CHAPTER $16$: INVESTMENTS $(12$ POINTS$)$

Background

Required

In Chapter $16$ you learned that some companies use excess cash to buy long$-$term investments $($assets

on the balance sheet$).$ The investments may be fixed income securities $($debt instruments$),$ equity

securities $($ownership instruments$)$ or derivative securities $($hedges or speculation$).$ You learned that

how the investments are recorded on the financial statements is dependent on the facts of each

investment purchase. Debt securities may be classified as held to maturity, available for sale or

trading. Equity securities are recorded on the balance sheet based on the percentage of ownership.

You further learned that the original cost of some of those investments may be required to be adjusted

to fair value in subsequent periods.

Wasting Cash, Inc. purchased the investments described in items $1$ through $3.$ Using the attached

template, show how each investment would impact$/$change Wasting Cash, Inc.$\text{'}$s financial statement

$($statement of cash flows, regular income statement and balance sheet$).$ Indicate each account name

and the related $ increase $($decrease$)$ for that account for each financial statement that the transaction

effects $($round all $ answers to the nearest dollar$).[$We discussed each of these concepts during

lecture $-$ review your notes.$]$

Wasting Cash, Inc. has significant excess cash and purchased an Apple $4-$year, $2\mathrm{.}5\%$ Coupon, $$150,000$ par value bond.

The Apple bond pays interest annually and was purchased when the YTM $($bond market rate of interest$)$ was $3\mathrm{.}75\%.$

Wasting Cash, Inc. paid $$143,154$ for the Apple bond on January $1$ of this year and intends to hold the bond until maturity.

Wasting Cash, Inc.$\text{'}$s year end is December $31.$ At December $31$ of this year, the fair value of the Apple bond was

$$149,500.$ How does this transaction affect Wasting Cash, Inc.$\text{'}$s financial statement in year one of the purchase $($use

attached template$)?[$Hint; this is a hold to maturity fixed income security so you should create a bond amortization

schedule for the Apple Bond to correctly determine the financial statement amounts.$]$

Wasting Cash, Inc. purchased $6,000$ common equity shares of Really Big Opportunity Company $($RBOC$)$ who has $55,000$

shares of issued and outstanding common stock. Wasting Cash, Inc. paid $$348,000$ for the RBOC shares on January $1$ of

this year and at the end of December $31$ of this year RBOC reported an annual net loss of $$4,000,000.$ Also, RBOC paid

a $$4$ per share cash dividend on December $31$ when RBOC's market price per share was trading at $$48.$ Wasting Cash,

Inc. does not believe there is a short$-$term profit motive when it decided to purchase RBOC's shares. How does this

transaction affect Wasting Cash, Inc.$\text{'}$s year end December $31$ financial statements for this transaction $($use attached

template and round any percentages to $4$ decimal places, for example $\mathrm{.}1479532$ would be $14\mathrm{.}80\%$ for $4$ decimal places$)?$

$[$Hint: Wasting Cash purchased an equity investment of $10\mathrm{.}91\%(6,00055,000).]$

On January $1$ of the current year Wasting Cash, Inc. invested in ASP Industries by acquiring $30\%$ of ASP's outstanding

stock for $$21,500,000.$ At the end of the current year $($December $31),$ ASP Industries reported net income of $$5,000,000$

and paid cash dividends totaling $$1,000,000.$ At December $31$ ASP Industries had a market value of $$75,000,000.$ How

does this transaction affect Wasting Cash, Inc.$\text{'}$s year end December $31$ financial statements for this transaction $($use

attached template and round to nearest dollar $ $)?[$Hint: this is an equity investment $>$ than $20\%$ but less than $50\%,$ which

calls for the use of the equity method.$]$

ACCT $321$: CHAPTER $16$ HANDOUT TEMPLATE SOLUTIONS