Chapter 8 Long-Term Investments and International Operations
53
(20-25 min.) P 8-63
Req. 1
Amount of
Cash Flow
5% Factor
from Table
Present Value
of Cash Flow
$ 20,000
x
.952
=
$ 19,040
25,000
x
.907
=
22,675
30,000
x
.864
=
25,920
25,000
x
.823
=
20,575
20,000
x
.784
=
15,680
$120,000
$103,890
You should choose the option with the payments over the five years
Req. 2
Amount of
Cash Flow
10% Factor
from Table
Present Value
of Cash Flow
$ 20,000
x
.909
=
$ 18,180
25,000
x
.826
=
20,650
30,000
x
.751
=
22,530
25,000
x
.683
=
17,075
20,000
x
.621
=
12,420
$120,000
$ 90,855
If the interest rate is 10%, you should choose the one payment of
Chapter 8 Long-Term Investments and International Operations
55
(continued) P 8-63
Req. 3
Amount of
Cash Flow
10% Factor
from Table
Present Value
of Cash Flow
$20,000
x
.909
=
$18,180
25,000
x
.826
=
20,650
30,000
x
.751
=
22,530
25,000
x
.683
=
17,075
$100,000
x
$78,435
$34,726**
x
.621
=
$21,565*
_____
*$100,000 – $78,435 = $21,565
**$21,565 / 0.621 = $34,726
Decision Cases
(15-20 min.) Decision Case 1
1. The parentheses signify losses (similar to expenses).
(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
2. The bond investment cannot be used to generate the needed income
because a sale of the bonds would increase net income by only
$6,200, computed as follows:
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
3. The Microsoft stock can be used to generate the needed income, as
follows:
Sale price of the investment in Microsoft stock
(5,000 × $53)……………………………………….
$265,000
Less: Cost of the Microsoft stock
(5,000 × $37)……………………………………….
185,000
Gain on sale of the Microsoft stock………………
$ 80,000
Recommendation: Sell the Microsoft stock.
Ethical Issue
Req. 1
The issue: Should Cohen have used his power to influence Web Talk to
pay a large cash dividend when they have to borrow to do so?
Req. 2 and Req. 3
Chapter 8 Long-Term Investments and International Operations
59
(continued) Ethical Issue
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
Focus on Financials: Amazon.com, Inc.
(15-20 min.)
Req. 1
From the caption Investments in Note 1—Description of Business and
Accounting Policies—Investments for which Amazon exercises
significant influence but not control are accounted for using the equity
Req. 2
Other investments of Amazon include
• Equity investments without readily determinable fair values and
Chapter 8 Long-Term Investments and International Operations
61
(continued) Amazon.com
Req. 3
As stated above, only equity investments that have a readily
determinable fair value are adjusted to fair value. In the Fair Value of
Financial Instruments section, Amazon.com, Inc. describes its fair-value
measurement methodologies as including Levels 1, 2, and 3 measures of
Fair Value.
Req. 4
Amazon’s financial statements include its own accounts, the accounts
Chapter 8 Long-Term Investments and International Operations
63
Focus on Analysis: YUM! Brands, Inc.
(30 min.)
Req. 1
Req. 2
The six segments are listed below, with China as the largest
international market.
1. YUM Restaurants China
Req. 3
According to Note 2 to the Consolidated Financial Statements, YUM!
Group Project
(2 – 3 hours)