Chapter 8
Long-Term Investments &
the Time Value of Money
Ethics Check
(5-10 min.) EC 8-1
a. Due care
b. Objectivity and independence
c. Integrity
d. Integrity
Short Exercises
(5–10 min.) S 8-1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
1
Cash ………………………………………………….
10,000
July
1
Cash ($10,000 × .05 × 6/12) ………………………
250
Interest Revenue ………………………………..
(5–10 min.) S 8-2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Jan.
Held-to-Maturity Investment in Bonds
($100,000 × .90) ………………………………………
90,000
Cash ………………………………………………….
90,000
July
Cash ($100,000 × .055 × 6/12) …………………..
2,750
Interest Revenue ………………………………..
2,750
(5–10 min.) S 8-3
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Interest Revenue ………………………………..
(5–10 min.) S 8-4
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Dec.
Interest Receivable ($100,000 × .055 × 6/12) …
2,750
Interest Revenue …………………………………
2,750
Held-to-Maturity Investment in Bonds
($100,000 – $90,000)/10 interest periods) ….
1,000
Interest Revenue …………………………………
1,000
(5–10 min.) S 8-5
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
July
1
Interest Revenue …………………………………………….
750
(5–10 min.) S 8-6
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Dec.
Interest Receivable ($100,000 × .12 × 6/12) ….
6,000
Interest Revenue ………………………………..
6,000
Interest Revenue …………………………………….
750
Held-to-Maturity Investment in Bonds
[($100,000 × 1.075) – $100,000]/10 interest
periods ……………………………………………………
750
(10-15 min.) S 8-7
1. $1,300,000 × 1.03 = $1,339,000 paid to purchase Amexon bonds.
HW will collect $1,300,000 at maturity.
3. Interest Revenue will be less than the amount of cash interest
received because the investor purchased the bond at a premium.
The investor will collect only the face amount of the bonds at
maturity. The difference between the purchase price and the
maturity value (the premium) is a reduction in interest revenue
over the life of the bonds.
Cash interest received each year …………………………
= Annual interest revenue ……………………………………..
(10-15 min) S 8-8
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
a.
June
Held-to-Maturity Investment in Bonds
($1,300,000 × 1.03) ………………………………….
1,339,000
Cash ………………………………………………….
1,339,000
b.
Dec.
Cash ($1,300,000 × .05 × 6/12) ………………….
Interest Revenue ………………………………..
c.
Interest Revenue …………………………………….
2021
d.
June 30
Cash ………………………………………………………
1,300,000
Held-to-Maturity Investment in Bonds ….
1,300,000
(5–10 min) S 8-9
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Mar.
Investment in AFSS (1,000 × $81.34) …………
81,340
Cash …………………………..……………………..
81,340
June
22
Cash (1,000 × $0.29) …………………………………
Dividend Revenue ………………………………
(5-10 min) S 8-10
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Dec.
Allowance to Adjust Investment in AFSS to
Market [(1,000 × $84.16) – $81,340] …………..
2,820
Unrealized Gain on Investment in AFSS
2,820
(5-10 min) S 8-11
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2017
Nov.
Unrealized Gain on Investment in AFSS ……
Allowance to Adjust Investment in AFSS
to Market …………………………………………..
Cash ………………………………………………………
74,500
Loss on Sale of Investment in AFSS …………
6,840
Investment in AFSS …………………………...
(15-20 min.) S 8-12
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Apr.
Investment in AFSS (300 × $20) ………………..
6,000
Cash …………………………..……………………..
6,000
July
Cash (300 × $1.29) ……………………………………
387
Dividend Revenue ………………………………
Dec.
Unrealized Loss on Investment in AFSS ……
200
Allowance to Adjust Investment in AFSS
Req. 2
The income statement will report dividend revenue of $387. The
statement of comprehensive income will report an unrealized loss on
available-for-sale securities of $200.
Req. 3
ASSETS
Total current assets ………………………………………..
$ XXX
Long-term assets:
Investment in AFSS……………………………………..
5,800
STOCKHOLDERS’ EQUITY
Common stock ……………………………………………..
$ XXX
Retained earnings .…………………………………………
Accumulated other comprehensive income:
(5-10 min.) S 8-13
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2017
May
Allowance to Adjust Investment in AFSS to
Market ………………………………………………..
Unrealized Loss on Investment in AFSS
200
200
Cash (300 × $30) …………………………………
9,000
Investment in AFSS ……………………….
6,000
Gain on Sale of Investment in AFSS ..
3,000
Req. 2
(10-15 min.) S 8-14
Req. 1
Equity method is appropriate because the investor (Eastern Motors)
holds a 30% investment in the investee company (Tripp Motors).
Req. 2
Journal
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Millions
a.
Equity-Method Investment ……………………………….
430
Cash ………………………………………………………….
430
To purchase equity-method investment.
Equity-Method Investment ($80 × .30) ……………….
Equity-Method Investment Revenue …………….
To record investment revenue.
c.
Cash ($40 × .30) ……………………………………………….
Equity-Method Investment …………………………..
To receive cash dividend on equity-method
investment.
Req. 3
Equity-Method Investment
(Amounts in millions)
(5 min.) S 8-15
Millions
Sale proceeds ……………………………………………………….…
$ 125
−
Carrying amount of the investment ($442 / 2) ……………..
(221)
=
(Loss) on sale of investment …………………………………….
$ (96)
(10 min.) S 8-16
1. A parent company is a corporation that owns a controlling (more than
50%) interest in another company. A subsidiary company is a
company that is controlled by another corporation.
2. Consolidated financial statements combine the balance sheets,
3. The parent company’s name appears on the consolidated financial
statements. To consolidate, the parent company must own more than
50% of the subsidiary’s stock.
(10 min.) S 8-17
1. Goodwill is an intangible asset. Goodwill is the excess of the
purchase price to acquire a subsidiary company over the sum of the
2. Noncontrolling interest arises when a parent company owns less than
100% of a subsidiary’s stock. The noncontrolling interest represents
the subsidiaries’ stock that is owned by stockholders other than the
parent company. The parent company can report noncontrolling
interest on its consolidated balance sheet among the stockholders’
equity.
(5 min.) S 8-18
1. Operating
2. Purchase of investment (or acquisition of other companies)
Sale of investment (or sale of other companies)
(10 min.) S 8-19
DATE: Early in 2017
TO: The Ink Spot Company Stockholders
FROM: Chief Executive Officer
RE: Investing Activities During 2016
Ink Spot Company’s investing activities used more cash than the
previous year principally due to the increase in purchases of property,
plant, and equipment and acquisitions and investments. The cash used
for investing activities was partially offset by an increase in cash flow
from the disposal of investments and from the disposal of property,
plant, and equipment.
(5-10 min.) S 8-20
2. $12,000 x 3.791 (PV of an annuity, 5 periods, 10%) = $45,492
(5-10 min.) S 8-21
2. $10,871.63 EXCEL formula = PV(1%,60,-150,–7500)
Exercises
(15-20 min.) E8-22A
Req. 1
Rentex, Inc., should use the amortized–cost method to account for the
long-term investment in bonds.
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Sept.
Held-to-Maturity Investment in Bonds
($30,000 × .97) …………………………………………
29,100
Cash ………………………………………………….
To purchase bond investment.
29,100
Dec.
31
Interest Receivable ($30,000 × .06 × 3/12) ……
450
Interest Revenue ………………………………..
Interest Revenue ………………………………..
To amortize discount on bond investment.
Req. 3
Balance sheet (partial)
ASSETS
Current assets:
Interest receivable …………………………………………………..
$ 450
($29,100 + $45) ……………………………………………………….
(10-15 min.) E 8-23A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
a.
Investment in AFSS (400 × $35)…………………..
14,000
Cash …………………………………………………….
14,000
b.
Cash (400 × $1.60) ……………………………………..
640
Dividend Revenue …………………………………
640
c.
Allowance to Adjust Investment in AFSS
to Market [400 × ($42 − $35)] ……………………….
2,800
Unrealized Gain on Investment in AFSS ….
2,800
d.
Unrealized Gain on Investment in AFSS ………
Cash (400 × $25) ………………………………………..
Loss on Sale of Investment in AFSS ……………
Investment in AFSS ………………………………
(15-25 min.) E 8-24A
Req. 1
Stock
Cost
Fair Value
Canada
(3,800 × $38.00)
=
$144,400
(3,800 × $29.125)
=
$110,675
Brazil
(640 × $47.25)
=
(640 × $49.25)
=
Russian
(1,500 × $77.00)
=
(1,500 × $69.50)
=
Total ……………………………………..
………………………….
Req. 2
Dec. 31
Unrealized Loss on Investments in
AFSS ($290,140 − $246,445)………………..
43,695
Allowance to Adjust Investments
in AFSS to Market ………………………
43,695
Req. 3
Statement of Comprehensive Income (partial):
Other comprehensive income:
Unrealized (loss) on investments in AFSS …………
$(43,695)
Balance Sheet (partial):
Investments in AFFS …………………………………………….
$246,445
Accumulated other comprehensive income:
Unrealized (loss) on investments in AFSS …………
(10-15 min.) E 8-25A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
a.
Equity-Method Investment ……………………….
1,500,000
Cash ………………………………………………….
1,500,000
Purchased equity-method investment.
b.
Equity-Method Investment ($670,000 × .40).
268,000
Equity-Method Investment Revenue…….
268,000
To record investment revenue.
c.
Cash ($440,000 × .40) ………………………………
Equity-Method Investment ………………….
To receive cash dividend on equity-method investment.
(10-15 min.) E 8-26A
Equity-Method Investment
a.
Purchase
1,500,000
c.
Dividends
176,000
b.
Net income
268,000
Balance
1,592,000
(15-20 min.) E 8-27A
Req. 1
The equity method is appropriate for a 30% investment in another
company’s common stock. Equity method is used for 20-50%
investments.
Req. 2
Balance sheet (partial):
Income statement (partial):
Other revenue
Equity-method investment revenue ……………………….
$ 66,000
_____
*Explanation:
Equity-Method Investment
(20-25 min.) E 8-28A
Req. 1 (consolidation work sheet and balance sheet)
Nutone
Othello
ELIMINATION
CONSOLIDATED
ASSETS
Inc.
Corp.
DEBIT
CREDIT
BALANCE SHEET
Cash
46,000
20,000
66,000
Accounts receivable, net
81,000
53,000
134,000
Note receivable from Nutone
42,000
(b) 42,000
Inventory
59,000
84,000
143,000
Investment in Othello Corp.
107,000
(a)107,000
Other assets
29,000
10,000
39,000
Total
611,000
300,000
762,000
LIABILITIES AND
STOCKHOLDERS’ EQUITY
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
Common stock
105,000
85,000
Req. 2
The stockholders’ equity of the consolidated entity is $341,000 ($105,000 + $236,000).