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Chapter 10: 1EI_1 (page 576)

As a result of the recent mortgage crisis, many banks reported record losses to their mortgage receivables and other assets based on the decline in these assets’ fair values.

Requirements

1. What would the effect be to stakeholders if such losses were not reported in a timely way?

Short Answer

Expert verified

Answer

If such losses are not reported, they will affect the stakeholders' decisions.

Step by step solution

01

Definition of Stakeholders

The person having an interest in the company that can affect the business entity and can also get affected by the business entity is known as a stakeholder.

02

Effect on Stakeholders

If the losses are not recorded, it will misrepresent the business's financial statement and affect the stakeholders' decisions. For example: if the losses are not reported, then the stakeholder will wish to increase their investment in the bank, and if the losses are reported, then they will not increase their investment.

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Most popular questions from this chapter

Classifying and accounting for equity investments

Boston Today Publishers completed the following investment transactions during 2018 and 2019:

2018

Dec. 6 Purchased 2,500 shares of Loveable stock at a price of \(24.00 per share, intending to sell the investment next month. Boston did not have significant influence over Loveable.

23. Received a cash dividend of \)1.50 per share on the Loveable stock.

31. Adjusted the investment to its market value of \(11.00 per share.

2019

Jan. 27 Sold the Loveable stock for \)18.20 per share.

Requirements

On December 31, 2018, how would the Loveable stock be classified and at what value would it be reported on the balance sheet?

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

Journalize the 2018 transactions. Explanations are not required.

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

1. Journalize Strategic’s investment transactions. Explanations are not required.

Computing rate of return on total assets

Montane Exploration Company reported these figures for 2018 and 2017:

Income statement: Partial

2018

2017

Interest expenses

\(16,700,000

\)16,500,000

Net income

16,900,000

20,200,000

Balance sheet: Partial

Dec 31, 2018

Dec 31, 2017

Total assets

\(316,000,000

\)420,000,000

Compute the rate of return on total assets for 2018. (Round to two decimals.)

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?
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