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.
1. What effect did the adjustments have on the financial statements? What effect did the adjustments have on the current ratio?
Current assets will increase with an amount equal to a decrease in long-term assets, and the current ratio will also increase
A financial metric that reflects the business entity’s performance by assessing its ability to repay short-term loans is the current ratio. The assessment is made using the current assets and current liabilities.
Due to the transfer of long-term assets of the business entity to current assets, total assets will remain unaffected. Still, the sub-total of long-term assets will decline, and the sub-total of the current asset will increase.
Due to the increase in the current assets, the company's current ratio will increase.
Accounting for debt investments
On January 1, 2018, the Chaucer’s Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December 31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer’s intends to hold the bonds until December 31, 2023.
1. Journalize the transactions related to Chaucer’s investment in Lake Turner bonds during 2018.
Question: S10-4 Accounting for equity investments
On January 1, 2018, Bryant, Inc. decides to invest in 3,750 shares of Farrier stock when the stock is selling for $16 per share. On August 1, 2018, Farrier paid a $0.70 per share cash dividend to stockholders. On December 31, 2018, Farrier reports net income of $50,000 for 2018. Assume Farrier has 15,000 shares of voting stock outstanding during 2018 and Bryant has significant influence over Farrier.
Journalize the transactions related to Bryant’s investment in the Farrier stock during 2018.
Accounting for equity investments
Suppose that on January 6, 2018, East Coast Motors paid $280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned net income of $90,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.)
1. What method should East Cost Motors use to account for the investment in Boxcar Motors? Give your reasoning.
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