Chapter 8

Long-Term Investments &

the Time Value of Money
Short Exercises
(10-15 min.) S 8-1
Req. 1
Journal
DATE
2012
Apr.
10

July

Dec.

22

31

ACCOUNT TITLES AND EXPLANATION

DEBIT

Available-for-Sale Investment (600 $17)...........

Cash..................................................................

10,200

Cash (600 $1.24).................................................

Dividend Revenue...........................................

744

Unrealized Loss on Investments..........................

Allowance to Adjust Investment
to Market ($10,200 $5,500)...........................

4,700

CREDIT

10,200

744

4,700

Req. 2
The income statement will report dividend revenue of $744. The statement of other
comprehensive income will report an unrealized loss on available-for-sale
investments of $4,700.
(continued) (10-15 min.) S 8-1
Req. 3
1

Chapter 8

Long-Term Investments and International Operations

ASSETS
Total current assets........

$ XXX

Long-term available-for-sale investments,

at market value........

5,500

STOCKHOLDERS EQUITY
Common stock..

$ XXX

Retained earnings

XXX

Accumulated other comprehensive income:

Unrealized (loss) on investments

(4,700)

(5-10 min.) S 8-2

Req. 1
Journal
DATE
2013
May
21

ACCOUNT TITLES AND EXPLANATION

Cash (600 $23)....................................................
Allowance to Adjust Investment to Market.........

DEBIT

CREDIT

13,800
4,700

Available-for-Sale Investment........................
Unrealized Loss on Investment
Gain on Sale of Investment............................

10,200
4,700
3,600

Req. 2
This gain on sale of investment is a realized gain. The loss recorded at December 31,
2012, was unrealized because it resulted from a change in the investments market
value, not from the sale of the investment.
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Financial Accounting 9/e Solutions Manual

(10-15 min.) S 8-3

Req. 1
Equity method is appropriate because the investor (Western Motors) holds a 35%
investment in the investee company (Phase Motors).

Req. 2
Journal
ACCOUNT TITLES AND EXPLANATION
a.

b.

c.

Long-Term Investment..........................................
Cash..................................................................
To purchase equity-method investment

DEBIT

CREDIT

Millions
380
380

Long-Term Investment ($40 .35)........................

Equity-Method Investment Revenue..
To record investment revenue

14

Cash ($20 .35).....................................................

Long-Term Investment....................................
To receive cash dividend on equity-method
investment

14

Req. 3
Long-Term Investment
(Amounts in millions)
Purchase

380 Dividends received

Net income

14

Balance

387

Chapter 8

Long-Term Investments and International Operations

(5 min.) S 8-4
Millions
Sale proceeds...

$ 130

Carrying amount of the investment ($387 / 2)..

(194)

(Loss) on sale of investment

$ (64)

(10 min.) S 8-5

1. A parent company is a corporation that owns a controlling (more than 50%)
interest in another company. A subsidiary company is a company that is
controlled by another corporation.

2. Consolidated financial statements combine the balance sheets, income

statements, and cash-flow statements of a parent company with those of its
subsidiaries as if the parent and its subsidiaries were one company.

3. The parent companys name appears on the consolidated financial statements. To

consolidate, the parent company must own more than 50% of the subsidiarys
stock.

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Financial Accounting 9/e Solutions Manual

(10 min.) S 8-6

1. Goodwill is an intangible asset. Goodwill is the excess of the purchase price to
acquire a subsidiary company over the sum of the market value of the
subsidiarys net assets (assets minus liabilities). Only the parent company
reports the goodwill. Goodwill appears as an intangible asset on the consolidated
balance sheet. Goodwill must be written down when its value is deemed to be
impaired.

2. Noncontrolling interest arises when a parent company owns less than 100% of a
subsidiarys stock. The noncontrolling interest represents the subsidiaries stock
that is owned by stockholders other than the parent company. The parent
company can report noncontrolling interest on its consolidated balance sheet
among the stockholders equity.
(10-15 min.) S 8-7
1. Paid $816,000 ($800,000 1.02); will collect $800,000 at maturity
2. Annual cash interest = $56,000 ($800,000 .07)
3. Annual interest revenue will be less than the amount of cash interest received
each year because the investor bought the bonds at a premium. The investor will
collect only the face amount of the bonds at maturity. The difference between the
purchase price paid and the face amount collected (the premium) is a reduction in
interest revenue over the life of the bonds.
4. Cash interest received each year...
$816,000 $800,000
Amortization
5 years
= Annual interest revenue...
5

Chapter 8

$56,000
=

(3,200)
$52,800

Long-Term Investments and International Operations

(10 min.) S 8-8

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

2012
a. June 30 Long-Term Investment in Bonds
($800,000 1.02)...............................................
Cash............................................................
To purchase bond investment
b. Dec.

c.

31 Cash ($800,000 .07 6/12)

Interest Revenue..
To receive semiannual interest
31 Interest Revenue.
Long-Term Investment in Bonds
[($816,000 $800,000) / 5 6/12]..........
To amortize bond investment

2017
d. June 30 Cash...................................................................
Long-Term Investment in Bonds...........
To receive face value at maturity

DEBIT

CREDIT

816,000
816,000

28,000
28,000

1,600
1,600

800,000
800,000

(5-10 min.) S 8-9

Req. 1
$10,000 x .681 (PV of $1, 5 periods, 8%) = $6,810
Req. 2
$10,000 x 3.993 (PV of an annuity, 5 periods, 8%) = $39,930
(5-10 min.) S 8-10
Req. 1
8-6

Financial Accounting 9/e Solutions Manual

$13,486.51

EXCEL formula = PV(1%,60,-300)

Req. 2
$16,238.76

EXCEL formula = PV(1%,60,-300,-5,000)

(5 min.) S 8-11
1. A. Operating
B. Investing Most closely related to this chapter
C. Financing

2. Purchase of investment (or acquisition of other companies)

Sale of investment (or sale of other companies)

(10 min.) S 8-12

DATE:

Early in 2012

TO:

The XYZ Company Stockholders

FROM:

Chief Executive Officer

RE:

Investing Activities During 2012

XYZ Companys investing activities used more cash than the previous year
principally due to the increase in purchases of property, plant, and equipment and
acquisitions and investments. The cash used for investing activities was partially
offset by an increase in cash flow from the disposal of investments and from the
disposal of property, plant, and equipment.

Chapter 8

Long-Term Investments and International Operations

Investing activities for XYZ were financed mainly with cash provided by operating
activities, which was significantly higher than the previous year. As you can see,
issuances of debt and stock were significantly lower than the previous year.
Because of the large increase from the previous year in net positive cash flow from
operations, XYZ was able to invest in the additional assets and investments without
additional borrowing.
Student responses may vary.

8-8

Financial Accounting 9/e Solutions Manual