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Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall
Chapter 10
Demonstration Problems
Investments
10-1
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 10-2
E10-9D
Requirements
1. Journalize any required 2014 entries for the bond investment.
2. How much cash interest will Premier Metal receive each year from Clean Chemicals?
3. How much interest revenue will Premier Metal report during 2014 on this bond investment?
4. How would the bond investment be classified on Premier Metal’s December 31, 2014, balance sheet?
5. Journalize the following on Premier Metal’s books:
a. Receipt of final interest payment on December 31, 2020
b. Disposal of the investment at maturity on December 31, 2020
Premier Metal Co. owns vast amounts of corporate bonds. Suppose Premier Metal buys $1,500,000 of Clean Chemical Corp. bonds at face value on January 2, 2014. The Clean Chemical Corp. bonds pay interest at the annual rate of 7% on June 30 and December 31 and mature on December 31, 2020. Premier Metal intends to hold the investment until maturity.
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Buys $1,500,000 of Clean Chemical Corp. bonds at face value on January 2, 2014.
E10-9D—Req.1
Date Accounts and Explanation Debit Credit
2014
Jan. 2 Long-Term Investments—Held-to-Maturity 1,500,000
Cash 1,500,000
Purchased investment in bonds.
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June 30 Receives interest at the annual rate of 7%
E10-9D—Req.1
Date Accounts and Explanation Debit Credit
2014
June 30 Cash ﴾$1,500,000 × 0.07 × 6/12﴿ 52,500
Interest Revenue 52,500
Received cash interest.
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Dec. 31 Receives interest at the annual rate of 7%
E10-9D—Req.1
Date Accounts and Explanation Debit Credit
2014
Dec. 31 Cash ﴾$1,500,000 × 0.07 × 6/12﴿ 52,500
Interest Revenue 52,500
Received cash interest.
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E10-9D—Req.2Semi-annual cash interest $52,500
Annual stated rate 7%
Total Cash Interest ═ Semi-annual cash interest × 2
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E10-9D—Req.2Semi-annual cash interest $52,500
Annual stated rate 7%
Total Cash Interest ═ Semi-annual cash interest × 2
═ $52,500 × 2
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E10-9D—Req.2Semi-annual cash interest $52,500
Annual stated rate 7%
Total Cash Interest ═ Semi-annual cash interest × 2
═ $52,500 × 2
═ $105,000
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E10-9D—Req.2Semi-annual cash interest $52,500
Annual stated rate 7%
Total Cash Interest ═ Semi-annual cash interest × 2
═ $52,500 × 2
═ $105,000
Alternatively,
Total Cash Interest ═ Face (par) value × Annual stated rate
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E10-9D—Req.2Semi-annual cash interest $52,500
Annual stated rate 7%
Total Cash Interest ═ Semi-annual cash interest × 2
═ $52,500 × 2
═ $105,000
Alternatively,
Total Cash Interest ═ Face (par) value × Annual stated rate
═ $1,500,000 × 7%
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E10-9D—Req.2Semi-annual cash interest $52,500
Annual stated rate 7%
Total Cash Interest ═ Semi-annual cash interest × 2
═ $52,500 × 2
═ $105,000
Alternatively,
Total Cash Interest ═ Face (par) value × Annual stated rate
═ $1,500,000 × 7%
═ $105,000
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E10-9D—Req.2&3Semi-annual cash interest $52,500
Annual stated rate 7%
Total Cash Interest ═ Semi-annual cash interest × 2
═ $52,500 × 2
═ $105,000
Alternatively,
Total Cash Interest ═ Face (par) value × Annual stated rate
═ $1,500,000 × 7%
═ $105,000
Premier Metal will report interest revenue of $105,000 each year.
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E10-9D—Req.2,3,&4Semi-annual cash interest $52,500
Annual stated rate 7%
Total Cash Interest ═ Semi-annual cash interest × 2
═ $52,500 × 2
═ $105,000
Alternatively,
Total Cash Interest ═ Face (par) value × Annual stated rate
═ $1,500,000 × 7%
═ $105,000
Premier Metals will report interest revenue of $105,000 during 2014 on this bond investment.
Premier Metals would report the bond investment as a held-to-maturity investment classified as a long-term asset on the December 31, 2014 balance sheet.
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Dec. 31 Receipt of final interest payment.
E10-9D—Req.5a
Date Accounts and Explanation Debit Credit
2020
Dec. 31 Cash ﴾$1,500,000 × 0.07 × 6/12﴿ 52,500
Interest Revenue 52,500
Received cash interest.
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Dec. 31 Disposal of the investment at maturity.
E10-9D—Req.5b
Date Accounts and Explanation Debit Credit
2020
Dec. 31 Cash 1,500,000
Long-Term Investments—Held-to-Maturity 1,500,000
Disposed of bond at maturity.
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Crystal Clear optics completed the following trading investment transactions during 2014 and 2015:
E10-15D
Requirements
1. Journalize Crystal Clear's investment transactions. Explanations are not required.
2. On December 31, 2014, how would the Golden stock be classified and at what value would it be reported on the balance sheet?
2014
Dec. 1 Purchased 1,000 shares of Golden stock at a price of $30.00 per share, intending to sell the investment next month.
15
Received a cash dividend of $1.00 per share on the Golden stock.
31 Adjusted the investment to its market value of $22.00 per share.
2015
Jan. 25 Sold the Golden stock for $25.00 per share.
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Dec. 1 Purchased 1,000 shares of Golden stock at a price of $30.00 per share, intending to sell the investment next month.
E10-15D—Req.1
Date Accounts and Explanation Debit Credit
2014
Dec. 1 Short-Term Investments—Trading ﴾1,000 × $30﴿ 30,000
Cash 30,000
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Dec. 15 Received a cash dividend of $1.00 per share on the Golden stock.
E10-15D—Req.1
Date Accounts and Explanation Debit Credit
2014
Dec. 15 Cash ﴾1,000 × $1﴿ 1,000
Dividend Revenue 1,000
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Dec. 31 Adjusted the investment to its market value of $22.00 per share.
E10-15D—Req.1
Date Accounts and Explanation Debit Credit
2014
Dec. 31 Unrealized Holding Loss—Trading 8,000
Fair Value Adjustment—Trading 8,000
$30,000 − ﴾1000 × $22﴿
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Jan. 25 Sold the Golden stock for $25.00 per share.
E10-15D—Req.1
Date Accounts and Explanation Debit Credit
2015
Jan. 25 Cash ﴾1,000 × $25﴿ 25,000
Fair Value Adjustment—Trading 8,000
Short-Term Investments—Trading 30,000
Gain on Disposal 3,000
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E10-15D—Req.2
Number of shares purchased 1,000
Market value of each share $22
Crystal Clear would report the trading investment at its $22,000 ﴾1,000 × $22 ﴿ fair value, classified as a current asset on the balance sheet at December 31, 2014.
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Fusion Company reported these figures for 2014 and 2013:
E10-16D
Compute the rate of return on total assets for 2014. (Round to two decimals.)
Income Statement—partial: 2014 2013
Interest Expense $15,000,000 $20,000,000
Net Income 22,000,000 25,000,000
Balance Sheet—partial:
Dec. 31, 2014 Dec. 31, 2013
Total Assets $350,000,000 $3400,00,000
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E10-16DNet income $22,000,000
Interest expense 15,000,000
Total assets-Dec. 31, 2014 350,000,000 Dec. 31, 2013 340,000,000
Rate of Return on Total Assets ═ Net income + Interest expenseAverage total assets
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E10-16DNet income $22,000,000
Interest expense 15,000,000
Total assets-Dec. 31, 2014 350,000,000 Dec. 31, 2013 340,000,000
Rate of Return on Total Assets ═ Net income + Interest expenseAverage total assets
Average Total Assets ═ Total assets on 2013 + Total assets on 20142
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E10-16DNet income $22,000,000
Interest expense 15,000,000
Total assets-Dec. 31, 2014 350,000,000 Dec. 31, 2013 340,000,000
Rate of Return on Total Assets ═ Net income + Interest expenseAverage total assets
Average Total Assets ═ Total assets on 2013 + Total assets on 20142
═ $340,000,000 + $350,000,0002
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E10-16DNet income $22,000,000
Interest expense 15,000,000
Total assets-Dec. 31, 2014 350,000,000 Dec. 31, 2013 340,000,000
Rate of Return on Total Assets ═ Net income + Interest expenseAverage total assets
Average Total Assets ═ Total assets on 2013 + Total assets on 20142
═ $340,000,000 + $350,000,0002
═ $690,000,0002
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E10-16DNet income $22,000,000
Interest expense 15,000,000
Total assets-Dec. 31, 2014 350,000,000 Dec. 31, 2013 340,000,000
Rate of Return on Total Assets ═ Net income + Interest expenseAverage total assets
Average Total Assets ═ Total assets on 2013 + Total assets on 20142
═ $340,000,000 + $350,000,0002
═ $690,000,0002
═ $345,000,000
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E10-16DNet income $22,000,000
Interest expense 15,000,000
Total assets-Dec. 31, 2014 350,000,000 Dec. 31, 2013 340,000,000
Rate of Return on Total Assets ═ Net income + Interest expenseAverage total assets
═ $22,000,000 + 15,000,000$345,000,000
Average Total Assets ═ Total assets on 2013 + Total assets on 20142
═ $340,000,000 + $350,000,0002
═ $690,000,0002
═ $345,000,000
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E10-16DNet income $22,000,000
Interest expense 15,000,000
Total assets-Dec. 31, 2014 350,000,000 Dec. 31, 2013 340,000,000
Rate of Return on Total Assets ═ Net income + Interest expenseAverage total assets
═ $22,000,000 + 15,000,000$345,000,000
═ $37,000,000$345,000,000
Average Total Assets ═ Total assets on 2013 + Total assets on 20142
═ $340,000,000 + $350,000,0002
═ $690,000,0002
═ $345,000,000
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E10-16DNet income $22,000,000
Interest expense 15,000,000
Total assets-Dec. 31, 2014 350,000,000 Dec. 31, 2013 340,000,000
Rate of Return on Total Assets ═ Net income + Interest expenseAverage total assets
═ $22,000,000 + 15,000,000$345,000,000
═ $37,000,000$345,000,000
═ 10.72%
Average Total Assets ═ Total assets on 2013 + Total assets on 20142
═ $340,000,000 + $350,000,0002
═ $690,000,0002
═ $345,000,000
End of Chapter 10
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