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Chapter 10: Q14RQ. (page 567)
What does the rate of return on total assets measure, and how is it calculated?
The rate of return on total assets calculates theability of the company to generate income using its assets. It is calculated using the average total assets, net income, and interest expenses.
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Question: P10-20A Accounting for equity investments
The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:
Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.
May 15 Received a cash dividend of \(0.61 per share on the Lili investment.
Dec. 15 Received a cash dividend of \)70,000 from Evan investment.
31 Received Evan鈥檚 annual report showing \(300,000 of net income.
31 Received Lili鈥檚 annual report showing \)120,000 of net income for the year.
31 Evan鈥檚 stock fair value at year-end was \(390,000.
31 Lili鈥檚 common stock fair value at year-end was \)12 per share.
Requirements
2. Post transactions to T-accounts to determine December 31, 2018, balances related to the investment and investment income accounts.
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, 鈥淲e鈥檝e 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.鈥� Carl made the adjustments even though he doesn鈥檛 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鈥檚 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?
The beginning balance sheet of Text Source Co. included a \(700,000 investment in Taylor stock (20% ownership).
During the year, Text Source completed the following investment transactions:
Mar. 3 Purchased 5,000 shares at \)13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.
May 15 Received a cash dividend of \(0.69 per share on the Josh investment.
Dec. 15 Received a cash dividend of \)100,000 from Taylor investment.
31 Received Taylor鈥檚 annual report showing \(100,000 of net income.
31 Received Josh鈥檚 annual report showing \)620,000 of net income for the year.
31 Taylor鈥檚 stock fair value at year-end was \(620,000.
31 Josh鈥檚 common stock fair value at year-end was \)14 per share.
Requirements
Post transactions to T-accounts to determine the December 31, 2018, balances related to the investment and investment income accounts.
Accounting for equity investments
Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned a net income of \)90,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.)
Requirements
Post all 2018 transactions to the investment T-account. What is its balance after all the transactions are posted? How would this balance be classified on the balance sheet dated December 31, 2018?
Question: P10-22B Classifying and accounting for debt and equity investments
Captain Transfer Corporation generated excess cash and invested in securities as follows:
2018
Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon.
Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment.
Sep. 16 Sold the Naradon stock for \(13.70 per share.
Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term.
Dec. 31 Received a \(600 interest payment from Purple.
31 Adjusted the Purple bond to its market value of \)44,000.
Requirements
Where is the unrealized holding gain or loss associated with the trading debt investment reported?
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