………………………… 0
22 Cash ((65,000 × $1.35) 87,750

………………………
Accounts 85,800
Receivable……………………
Gain….

Operations
Jun 18 Accounts 45,430
e Payable……………………………
Cash (C$59,000 × $.76) 44,840
………………….
Gain….
24 Cash (₤134,000 × $1.94) 259,96

……………………. 0
Loss……..
Accounts 263,98
Receivable…………………… 0

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.

Operations
(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.
EXCHANG
YEN E DOLLARS
RATE
Assets 480,000,0 $.01100 $5,280,0
00 00
Liabilities 115,000,0 .01100 $

00 1,265,00
0
Share capital 40,000,0 0.0095 380,0
00 00
Retained earnings 325,000,0 0.0100 3,250,0
00 00
Accumulated other
comprehensive
income:
Foreign-currency
translation 385,0
adjustment 00
480,000,0 $5,280,0
00 00

Operations
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.

Operations
(continued) P 10-56B
Req. 2
Balance sheet:
ASSETS
Total current assets..................................... $
XXX
value.............................................................
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 ($530,000 212,000
× .40)
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

Operations
(45-60 min.) P 10-57B
Req. 1
Journal
Mar. 16 Long-Term Investments (1,600 × 20,40

$12.75)................................................ 0
Cash............................................... 20,40
0
Purchased available for sale
investment.
May 21 Cash (1,600 × $1.50)........................... 2,40

0
Dividend Revenue.......................... 2,40
0
Received cash dividend.
Aug. 17 Cash.................................................... 85,00

0
Long-Term Investments in NEW 85,00
Software 0
Received cash dividend on equity-method
investment.
Dec. 31 Long-Term Investments in NEW

Software
($500,000 × .23).................................. 115,000
Equity-Method Investment Revenue 115,00
0
31 Allowance to Adjust Investment to
Market
($26,100 − $20,400)
5,700
Unrealized Gain on Investment..... 5,700
Adjusted investment to market value.

Operations
Req. 2
Long-Term Investments in New Software

Jan Balance 616,00 Aug 1 Dividend 85,000
. 1 0. 7 s
Dec 3 Net income 115,00
. 1 0
Dec 3 Balance 646,00
. 1 0
Req. 3
Total current $
assets………………………………… XXX
value.
Long-term investments in affiliates, at 646,000
equity….

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

Space = liabilities = = 0.734
considered alone Total assets $89.5
Req. 2
Consolidat
Space SMCC Elimination ed Totals
s
−
1.7
Total assets................... $89.5 $170. − 14.7 $243.9
8
Total liabilities............... $65.7 $156. − 1.7 $220.1

1
Total shareholders’ 23.8 14. − 14.7 23.8
equity............................. 7
Total liabilities and $89.5 $170. − 16.4 − $243.9
equity............................. 8 16.4
Req. 3

Operations
Total $220.
Consolidated
liabilities 1
debt = = = 0.902
Total assets $243.
ratio of Space
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 CONSOLIDATE
D
ASSETS RONNEY DINETTE DEBIT CREDIT AMOUNTS
Cash 54,000 52,000 106,000
0
Note receivable from 192,000 — (b) 0
Dinette 192,000
Inventory 278,000 452,000 730,000
Investment in Dinette 346,000 — (a)346,00 0
0
Plant assets, net 397,00 457,00 854,00
0 0 0
Total 1,462,0 1,050,00 1,974,00
00 0 0
LIABILITIES AND
0
Notes payable 399,000 329,00 (b) 536,000
0 192,000
0
Share capital 577,000 259,00 (a) 577,000
0 259,000
0 0 87,000 0
Total 1,462,00 1,050,00 234,000 538,000 1,974,00
0 0 0

(45-60 min.) P 10-60B
Req. 1
Journal
2010
Jan. 1 Long-Term Investment in
Bonds
($2,700,000 × 1.18)..................... 3,186,00
0
Cash....................................... 3,186,0
00
July 1 Cash ($2,700,000 × .08 × 6/12) 108,000

. …
To receive semiannual
interest.
1 Interest Revenue........................ 60,750

Bonds
[($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
31 Interest Revenue........................ 40,500

Bonds
[($3,186,000 − $2,700,000) /
48*] × 4........................................ 40,500
_____
*Amortization period: 48 months, from January 1, 2010
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, XXX,XXX
net……………..
Income statement for the year ended October 31,

2010:
Other revenues:
Interest revenue ($108,000 − $60,750 + $72,000 $78,75
− $40,500) 0

(30-40 min.) P 10-
61B
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDI
T
May 1 Accounts Receivable ((60,000 × 82,800

$1.38)…..
Sales 82,800
Revenue……………………………
10 Supplies…………………………………… 44,460
….
Accounts Payable (C$57,000 × 44,460
$.78)…
17 Accounts Receivable (₤148,000 × 287,12

$1.94).. 0
Sales 287,12
Revenue…………………………… 0
22 Cash ((60,000 × $1.41) 84,600

………………………
Accounts 82,800
Receivable……………………
Gain….

Jun 18 Accounts 44,460
e Payable……………………………
Cash (C$57,000 × $.77) 43,890
………………….
Gain….
24 Cash (₤148,000 × $1.91) 282,68

……………………. 0
Loss……..
Accounts 287,12
Receivable…………………… 0

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.

(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.
EXCHANG
YEN E DOLLARS
RATE
Assets 410,000,00 $0.0090 $3,690,0
0 00
Liabilities 100,000,0 0.0090 $900,000

00
Share capital 18,000,0 0.0075 135,00
00 0
Retained earnings 292,000,00 0.0088 2,569,6
0 00
Accumulated other
comprehensive
income:
Foreign-currency
translation 85,40
adjustment 0
410,000,00 $3,690,0
0 00

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

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

(
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 $380,000
investment…………………..
Less: Commission to sell ($380,000 × .01) (3,800)
…….
Amortized carrying amount of the
bond investment
[$250,000 + ($400,000 − $250,000) ×
(370,000
8/10]
)
Gain on sale of the bond $ 6,200
investment………………..
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)………………………………………. $265,00
0
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.
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.

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.
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)

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


Ch10 Harrison 8e GE SM

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ch10 Harrison 8e GE SM

Uploaded by

Copyright:

Available Formats

Chapter 10

Long-Term Investments &

(10-15 min.) S 10-1

July 22 Cash (400 × $1.26) 504

Dec. 31 Unrealized Loss on 3,600

41 Financial Accounting 8/e Solutions Manual

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

Chapter 10 Long-Term Investments and 42

1. Equity method is appropriate because the investor

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

c. Cash ($25 × .40) 10

Chapter 10 Long-Term Investments and 44

(10 min.) S 10-5

1. A parent company is a corporation that owns a

2. Consolidated financial statements combine the

45 Financial Accounting 8/e Solutions Manual

3. The parent company’s name appears on the

Chapter 10 Long-Term Investments and 46

1. Goodwill is an intangible asset. Goodwill is the

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

47 Financial Accounting 8/e Solutions Manual

1. Paid $1,144,000 ($1,100,000 × 1.04)

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

3. Annual interest revenue will be less than the

4. Cash interest received each $66,000

Chapter 10 Long-Term Investments and 48

b. Dec. 31 Cash ($1,100,000 × .06 × 6/12) 33,00

49 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 50

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

Oct. 25 Accounts Payable

Currency Strengthene Weakened

51 Financial Accounting 8/e Solutions Manual

Chapter 10 Long-Term Investments and 52

DATE: Early in 2012

ABC Company financed its 2011 investments in the following

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

As you can see, there was not much change in borrowing

53 Financial Accounting 8/e Solutions Manual

Student responses may vary

Chapter 10 Long-Term Investments and 54

a. Long-Term Investment (470 × $31) 14,57

b. Cash (470 × $1.70) 799

c. Allowance to Adjust Investment to Market

d. Cash (470 × $22) 10,34

Chapter 10 Long-Term Investments and 56

Shares Cost Current Market Value

Stockholm (3,400 × $35) = $119,00 (3400 × = $

London ( 660 × = 30,690 ( 660 × = 31,845

Glasgow (1,200 × $74) = 88,800 (1,200 × = 82,50

Total……………………………… $238,49 ………………………. 210,820

Dec. Unrealized Loss on Investment

Income Statement (partial):

57 Financial Accounting 8/e Solutions Manual

Balance Sheet (partial):

Chapter 10 Long-Term Investments and 58

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

c. Cash ($400,000 × .25) 100,000

Ending balance in the investment account:

59 Financial Accounting 8/e Solutions Manual

Long-Term Investment in Payton Software