Chapter 10 Demonstration Problems Investments Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-1

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-2 E10-9D Requirements 1.Journalize any required 2014 entries for the bond investment. 2.How much cash interest will Premier Metal receive each year from Clean Chemicals? 3.How much interest revenue will Premier Metal report during 2014 on this bond investment? 4.How would the bond investment be classified on Premier Metal’s December 31, 2014, balance sheet? 5.Journalize the following on Premier Metal’s books: a.Receipt of final interest payment on December 31, 2020 b.Disposal of the investment at maturity on December 31, 2020 Premier Metal Co. owns vast amounts of corporate bonds. Suppose Premier Metal buys $1,500,000 of Clean Chemical Corp. bonds at face value on January 2, The Clean Chemical Corp. bonds pay interest at the annual rate of 7% on June 30 and December 31 and mature on December 31, Premier Metal intends to hold the investment until maturity.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 10-3 Buys $1,500,000 of Clean Chemical Corp. bonds at face value on January 2, E10-9D—Req.1 DateAccounts and ExplanationDebitCredit 2014 Jan. 2 Long-Term Investments—Held-to-Maturity1,500,000 Cash 1,500,000 Purchased investment in bonds.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 10-4 June 30 Receives interest at the annual rate of 7% E10-9D—Req.1 DateAccounts and ExplanationDebitCredit 2014 June 30 Cash ﴾$1,500,000 × 0.07 × 6/12﴿52,500 Interest Revenue 52,500 Received cash interest.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 10-5 Dec. 31 Receives interest at the annual rate of 7% E10-9D—Req.1 DateAccounts and ExplanationDebitCredit 2014 Dec. 31 Cash ﴾$1,500,000 × 0.07 × 6/12﴿52,500 Interest Revenue 52,500 Received cash interest.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-6 E10-9D—Req.2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash Interest═Semi-annual cash interest × 2

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-7 E10-9D—Req.2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash Interest═Semi-annual cash interest × 2 ═$52,500 × 2

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-8 E10-9D—Req.2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash Interest═Semi-annual cash interest × 2 ═$52,500 × 2 ═$105,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-9 E10-9D—Req.2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash Interest═Semi-annual cash interest × 2 ═$52,500 × 2 ═$105,000 Alternatively, Total Cash Interest═Face (par) value × Annual stated rate

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-10 E10-9D—Req.2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash Interest═Semi-annual cash interest × 2 ═$52,500 × 2 ═$105,000 Alternatively, Total Cash Interest═Face (par) value × Annual stated rate ═$1,500,000 × 7%

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-11 E10-9D—Req.2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash Interest═Semi-annual cash interest × 2 ═$52,500 × 2 ═$105,000 Alternatively, Total Cash Interest═Face (par) value × Annual stated rate ═$1,500,000 × 7% ═$105,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-12 E10-9D—Req.2&3 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash Interest═Semi-annual cash interest × 2 ═$52,500 × 2 ═$105,000 Alternatively, Total Cash Interest═Face (par) value × Annual stated rate ═$1,500,000 × 7% ═$105,000 Premier Metal will report interest revenue of $105,000 each year.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-13 E10-9D—Req.2,3,&4 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash Interest═Semi-annual cash interest × 2 ═$52,500 × 2 ═$105,000 Alternatively, Total Cash Interest═Face (par) value × Annual stated rate ═$1,500,000 × 7% ═$105,000 Premier Metals will report interest revenue of $105,000 during 2014 on this bond investment. Premier Metals would report the bond investment as a held-to-maturity investment classified as a long-term asset on the December 31, 2014 balance sheet.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Dec. 31 Receipt of final interest payment. E10-9D—Req.5a DateAccounts and ExplanationDebitCredit 2020 Dec. 31 Cash ﴾$1,500,000 × 0.07 × 6/12﴿52,500 Interest Revenue 52,500 Received cash interest.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Dec. 31 Disposal of the investment at maturity. E10-9D—Req.5b DateAccounts and ExplanationDebitCredit 2020 Dec. 31 Cash1,500,000 Long-Term Investments—Held-to-Maturity 1,500,000 Disposed of bond at maturity.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-16 Crystal Clear optics completed the following trading investment transactions during 2014 and 2015: E10-15D Requirements 1.Journalize Crystal Clear's investment transactions. Explanations are not required. 2.On December 31, 2014, how would the Golden stock be classified and at what value would it be reported on the balance sheet? 2014 Dec. 1Purchased 1,000 shares of Golden stock at a price of $30.00 per share, intending to sell the investment next month. 15Received a cash dividend of $1.00 per share on the Golden stock. 31Adjusted the investment to its market value of $22.00 per share Jan. 25Sold the Golden stock for $25.00 per share.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Dec. 1 Purchased 1,000 shares of Golden stock at a price of $30.00 per share, intending to sell the investment next month. E10-15D—Req.1 DateAccounts and ExplanationDebitCredit 2014 Dec. 1 Short-Term Investments—Trading ﴾1,000 × $30﴿30,000 Cash 30,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Dec. 15 Received a cash dividend of $1.00 per share on the Golden stock. E10-15D—Req.1 DateAccounts and ExplanationDebitCredit 2014 Dec. 15 Cash ﴾1,000 × $1﴿1,000 Dividend Revenue 1,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Dec. 31 Adjusted the investment to its market value of $22.00 per share. E10-15D—Req.1 DateAccounts and ExplanationDebitCredit 2014 Dec. 31 Unrealized Holding Loss—Trading8,000 Fair Value Adjustment—Trading 8,000 $30,000 − ﴾1000 × $22﴿

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall Jan. 25 Sold the Golden stock for $25.00 per share. E10-15D—Req.1 DateAccounts and ExplanationDebitCredit 2015 Jan. 25 Cash ﴾1,000 × $25﴿25,000 Fair Value Adjustment—Trading8,000 Short-Term Investments—Trading 30,000 Gain on Disposal 3,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall E10-15D—Req.2 Number of shares purchased1,000 Market value of each share$22 Crystal Clear would report the trading investment at its $22,000 ﴾1,000 × $22﴿ fair value, classified as a current asset on the balance sheet at December 31, 2014.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-22 Fusion Company reported these figures for 2014 and 2013: E10-16D Compute the rate of return on total assets for (Round to two decimals.) Income Statement—partial: Interest Expense$15,000,000$20,000,000 Net Income22,000,00025,000,000 Balance Sheet—partial: Dec. 31, 2014Dec. 31, 2013 Total Assets$350,000,000$3400,00,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-23 E10-16D Net income$22,000,000 Interest expense15,000,000 Total assets-Dec. 31, ,000,000 Dec. 31, ,000,000 Rate of Return on Total Assets═ Net income + Interest expense Average total assets

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-24 E10-16D Net income$22,000,000 Interest expense15,000,000 Total assets-Dec. 31, ,000,000 Dec. 31, ,000,000 Rate of Return on Total Assets═ Net income + Interest expense Average total assets Average Total Assets═ Total assets on Total assets on

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-25 E10-16D Net income$22,000,000 Interest expense15,000,000 Total assets-Dec. 31, ,000,000 Dec. 31, ,000,000 Rate of Return on Total Assets═ Net income + Interest expense Average total assets Average Total Assets═ Total assets on Total assets on ═$340,000,000 + $350,000,000 2

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-26 E10-16D Net income$22,000,000 Interest expense15,000,000 Total assets-Dec. 31, ,000,000 Dec. 31, ,000,000 Rate of Return on Total Assets═ Net income + Interest expense Average total assets Average Total Assets═ Total assets on Total assets on ═$340,000,000 + $350,000,000 2 ═$690,000,000 2

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-27 E10-16D Net income$22,000,000 Interest expense15,000,000 Total assets-Dec. 31, ,000,000 Dec. 31, ,000,000 Rate of Return on Total Assets═ Net income + Interest expense Average total assets Average Total Assets═ Total assets on Total assets on ═$340,000,000 + $350,000,000 2 ═$690,000,000 2 ═$345,000,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-28 E10-16D Net income$22,000,000 Interest expense15,000,000 Total assets-Dec. 31, ,000,000 Dec. 31, ,000,000 Rate of Return on Total Assets═ Net income + Interest expense Average total assets ═$22,000, ,000,000 $345,000,000 Average Total Assets═ Total assets on Total assets on ═$340,000,000 + $350,000,000 2 ═$690,000,000 2 ═$345,000,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall15-29 E10-16D Net income$22,000,000 Interest expense15,000,000 Total assets-Dec. 31, ,000,000 Dec. 31, ,000,000 Rate of Return on Total Assets═ Net income + Interest expense Average total assets ═$22,000, ,000,000 $345,000,000 ═$37,000,000 $345,000,000 Average Total Assets═ Total assets on Total assets on ═$340,000,000 + $350,000,000 2 ═$690,000,000 2 ═$345,000,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall10-30 E10-16D Net income$22,000,000 Interest expense15,000,000 Total assets-Dec. 31, ,000,000 Dec. 31, ,000,000 Rate of Return on Total Assets═ Net income + Interest expense Average total assets ═$22,000, ,000,000 $345,000,000 ═$37,000,000 $345,000,000 ═10.72% Average Total Assets═ Total assets on Total assets on ═$340,000,000 + $350,000,000 2 ═$690,000,000 2 ═$345,000,000

End of Chapter Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall