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Chapter 10: Q10_1FC_2 (page 576)

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

What type of information in the financial reports would have helped the bank detect this reclassification?

Short Answer

Expert verified

The bank will detect the reclassification of the assets through the footnotes of the balance sheet.

Step by step solution

01

Definition of Footnotes

The notes disclosed at the bottom of the financial statement reflecting the additional information not reflected in the financial statement are known as footnotes.

02

Information in the Financial Statements that will help the Bank to Detect the Reclassification of Assets

The full disclosure principle requires the business entity to report all the financial information on its financial statement. Some information cannot be reported in the financial statement, and the business entity report such information in a footnote or note to the financial statement.

Therefore, the transfer of assets from long-term to current assets will be reported in the note to the financial statement.

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Most popular questions from this chapter

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’s annual report showing \(300,000 of net income.

31 Received Lili’s annual report showing \)120,000 of net income for the year.

31 Evan’s stock fair value at year-end was \(390,000.

31 Lili’s common stock fair value at year-end was \)12 per share.

Requirements

1. Journalize the transactions for the year of Waterfall Source.

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?

Accounting for equity investments

Money Man Investments completed the following transactions during 2018:

Jan. 14 Purchased 400 shares of Technomite stock, paying \(56 per share. The investment represents 25% ownership in Technomite’s voting stock and Money Man has significant influence over Technomite. Money Man intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.27 per share on the Technomite stock.

Dec. 31 Technomite’s current market value is \(51 per share.

31 Technomite reported net income of \)180,000 for the year ended 2018.

Requirements

1. Journalize Money Man’s transactions. Explanations are not required.

How are held-to-maturity debt investments reported on the financial statements?

Accounting for debt investments

Peyton Investments completed the following investment transactions during 2018:

2018

Jan. 5 Purchased Vedder Company’s \(400,000 bond at face value. Peyton classified the investment as available-for-sale. The Vedder bond pays interest at the annual rate of 4% on June 30 and December 31 and matures on December 31, 2021. Management’s intent is to keep the bonds for several years.

Jun. 30 Received an interest payment from Vedder.

Dec. 31 Received an interest payment from Vedder.

31 Adjusted the investment to its current market value of \)396,000

Requirements

Prepare a comprehensive income statement for Peyton Investments for year ended December 31, 2018. Assume net income was $200,000.
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