Demonstration Problems Chapter 10 Investments 10-1 2016 Pearson Education, Inc. 10-2 Demonstration of E10-9 & E10-10 Requirements 1.Journalize any required 2016 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 2016 on this bond investment? 4.How would the bond investment be classified on Premier Metals December 31, 2016, balance sheet? 5.Journalize the following on Premier Metals 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. 2016 Pearson Education, Inc. 10-3 Buys $1,500,000 of Clean Chemical Corp. bonds at face value on January 2, Demonstration of E10-9Req. 1 DateAccounts and ExplanationDebitCredit 2016 Jan. 2 Long-Term InvestmentsHeld-to-Maturity1,500,000 Cash 1,500,000 Purchased investment in bonds. 2016 Pearson Education, Inc. 10-4 June 30 Receives interest at the annual rate of 7% Demonstration of E10-9Req. 1 DateAccounts and ExplanationDebitCredit 2016 June 30 Cash $1,500,000 0.07 6/1252,500 Interest Revenue 52,500 Received cash interest. 2016 Pearson Education, Inc. 10-5 Dec. 31 Receives interest at the annual rate of 7% Demonstration of E10-9Req. 1 DateAccounts and ExplanationDebitCredit 2016 Dec. 31 Cash $1,500,000 0.07 6/1252,500 Interest Revenue 52,500 Received cash interest. 2016 Pearson Education, Inc. 10-6 Demonstration of E10-9Req. 2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash InterestSemi-annual cash interest 2 2016 Pearson Education, Inc. 10-7 Demonstration of E10-9Req. 2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash InterestSemi-annual cash interest 2 $52,500 2 2016 Pearson Education, Inc. 10-8 Demonstration of E10-9Req. 2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash InterestSemi-annual cash interest 2 $52,500 2 $105,000 2016 Pearson Education, Inc. 10-9 Demonstration of E10-9Req. 2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash InterestSemi-annual cash interest 2 $52,500 2 $105,000 Alternatively, Total Cash InterestFace (par) value Annual stated rate 2016 Pearson Education, Inc. 10-10 Demonstration of E10-9Req. 2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash InterestSemi-annual cash interest 2 $52,500 2 $105,000 Alternatively, Total Cash InterestFace (par) value Annual stated rate $1,500,000 7% 2016 Pearson Education, Inc. 10-11 Demonstration of E10-9Req. 2 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash InterestSemi-annual cash interest 2 $52,500 2 $105,000 Alternatively, Total Cash InterestFace (par) value Annual stated rate $1,500,000 7% $105,000 2016 Pearson Education, Inc. 10-12 Demonstration of E10-9Req. 3 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash InterestSemi-annual cash interest 2 $52,500 2 $105,000 Alternatively, Total Cash InterestFace (par) value Annual stated rate $1,500,000 7% $105,000 Premier Metal will report interest revenue of $105,000 each year. 2016 Pearson Education, Inc. 10-13 Demonstration of E10-10Req. 1 Semi-annual cash interest $52,500 Annual stated rate 7% Total Cash InterestSemi-annual cash interest 2 $52,500 2 $105,000 Alternatively, Total Cash InterestFace (par) value Annual stated rate $1,500,000 7% $105,000 Premier Metals will report interest revenue of $105,000 during 2016 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, 2016 balance sheet. 2016 Pearson Education, Inc. 10-14 Dec. 31 Receipt of final interest payment. Demonstration of E10-10Req. 2a DateAccounts and ExplanationDebitCredit 2020 Dec. 31 Cash $1,500,000 0.07 6/1252,500 Interest Revenue 52,500 Received cash interest. 2016 Pearson Education, Inc. 10-15 Dec. 31 Disposal of the investment at maturity. Demonstration of E10-10Req. 2b DateAccounts and ExplanationDebitCredit 2020 Dec. 31 Cash1,500,000 Long-Term InvestmentsHeld-to-Maturity 1,500,000 Disposed of bond at maturity. 2016 Pearson Education, Inc. 10-16 Crystal Clear optics completed the following trading investment transactions during 2016 and 2017: Demonstration of E10-15 Requirements 1.Journalize Crystal Clear's investment transactions. Explanations are not required. 2.On December 31, 2016, how would the Golden stock be classified and at what value would it be reported on the balance sheet? 2016 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. 2016 Pearson Education, Inc. 10-17 Dec. 1 Purchased 1,000 shares of Golden stock at a price of $30.00 per share, intending to sell the investment next month. Demonstration of E10-15Req. 1 DateAccounts and ExplanationDebitCredit 2016 Dec. 1 Short-Term InvestmentsTrading 1,000 $3030,000 Cash 30,000 2016 Pearson Education, Inc. 10-18 Dec. 15 Received a cash dividend of $1.00 per share on the Golden stock. Demonstration of E10-15Req. 1 DateAccounts and ExplanationDebitCredit 2016 Dec. 15 Cash 1,000 $11,000 Dividend Revenue 1,000 2016 Pearson Education, Inc. 10-19 Dec. 31 Adjusted the investment to its market value of $22.00 per share. Demonstration of E10-15Req. 1 DateAccounts and ExplanationDebitCredit 2016 Dec. 31 Unrealized Holding LossTrading8,000 Fair Value AdjustmentTrading 8,000 $30,000 1000 $22 2016 Pearson Education, Inc. 10-20 Jan. 25 Sold the Golden stock for $25.00 per share. Demonstration of E10-15Req. 1 DateAccounts and ExplanationDebitCredit 2017 Jan. 25 Cash 1,000 $2525,000 Fair Value AdjustmentTrading8,000 Short-Term InvestmentsTrading 30,000 Gain on Disposal 3,000 2016 Pearson Education, Inc. 10-21 Demonstration of E10-15Req. 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, 2016 Pearson Education, Inc. 10-22 Fusion Company reported these figures for 2016 and 2015: Demonstration of E10-16 Compute the rate of return on total assets for (Round to two decimals.) Income Statementpartial: Interest Expense$15,000,000$20,000,000 Net Income22,000,00025,000,000 Balance Sheetpartial: Dec. 31, 2016Dec. 31, 2015 Total Assets$350,000,000$3400,00,000 2016 Pearson Education, Inc. 10-23 Demonstration of E10-16 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 2016 Pearson Education, Inc. 10-24 Demonstration of E10-16 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 2016 Pearson Education, Inc. 10-25 Demonstration of E10-16 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 2016 Pearson Education, Inc. Demonstration of E10-16 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 Demonstration of E10-16 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 Demonstration of E10-16 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 Demonstration of E10-16 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 Demonstration of E10-16 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 2016 Pearson Education, Inc.