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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: S10-6 Accounting for debt investments
On June 1, 2018, Josh’s Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit’s bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term.
Requirements
What was the net effect of the investment on Josh’s net income for the year ended 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
3. Prepare T-accounts for the investment assets, and show how to report the investments on Captain Transfer’s balance sheet at December 31, 2018.
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
1. What effect did the adjustments have on the financial statements? What effect did the adjustments have on the current ratio?
Accounting for debt investments
Griffin purchased a bond on January 1, 2018, for \(140,000. The bond has a face value of \)140,000 and matures in 20 years. The bond pays interest on June 30 and December 31 at a 3% annual rate. Griffin plans on holding the investment until maturity.
Requirements
1. Journalize the 2018 transactions related to Griffin’s bond investment. Explanations are not required.
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’s annual report showing \(100,000 of net income.
31 Received Josh’s annual report showing \)620,000 of net income for the year.
31 Taylor’s stock fair value at year-end was \(620,000.
31 Josh’s common stock fair value at year-end was \)14 per share.
Requirements
Post transactions to T-accounts to determine the December 31, 2018, balances related to the investment and investment income accounts.
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