Chapter 25: Serial Problem

Business Solutions Problem (Trading Securities) - P1 1. Record Purchases of Trading Securities (April 16 and April 30): o April 16: Purchase of Johnson & Johnson bonds Debit Trading Securities (Johnson & Johnson Bonds) $10,000 Credit Cash $10,000 o April 30: Purchase of Starbucks notes Debit Trading Securities (Starbucks Notes) $4,400 Credit Cash $4,400 2. Fair Value Adjustment on June 30, 2022: o June 30: Adjust to fair value for the Johnson & Johnson bonds and Starbucks notes.  Johnson & Johnson bonds: Fair value = $12,000, Cost = $10,000 → Increase by $2,000  Starbucks notes: Fair value = $3,800, Cost = $4,400 → Decrease by $600 Adjusting Entry: plaintext Копировать код Debit Fair Value Adjustment $1,400 Credit Unrealized Gain—Income $1,400 This adjustment brings the trading securities to fair value. Apple Financial Analysis (Return on Assets) - AA C-1 1. Compute Apple’s Return on Total Assets (ROA) for 2018 and 2019: o ROA Formula: Return on Total Assets=Net IncomeAverage Total Assets o Use Apple’s financial statements to compute ROA based on the provided data for both years. 2. Analyze Change in ROA: o Determine whether Apple’s ROA improved or declined and assess whether this is favorable or unfavorable by examining factors like profit margin and asset turnover. 3. Accounting for Beats by Dre Acquisition: o Apple would likely use consolidation for Beats, as it acquired 100% of the company, meaning that Beats’ assets, liabilities, revenue, and expenses are fully integrated into Apple’s financial statements. Comparative Analysis of Apple and Google - AA C-2 1. Calculate Return on Total Assets for Apple and Google: o Similar to AA C-1, use net income and average total assets from Apple’s and Google’s statements. 2. Compare ROA: o Identify which company had a better ROA and consider factors contributing to this difference, such as profit margins or asset efficiency. 3. Profit Margin and Total Asset Turnover: o Calculate profit margin (net income/net sales) and total asset turnover (net sales/average total assets) for each company to gain insights into operational efficiency and profitability. Extended Analysis - Samsung, Apple, and Google - AA C-3 1. Calculate Samsung’s Return on Total Assets (ROA): o Follow the ROA calculation, then compare it to Apple’s and Google’s ROA. 2. Profit Margin and Total Asset Turnover for Samsung: o Calculate these metrics to analyze Samsung’s performance in relation to Apple and Google. Discussion Questions Summary 1. Classification of Investments as Current Assets: o Investments should be classified as current assets if they are expected to be liquidated within one year or if they are part of a trading portfolio intended for short-term profit. 2. Valuation of Short-Term Debt Investments: o Trading securities should be reported at fair value, with unrealized gains or losses impacting net income. 3. Realized Gains on Stock Investments: o If sold for a gain, the difference should be recorded as Realized Gain on Sale of Investment on the income statement. 4. Debt and Equity Investment Classifications: o o Debt: Trading, available-for-sale, held-to-maturity. Equity: No significant influence, significant influence, controlling influence. Ethics Challenge - BTN C-1 1. Impact of Classification on Bonus: o Hartman’s bonus could be affected if unrealized losses on availablefor-sale securities are not reported in net income, whereas trading securities’ fair value changes directly impact net income. 2. Criteria for Classification: o Securities intended to be held until maturity should be classified as held-to-maturity. Securities available for sale, without intent to hold to maturity, are available-for-sale. 3. Oversight on Classification: o Company policies and internal controls should review classifications, especially when financial incentives might influence reporting.