FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S8-21
(5-10 min.)
Solution:
Req. 1
1. What is the present value of the lease if the annual interest rate in the
lease is 12%? Use the PV function in Excel to compute the present value.
2. What is the present value of the lease if the car can likely be sold for
$7,500 at the end of five years?
Chapter 8 : Long-Term Investments and the Time Value of Money Page 21 of 80
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-22A
(15-20 min.)
Requirements
Solution:
Req. 1
Req. 2
Sept
30 Held-to-Maturity Investment in Bonds
($30,000 × .97) 29,100
Req. 3
Balance sheet (partial)
ASSETS
Current assets:
Long-term assets:
Held-to-maturity investment in bonds
DEBIT
Journal
ACCOUNT TITLES AND EXPLANATION
1. What method should Rentex use to account for its investment in the Morin
Corp. bonds?
2. Using the straight-line method of amortizing the discount on bonds,
journalize all of Rentex’s transactions on the bonds for 2016.
3. Show how Rentex would report everything related to the bond investment
on its balance sheet at its year-end, December 31, 2016.
Rentex, Inc., should use the amortized-cost method to account for the long–
term investment in bonds.
CREDIT
Chapter 8 : Long-Term Investments and the Time Value of Money Page 22 of 80
To accrue interest revenue.
Held-to-Maturity Investment in Bonds
To amortize discount on bond investment.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-23A
(10-15 min.)
Solution:
a. Investment in AFSS (400 × $35) 14,000
Cash 14,000
Journal
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Journalize the following long-term, available-for-sale security transactions of Isley
Department Stores:
a. Purchased 400 shares of Howell Fine Foods common stock at $35 per share, with
the intent of holding the stock for the indefinite future.
b. Received a cash dividend of $1.60 per share on the Howell Fine Foods investment.
c. At year-end, adjusted the investment account to fair value of $42 per share.
d. Sold the Howell Fine Foods stock for the price of $25 per share.
DATE
Chapter 8 : Long-Term Investments and the Time Value of Money Page 23 of 80
b. Cash (400 × $1.60) 640
Unrealized Gain on Investment in AFSS 2,800
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-24A
(15-25 min.)
Requirements
Solution:
Req. 1
Stock
Canada (3,800 × $38.00)
=
144,400$ (3,000 × $30.125)
=
110,675$
Req. 2
Dec. 31 Unrealized Loss on Investments in
Req. 3
Statement of Other Comprehensive Income (partial):
Other comprehensive income:
Unrealized (loss) on investments in AFSS
(43,695)$
Balance Sheet (partial):
ASSETS
Long-term assets:
Investments in AFSS
246,445$
Accumulated other comprehensive income:
Unrealized (loss) on investments in AFSS
(43,695)$
Fair Value
Cost
1. Determine the cost and the fair value of the long-term investment portfolio at
December 31.
2. Record Michael’s adjusting entry at December 31.
3. What would Michael Co. report on its statement of comprehensive income and
balance sheet at year-end for the information given? Make the necessary disclosures.
Ignore income tax.
Chapter 8 : Long-Term Investments and the Time Value of Money Page 24 of 80
Brazil (640 × $47.25)
=
=
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-25A
(10-15 min.)
Requirements
Solution:
Req. 1
a. Equity-Method Investment 1,500,000
Cash 1,500,000
Req. 2
1. Record the following in Nelson’s journal: (a) purchase of the investment, (b)
Nelson’s
proportion of Simpson Software’s net income, and (c) receipt of the cash dividends.
2. What is the ending balance in Nelson’s investment account?
Ending balance in the investment account:
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Chapter 8 : Long-Term Investments and the Time Value of Money Page 25 of 80
b. Equity-Method Investment ($670,000 × .40). 268,000
Equity-Method Investment Revenue 268,000
Equity-Method Investment 176,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-26A
(10-15 min.)
Solution:
a. Purchase 1,500,000 c. Dividends 176,000
Proceeds from sale of investment
How much is Nelson’s gain or loss on the sale of the investment?
Equity-Method Investment
$ 1,500,000
Chapter 8 : Long-Term Investments and the Time Value of Money Page 26 of 80
b. Net income 268,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-27A
(15-20 min.)
Requirements
Solution:
Req. 1
Req. 2
Balance sheet (partial):
ASSETS
Long-term assets:
*Explanation:
Cost 500,000
Share of net income Share of dividends
($220,000 × 0.30) 66,000 ($140,000 × .30) 42,000
Balance 524,000
1. Which method is appropriate for Ashcroft Financial to use in accounting
for its investment in Magic, Inc.? Why?
2. Show everything that Ashcroft would report for the investment and any
investment revenue in its year-end financial statements.
The equity method is appropriate for a 30% investment in another
Equity-Method Investment
Chapter 8 : Long-Term Investments and the Time Value of Money Page 27 of 80
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-28A
(20-25 min.)
Requirements
Solution:
Req. 1
DEBIT CREDIT
Cash 46,000 20,000 66,000
Accounts receivable, net 81,000 53,000 134,000
Req. 2
1. Prepare a consolidated balance sheet of Nutone, Inc. It is sufficient to complete the
consolidation work sheet. Use Exhibit 8-7 as a model.
2. What is the amount of stockholders’ equity for the consolidated entity?
Assets
Nutone,
Inc.
Othello
Corp.
CONS..
BALANCE
SHEET
ELIMINATION
Chapter 8 : Long-Term Investments and the Time Value of Money Page 28 of 80
Investment in Othello 289,000 91,000
Accounts payable 48,000 20,000 68,000
Notes payable 145,000 39,000 (b) 42,000 142,000
Other liabilities 77,000 134,000 211,000
Common stock 105,000 85,000 (a) 85,000 105,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-29A
(10-15 min.)
Solution:
Assets 650,000 861,900$
1.362$
During the period covered by this scenario, which currency was stronger, the
dollar or the euro?
German Subsidiary:
EXCHANGE
RATE
EUROS
DOLLARS
Chapter 8 : Long-Term Investments and the Time Value of Money Page 29 of 80
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-30A
(15-20 min.)
Requirement
Solution:
Cash flows from investing activities:
Capital expenditures
Millions
1. Prepare the investing activities section of Honey Bakery’s statement of cash
flows. Based solely on Honey Bakery’s investing activities, does it appear that
the company is growing or shrinking? How can you tell?
Fiscal Year 2016
Statement of Cash Flows (partial)
Honey Bakery
(10.0)$
Chapter 8 : Long-Term Investments and the Time Value of Money Page 30 of 80
Sale of property, plant, and equipment
Sale of other businesses
Purchase of long-term investments
Sale of long-term investments
Net cash (used) in investing activities
(10.3)$
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-31A
(20-25 min.)
Requirement
Solution:
Cash 3,116,000
Notes Receivable
3,116,000
1. For each item listed, make the journal entry that placed the item on
Cityside Properties’ statement of cash flows.
Journal
DEBIT
CREDIT
DATE
ACCOUNT TITLES AND EXPLANATION
Chapter 8 : Long-Term Investments and the Time Value of Money Page 31 of 80
Short-Term Investments 3,465,000
Cash 1,409,000
Cash 515,000
Property and Equipment 1,770,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-32A
(10-15 min.)
Solution:
Using the PV function in Excel, compute the price Stockman paid (the
present value) for the bond investment.
Chapter 8 : Long-Term Investments and the Time Value of Money Page 32 of 80
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-33B
(15-20 min.)
Requirements
Solution:
Req. 1
Req. 2
Sept.
30 Held-to-Maturity Investment in Bonds
($46,000 × .97) 44,620
Cash 44,620
1. What method should Baytex use to account for its investment in the Hartley Corp.
bonds?
2. Using the straight-line method of amortizing the discount on bonds, journalize all of
Baytex’s transactions on the bonds for 2016.
3. Show how Baytex would report everything related to the bond investment on its
balance
Baytex should use the amortized-cost method to account for the long-term investment in
bonds.
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Chapter 8 : Long-Term Investments and the Time Value of Money Page 33 of 80
To purchase bond investment.
Interest Revenue 575
To accrue interest revenue.
31 Held-to-Maturity Investment in Bonds
Interest Revenue 69
To amortize discount on bond investment.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-34B
(10-15 min.)
Solution:
a. Investment in AFSS (410 × $31) 12,710
Cash 12,710
CREDIT
Journalize the following long-term, available-for-sale investment transactions of
Hammond Department Stores:
a. Purchased 410 shares of Potter Fine Foods common stock at $31 per share, with
the intent of holding the stock for the indefinite future.
b. Received a cash dividend of $1.10 per share on the Potter Fine Foods
investment.
c. At year-end, adjusted the investment account to fair value of $36 per share.
d. Sold the Potter Fine Foods stock for the price of $27 per share.
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
Chapter 8 : Long-Term Investments and the Time Value of Money Page 34 of 80
b. Cash (410 × $1.10) 451
d. Unrealized Gain on Investment in AFSS 2,050
Investment in AFSS 12,710
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-35B
(15-25 min.)
Requirements
Solution:
Req. 1
Stock
Dublin (2,800 × $35) = 98,000$ (2,800 × $28.125) = 78,750$
Req. 2
Dec. 31 Unrealized Loss on Investments in
Allowance to Adjust Investments in
AFSS to Market
Req. 3
Statement of Other Comprehensive Income (partial):
Other comprehensive income:
Unrealized (loss) on investments in AFSS
(24,525)$
Balance Sheet (partial):
ASSETS
Long-term assets:
Accumulated other comprehensive income:
Cost
Fair Value
1. Determine the cost and the fair value of the long-term investment portfolio at
December 31.
2. Record Ogden Co.’s adjusting entry at December 31.
3. What would Ogden Co. report on its statement of comprehensive income and
balance sheet at year-end for the information given? Make the necessary disclosures.
Ignore income tax.
Chapter 8 : Long-Term Investments and the Time Value of Money Page 35 of 80
Chile (590 × $45.50) = 26,845 (590 × $48.00) = 28,320
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-36B
(10-15 min.)
Requirements
Solution:
Req. 1
a. Equity-Method Investment 1,300,000
Cash 1,300,000
Req. 2
1. Record the following in Watson’s journal: (a) purchase of the investment, (b) Watson’s
proportion of Smith Software’s net income, and (c) receipt of the cash dividends.
2. What is the ending balance in Watson’s investment account?
Ending balance in the investment account:
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Chapter 8 : Long-Term Investments and the Time Value of Money Page 36 of 80
b. Equity-Method Investment ($680,000 × .30) 204,000
Equity-Method Investment Revenue 204,000
Equity-Method Investment 135,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-37B
(10-15 min.)
Solution:
a. Purchase 1,300,000 c. Dividends 135,000
How much is Watson’s gain or loss on the sale of the
Equity-Method Investment
Chapter 8 : Long-Term Investments and the Time Value of Money Page 37 of 80
b. Net income 204,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-38B
(15-20 min.)
Requirements
Solution:
Req. 1
Req. 2
Balance sheet (partial):
ASSETS
Long-term assets:
*Explanation:
Cost 570,000
Share of net income Share of dividends
($260,000 × 0.45) 117,000 ($135,000 × .45) 60,750
Balance 626,250
1. Which method is appropriate for Agani Financial to use in its accounting for its
investment in Sonic, Inc.? Why?
2. Show everything that Agani would report for the investment and any investment
revenue in its year-end financial statements.
The equity method is appropriate for a 45% investment in another company’s
common stock. Equity method is used for 20-50% investments.
Equity-Method Investment
Chapter 8 : Long-Term Investments and the Time Value of Money Page 38 of 80
Equity-method investment $ 626,250*
Equity-method investment revenue 117,000$
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-39B
(20-25 min.)
Requirements
Solution:
Req. 1
DEBIT CREDIT
Cash 54,000 14,000 68,000
Accounts receivable, net 80,000 55,000 135,000
Req. 2
The stockholders’ equity of the consolidated entity is $321,000 ($113,000 + $208,000).
1. Prepare a consolidated balance sheet of Gamma, Inc. It is sufficient to complete the
consolidation work sheet. Use Exhibit 8-7 as a model.
2. What is the amount of stockholders’ equity for the consolidated entity?
Assets
Gamma, Inc.
Cressida
Corp.
ELIMINATION
CONS.
BALANCE
SHEET
Chapter 8 : Long-Term Investments and the Time Value of Money Page 39 of 80
Accounts payable 46,000 28,000 74,000
Notes payable 154,000 36,000 (b) 40,000 150,000
Other liabilities 78,000 138,000 216,000
Common stock 113,000 85,000 (a) 85,000 113,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E8-40B
(10-15 min.)
Solution:
Assets 600,000 816,000$
During the period covered by this situation, which currency was stronger, the
dollar or the euro?
Greek Subsidiary:
EUROS
EXCHANGE
RATE
DOLLARS
1.36$
Chapter 8 : Long-Term Investments and the Time Value of Money Page 40 of 80