(20-25 min.) P 8-69B
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 Lundgren Corp. invested in the Japanese
subsidiary.
YEN
EXCHANGE
RATE
DOLLARS
Assets
410,000,000
$0.0110
$4,510,000
Liabilities
115,000,000
0.0110
$1,265,000
Stockholders’ equity:
Common stock
35,000,000
0.0095
332,500
Retained earnings
0.0100
comprehensive income:
Foreign-currency
translation adjustment
312,500
The foreign currency translation adjustment is reported in accumulated other
comprehensive income in stockholders’ equity on the balance sheet and other
comprehensive income on the statement of comprehensive income.
Req. 2
Challenge Exercises and Problem
(15-20 min.) E 8-70
Req. 1
a. Consolidation
c. Equity
Req. 2
PlaySpace’s net income for 2016:
Req. 3
b.
Investment in AFSS
($1,000,000 − $300,000)…………………………………………
$ 700,000
$1,127,500
(20 min.) E 8-71
Req. 1
Two components of accumulated other comprehensive income are:
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 assets of
a foreign subsidiary are translated into more dollars than the equities
(liabilities plus stockholders’ equity).
Req. 3
Millions
Accumulated other comprehensive (loss) at
December 31, 2016 ………………………………………………………….
$(58)
Foreign-currency translation adjustment ………………………………
Unrealized loss on investments in AFSS ………………………………
Accumulated other comprehensive (loss) at
(20-25 min.) P 8-72
Req. 1
Amount of
Cash Flow
8% Factor
from Table
Present Value
of Cash Flow
$ 25,000
x
.926
=
$ 23,150
45,000
x
.857
=
38,565
35,000
x
.794
=
27,790
15,000
x
.735
=
11,025
50,000
x
.681
34,050
$134,580
You should choose the option with the payments over the five years
rather than the one payment of $120,000. The present value of the
payments, $134,580, is higher than the present value of the single
payment, $120,000.
Req. 2
Amount of
Cash Flow
10% Factor
from Table
Present Value
of Cash Flow
$ 25,000
x
.909
=
$ 22,725
45,000
x
.826
=
37,170
35,000
x
.751
=
26,285
15,000
x
.683
=
10,245
50,000
x
.621
=
31,050
$127,475
If the interest rate is 10%, you should choose the payments over the five
years because the present value of those five payments, $127,475, is
higher than the present value of the single payment of $120,000.
(continued) P 8-72
Req. 3
Amount of
Cash Flow
10% Factor
from Table
Present Value
of Cash Flow
$ 25,000
x
.909
=
$22,725
45,000
x
.826
=
37,170
35,000
x
.751
=
26,285
15,000
x
.683
=
10,245
Yr. 4
Decision Cases
(15-20 min.) Decision Case 1
1. The parentheses signify losses (similar to expenses).
3. These items are not included in net income or in retained earnings.
For 2016, Infografix reported net income of $1.8 billion ($26.6 − $24.8).
(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]
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)……………………………………….
Gain on sale of the Microsoft stock………………
$ 80,000
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
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.
As a member of Web Talk’s board of directors, Cohen is also
(continued) Ethical Issue
Req. 4
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.
Focus on Financials: Apple Inc.
(15-20 min.)
Req. 1
From the caption Cash Equivalents and Marketable Securities in Note
1—Summary of Significant Accounting Policies—Marketable Debt
Investments for which the contractual maturity date is 12 months or less
Req. 2
Apple does adjust for periodic changes in fair value of their investments.
According to Cash Equivalents and Marketable Securities in Note 1—
Summary of Significant Accounting Policies—the company’s securities
Req. 3
Apple considers any declines in market value of its marketable
securities to be temporary. The company invests in only highly rated
securities and the investment policy limits its amount of credit exposure
(continued) Apple Inc.
low and the risk of principal loss is low. This also means the securities
that Apple currently owns are investment grade securities, which
improves the company’s liquidity. If the decline in market value is other
than temporary, Apple also considers how long the value has declined,
financial condition of the issuer, changes in the market, and intent to sell
before impairing an investment.
Focus on Analysis: Under Armour, Inc.
(30 min.)
Req. 1
Under Armour’s three main categories are Apparel, Footwear, and
Accessories. The categories brought in the following revenue listed
from greatest to smallest for 2014.
(In Millions)
Req. 2
Under Armour operates in: North America; Latin America; Europe, the
Middle East and Africa; and Asia-Pacific. The regional segment that
brought in the most revenue for 2014 was North America, reporting
$2,796 million in net revenues.
Req. 3
According to Note 2 to the Consolidated Financial Statements, Under
Armour, Inc. consolidates its wholly owned subsidiaries. Any amounts
Group Project
(2 – 3 hours)
Student responses will vary.