Chapter 10: Q1CA (page 577)
In 150 words or fewer, explain the difference between trading debt investments and available-for-sale debt investments.
Points of difference are:
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Question: 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
Has a fraud occurred? If so, what is the fraud?
Accounting for equity investments
Strategic Investments completed the following investment transactions during 2018:
Jan. 14 Purchased 800 shares of Phyflexon stock, paying \(50 per share. The investment represents 4% ownership in Phyflexon’s voting stock. Strategic does not have significant influence over Phyflexon. Strategic intends to hold the investment for the indefinite future.
Aug. 22 Received a cash dividend of \)0.24 per share on the Phyflexon stock.
Dec. 31 Adjusted the investment to its current market value of \(45 per share.
31 Phyflexon reported net income of \)330,000 for the year ended 2018.
Requirements
Prepare a partial income statement for Strategic Investments for year ended December 31, 2018.
Accounting for debt investments
League Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $900,000 of CocoCorp bonds at face value on January 2, 2018. The CocoCorp bonds pay interest at the annual rate of 8% on June 30 and December 31 and mature on December 31, 2022. League Up intends to hold the investment until maturity.
Requirements
2. Journalize the following on League Up’s books:
a. Receipt of final interest payment on December 31, 2022.
b. Disposition of the investment at maturity on December 31, 2022
How is the purchase of a held-to-maturity debt security at face value recorded?
Question: S10-7 Computing rate of return on total assets
Barot’s 2018 financial statements reported the following items—with 2017 figures given for comparison:
BAROT INC | ||
Balance Sheet | ||
As of December 31, 2018 and 2017 | ||
2018 | 2017 | |
Total assets | \(32,978 | \)30,660 |
Total liabilities | 19,400 | 11,560 |
Total stockholder’s equity | 13,578 | 19,100 |
Total liabilities and stockholder’s equity | \(32,978 | \)30,660 |
Net income for 2018 was \(3,910, and interest expense was \)240. Compute Barot’s rate of return on total assets for 2018. (Round to the nearest percent.)
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