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Chapter 10: Q1CA (page 577)
In 150 words or fewer, explain the difference between trading debt investments and available-for-sale debt investments.
Points of difference are:
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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.
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?
On May 15, 2018, Mayer Co. invests \(8,000 in John, Inc. stock. John pays Mayer a \)200 dividend on November 15, 2018. Mayer sells the John stock on December 10, 2018, for $7,500. Assume the Mayer Co. does not have significant influence over John, Inc. Journalize the 2018 transactions related to Mayer’s investment in John stock.
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.)
Question: S10-5 Accounting for debt investments
On February 1, 2018, Bell Co. decides to invest excess cash of \(16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was \)19,600. The investment is categorized as a trading debt investment.
Requirements
1. Journalize the transactions for Bell’s investment in Grant, Inc. for 2018.
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