P10-25, cont.
SOLUTION
Requirement 1
P10-25, cont.
Requirement 1, cont.
Requirement 2
Critical Thinking
Tying It All Together Case 10-1
Berkshire Hathaway, Inc. is a holding company owning subsidiaries that engage in a variety of
different business activities including insurance, freight rail transportation, utilities and energy,
manufacturing, services and retail.
Requirements
With a partner or group, lead your class in a discussion of the following questions or write a report as
directed by your instructor.
1. Review Note 3 (Investments in fixed maturity securities). At December 31, 2015, what type of
investments in securities with fixed maturities did the company hold?
2. Review Note 4 (Investments in equity securities). At December 31, 2015, what type of investments in
equity securities did the company hold?
3. Review Note 1(d) (Investments). How, if at all, does the company use fair value measurements in
regards to its investments?
SOLUTION
Requirement 1
Decision Case 10-1
Rock Designs, Inc. is a jewelry store located in Miramar Beach, Florida. After Valentine’s Day, the store
often has excess cash to get it through the three-month slow season. The primary stockholder, Hardy
Rock, wants to make this seasonal cash work for the business.
Requirements
1. Identify which investment class options are available to Rock Designs, Inc.
2. The company identifies that it wants to invest in the technology sector and has narrowed its choices
to three companies: Apple, Inc., Google, Inc., and Microsoft Corporation. Prepare a brief analysis
comparing the three companies, and recommend one of the three based on your analysis.
SOLUTION
Requirement 1
Ethical Issue 10-1
As a result of the recent mortgage crisis, many banks reported record losses to their mortgage
receivables and other assets based on the decline in these assets’ fair values.
Requirements
1. What would the effect be to stakeholders if such losses were not reported in a timely way?
2. If a business chooses not to report these losses, is there an ethical issue involved? Who is hurt?
SOLUTION
Fraud Case 10-1
Wild Adventure conducts tours of wildlife reserves around the world. The company recently purchased a
lodge in Adelaide, Australia, securing a 4% mortgage from First Bank. In addition to monthly payments,
Wild Adventure must provide annual reports to the bank showing that the company has a current ratio of
1.2 or better.
After reviewing the annual reports, the CEO, N. O. Scrooge, approached Carl Hauptfleisch, the
CFO, and stated, “We’ve decided we are going to move all our long-term debt investments into our
brokerage account so we can sell them soon. Carl, go ahead and make the adjusting entries as of the
current year-end.”
Carl made the adjustments even though he doesn’t think the company will actually go ahead with
the planned sale of the long-term debt investments. The subsequent year, the economy turned, and the
company’s travel revenues dropped more than 60%. Wild Adventure eventually defaulted on the First
Bank loan.
Requirements
1. What effect did the adjustments have on the financial statements? What effect did the adjustments
have on the current ratio?
2. What type of information in the financial reports would have helped the bank detect this
reclassification?
3. Has a fraud occurred? If so, what is the fraud?
SOLUTION
Financial Statement Case 10-1
Details about a company’s investments appear in a number of places in the annual report. Use Target
Corporation’s Fiscal 2015 annual report to answer the following questions. Visit
Requirements
1. Calculate the rate of return on total assets for Target Corporation for the year ended January 30, 2016.
2. Compare Target Corporation’s rate of return on total assets to Kohl’s Corporation’s ratio. Discuss
the differences.
SOLUTION
Requirement 1
Communication Activity 10-1
In 150 words or fewer, explain the difference between trading debt investments and available-for-sale debt
investments.
SOLUTION