Investments

Accounting for equity investments

Captain Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 200 shares of Velcon stock, paying \(53 per share. The investment represents 4% ownership in Velcon’s voting stock. Captain does not have significant influence over Velcon. Captain intends to hold the investment for the indefinite future. 

Aug. 22 Received a cash dividend of \)0.28 per share on the Velcon stock. 

Dec. 31 Adjusted the Velcon investment to its current market value of $58. 

Requirements 

Journalize the entries for 2018. Explanations are not required.

Accounting for equity investments

Captain Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 200 shares of Velcon stock, paying \(53 per share. The investment represents 4% ownership in Velcon’s voting stock. Captain does not have significant influence over Velcon. Captain intends to hold the investment for the indefinite future. 

Aug. 22 Received a cash dividend of \)0.28 per share on the Velcon stock. 

Dec. 31 Adjusted the Velcon investment to its current market value of $58. 

Requirements 

What account(s) and amount(s), if any, would be reported on Captain’s income statement for the year ended December 31, 2018?

Accounting for equity investments

Money Man Investments completed the following transactions during 2018:

Jan. 14 Purchased 400 shares of Technomite stock, paying \(56 per share. The investment represents 25% ownership in Technomite’s voting stock and Money Man has significant influence over Technomite. Money Man intends to hold the investment for the indefinite future. 

Aug. 22 Received a cash dividend of \)0.27 per share on the Technomite stock.

Dec. 31 Technomite’s current market value is \(51 per share. 

        31 Technomite reported net income of \)180,000 for the year ended 2018.

Requirements 

1. Journalize Money Man’s transactions. Explanations are not required. 

Accounting for equity investments

Money Man Investments completed the following transactions during 2018:

Jan. 14 Purchased 400 shares of Technomite stock, paying \(56 per share. The investment represents 25% ownership in Technomite’s voting stock and Money Man has significant influence over Technomite. Money Man intends to hold the investment for the indefinite future. 

Aug. 22 Received a cash dividend of \)0.27 per share on the Technomite stock.

Dec. 31 Technomite’s current market value is \(51 per share. 

        31 Technomite reported net income of \)180,000 for the year ended 2018.

Requirements 

Classify and prepare partial financial statements for Money Man’s 25% Technomite investment for the year ended December 31, 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.) 

Requirements 

1. What method should East Cost Motors use to account for the investment in Boxcar Motors? Give your reasoning.

Accounting for equity investments

Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned a net income of \)90,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.) 

Requirements 

2. Journalize all required 2018 transactions related to East Cost Motors’s Boxcar investment. Include an explanation for each entry.

Accounting for equity investments

Suppose that on January 6, 2018, East Coast Motors paid \(280,000,000 for its 35% investment in Boxcar Motors. East Coast has significant influence over Boxcar after the purchase. Assume Boxcar earned a net income of \)90,000,000 and paid cash dividends of $45,000,000 to all outstanding stockholders during 2018. (Assume all outstanding stock is voting stock.) 

Requirements 

Post all 2018 transactions to the investment T-account. What is its balance after all the transactions are posted? How would this balance be classified on the balance sheet dated December 31, 2018?

Classifying and accounting for equity investments 

Boston Today Publishers completed the following investment transactions during 2018 and 2019:

2018 

Dec. 6 Purchased 2,500 shares of Loveable stock at a price of \(24.00 per share, intending to sell the investment next month. Boston did not have significant influence over Loveable. 

     23. Received a cash dividend of \)1.50 per share on the Loveable stock. 

     31. Adjusted the investment to its market value of \(11.00 per share.

2019 

Jan. 27 Sold the Loveable stock for \)18.20 per share.

Requirements 

1. Journalize Boston Today’s investment transactions. Explanations are not required.

Classifying and accounting for equity investments 

Boston Today Publishers completed the following investment transactions during 2018 and 2019:

2018 

Dec. 6 Purchased 2,500 shares of Loveable stock at a price of \(24.00 per share, intending to sell the investment next month. Boston did not have significant influence over Loveable. 

     23. Received a cash dividend of \)1.50 per share on the Loveable stock. 

     31. Adjusted the investment to its market value of \(11.00 per share.

2019 

Jan. 27 Sold the Loveable stock for \)18.20 per share.

Requirements 

On December 31, 2018, how would the Loveable stock be classified and at what value would it be reported on the balance sheet?

Computing rate of return on total assets

Montane Exploration Company reported these figures for 2018 and 2017:

Compute the rate of return on total assets for 2018. (Round to two decimals.)

Question: P10-20A Accounting for equity investments

The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:

Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.

May 15 Received a cash dividend of \(0.61 per share on the Lili investment. 

Dec. 15 Received a cash dividend of \)70,000 from Evan investment. 

        31 Received Evan’s annual report showing \(300,000 of net income. 

        31 Received Lili’s annual report showing \)120,000 of net income for the year. 

        31 Evan’s stock fair value at year-end was \(390,000. 

        31 Lili’s common stock fair value at year-end was \)12 per share.

Requirements 

2. Post transactions to T-accounts to determine December 31, 2018, balances related to the investment and investment income accounts.

Question: P10-20A Accounting for equity investments

The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:

Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.

May 15 Received a cash dividend of \(0.61 per share on the Lili investment. 

Dec. 15 Received a cash dividend of \)70,000 from Evan investment. 

        31 Received Evan’s annual report showing \(300,000 of net income. 

        31 Received Lili’s annual report showing \)120,000 of net income for the year. 

        31 Evan’s stock fair value at year-end was \(390,000. 

        31 Lili’s common stock fair value at year-end was \)12 per share.

Requirements 

3. Prepare Waterfall Source’s partial balance sheet at December 31, 2018, from your answers in Requirement 2.

Question: P10-20A Accounting for equity investments

The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:

Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.

May 15 Received a cash dividend of \(0.61 per share on the Lili investment. 

Dec. 15 Received a cash dividend of \)70,000 from Evan investment. 

        31 Received Evan’s annual report showing \(300,000 of net income. 

        31 Received Lili’s annual report showing \)120,000 of net income for the year. 

        31 Evan’s stock fair value at year-end was \(390,000. 

        31 Lili’s common stock fair value at year-end was \)12 per share.

Requirements 

4. Where is the unrealized holding gain or loss associated with the Lili stock reported?

Accounting for debt investments 

Suppose Solomon Brothers purchases $500,000 of 6% annual bonds of Morin Corporation at face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2022. Solomon intends to hold the Morin bond investment until maturity. 

Requirements 

1. Journalize Solomon Brothers’ transactions related to the bonds for 2018.

Accounting for debt investments 

Suppose Solomon Brothers purchases $500,000 of 6% annual bonds of Morin Corporation at face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2022. Solomon intends to hold the Morin bond investment until maturity. 

Requirements 

Journalize the entry required on the Morin bonds maturity date. (Assume the last interest payment has already been recorded.)

Classifying and accounting for debt and equity investments

Jetway Corporation generated excess cash and invested in securities as follows: 2018 

Jul. 2 Purchased 4,200 shares of Pogo, Inc. common stock at \(12.00 per share. Jetway plans to sell the stock within three months, when the company will need the cash for normal operations. Jetway does not have significant influence over Pogo.

Aug. 21 Received a cash dividend of \)0.80 per share on the Pogo stock investment.

Sep. 16 Sold the Pogo stock for \(13.40 per share. 

Oct. 1 Purchased a Violet bond for \)20,000 at face value. Jetway classifies the investment as trading and short-term.

Dec. 31 Received a \(100 interest payment from Violet. 

        31 Adjusted the Violet bond to its market value of \)22,000. 

Requirements 

Where is the unrealized holding gain or loss associated with the trading debt investment reported?

Classifying and accounting for debt and equity investments

Jetway Corporation generated excess cash and invested in securities as follows: 2018 

Jul. 2 Purchased 4,200 shares of Pogo, Inc. common stock at \(12.00 per share. Jetway plans to sell the stock within three months when the company will need the cash for normal operations. Jetway does not have significant influence over Pogo.

Aug. 21 Received a cash dividend of \)0.80 per share on the Pogo stock investment.

Sep. 16 Sold the Pogo stock for \(13.40 per share. 

Oct. 1 Purchased a Violet bond for \)20,000 at face value. Jetway classifies the investment as trading and short-term.

Dec. 31 Received a \(100 interest payment from Violet. 

        31 Adjusted the Violet bond to its market value of \)22,000. 

Requirements 

1. Classify each of the investments made during 2018. (Assume the equity investments represent less than 20% of the ownership of outstanding voting stock.)

Classifying and accounting for debt and equity investments

Jetway Corporation generated excess cash and invested in securities as follows: 2018 

Jul. 2 Purchased 4,200 shares of Pogo, Inc. common stock at \(12.00 per share. Jetway plans to sell the stock within three months when the company will need the cash for normal operations. Jetway does not have significant influence over Pogo.

Aug. 21 Received a cash dividend of \)0.80 per share on the Pogo stock investment.

Sep. 16 Sold the Pogo stock for \(13.40 per share. 

Oct. 1 Purchased a Violet bond for \)20,000 at face value. Jetway classifies the investment as trading and short-term.

Dec. 31 Received a \(100 interest payment from Violet. 

        31 Adjusted the Violet bond to its market value of \)22,000. 

Requirements 

Journalize the 2018 transactions. Explanations are not required.

Classifying and accounting for debt and equity investments

Jetway Corporation generated excess cash and invested in securities as follows: 2018 

Jul. 2 Purchased 4,200 shares of Pogo, Inc. common stock at \(12.00 per share. Jetway plans to sell the stock within three months, when the company will need the cash for normal operations. Jetway does not have significant influence over Pogo.

Aug. 21 Received a cash dividend of \)0.80 per share on the Pogo stock investment.

Sep. 16 Sold the Pogo stock for \(13.40 per share. 

Oct. 1 Purchased a Violet bond for \)20,000 at face value. Jetway classifies the investment as trading and short-term.

Dec. 31 Received a \(100 interest payment from Violet. 

        31 Adjusted the Violet bond to its market value of \)22,000. 

Requirements 

Prepare T-accounts for the investment assets, and show how to report the investments on Jetway’s balance sheet at December 31, 2018.

Question: P10-20A Accounting for equity investments

The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:

Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.

May 15 Received a cash dividend of \(0.61 per share on the Lili investment. 

Dec. 15 Received a cash dividend of \)70,000 from Evan investment. 

        31 Received Evan’s annual report showing \(300,000 of net income. 

        31 Received Lili’s annual report showing \)120,000 of net income for the year. 

        31 Evan’s stock fair value at year-end was \(390,000. 

        31 Lili’s common stock fair value at year-end was \)12 per share.

Requirements 

1. Journalize the transactions for the year of Waterfall Source.

Question: P10-21B Accounting for debt investments

Suppose Hale and Sons purchases $800,000 of 3.5% annual bonds of Tyson Way Corporation at face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2022. Hale and Sons intends to hold the Tyson Way bond investment until maturity. 

Requirements 

1. Journalize Hale and Sons’s transactions related to the bonds for 2018. 

Question: P10-21B Accounting for debt investments

Suppose Hale and Sons purchases $800,000 of 3.5% annual bonds of Tyson Way Corporation at face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2022. Hale and Sons intends to hold the Tyson Way bond investment until maturity. 

Requirements 

2. Journalize the entry required on the Tyson Way bonds maturity date. (Assume the last interest payment has already been recorded.)

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018 

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon. 

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment. 

Sep. 16 Sold the Naradon stock for \(13.70 per share. 

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term. 

Dec. 31 Received a \(600 interest payment from Purple. 

        31 Adjusted the Purple bond to its market value of \)44,000. 

Requirements 

Classify each of the investments made during 2018. (Assume the equity investments represent less than 20% of ownership of outstanding voting stock.)

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018 

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon. 

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment. 

Sep. 16 Sold the Naradon stock for \(13.70 per share. 

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term. 

Dec. 31 Received a \(600 interest payment from Purple. 

        31 Adjusted the Purple bond to its market value of \)44,000. 

Requirements 

Journalize the 2018 transactions. Explanations are not required.

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018 

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon. 

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment. 

Sep. 16 Sold the Naradon stock for \(13.70 per share. 

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term. 

Dec. 31 Received a \(600 interest payment from Purple. 

        31 Adjusted the Purple bond to its market value of \)44,000. 

Requirements 

3. Prepare T-accounts for the investment assets, and show how to report the investments on Captain Transfer’s balance sheet at December 31, 2018.

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018 

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon. 

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment. 

Sep. 16 Sold the Naradon stock for \(13.70 per share. 

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term. 

Dec. 31 Received a \(600 interest payment from Purple. 

        31 Adjusted the Purple bond to its market value of \)44,000. 

Requirements 

 Where is the unrealized holding gain or loss associated with the trading debt investment reported?

Question: P10-23B Accounting for equity investments

The beginning balance sheet of Text Source Co. included a \(700,000 investment in Taylor stock (20% ownership).

During the year, Text Source completed the following investment transactions:

Mar. 3 Purchased 5,000 shares at \)13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.

May 15 Received a cash dividend of \(0.69 per share on the Josh investment. 

Dec. 15 Received a cash dividend of \)100,000 from Taylor investment. 

         31 Received Taylor’s annual report showing \(100,000 of net income. 

         31 Received Josh’s annual report showing \)620,000 of net income for the year. 

         31 Taylor’s stock fair value at year-end was \(620,000. 

         31 Josh’s common stock fair value at year-end was \)14 per share. 

Requirements 

Journalize the transactions for the year of Text Source.

1. Question: P10-23B Accounting for equity investments

The beginning balance sheet of Text Source Co. included a \(700,000 investment in Taylor stock (20% ownership).

During the year, Text Source completed the following investment transactions:

Mar. 3 Purchased 5,000 shares at \)13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.

May 15 Received a cash dividend of \(0.69 per share on the Josh investment. 

Dec. 15 Received a cash dividend of \)100,000 from Taylor investment. 

         31 Received Taylor’s annual report showing \(100,000 of net income. 

         31 Received Josh’s annual report showing \)620,000 of net income for the year. 

         31 Taylor’s stock fair value at year-end was \(620,000. 

         31 Josh’s common stock fair value at year-end was \)14 per share. 

Requirements 

Post transactions to T-accounts to determine the December 31, 2018, balances related to the investment and investment income accounts.

Question: P10-23B Accounting for equity investments

The beginning balance sheet of Text Source Co. included a \(700,000 investment in Taylor stock (20% ownership).

During the year, Text Source completed the following investment transactions:

Mar. 3 Purchased 5,000 shares at \)13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.

May 15 Received a cash dividend of \(0.69 per share on the Josh investment. 

Dec. 15 Received a cash dividend of \)100,000 from Taylor investment. 

         31 Received Taylor’s annual report showing \(100,000 of net income. 

         31 Received Josh’s annual report showing \)620,000 of net income for the year. 

         31 Taylor’s stock fair value at year-end was \(620,000. 

         31 Josh’s common stock fair value at year-end was \)14 per share. 

Requirements 

Prepare Text Source’s partial balance sheet at December 31, 2018, from your answers in Requirement 2.

Question: P10-23B Accounting for equity investments

The beginning balance sheet of Text Source Co. included a \(700,000 investment in Taylor stock (20% ownership).

During the year, Text Source completed the following investment transactions:

Mar. 3 Purchased 5,000 shares at \)13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.

May 15 Received a cash dividend of \(0.69 per share on the Josh investment. 

Dec. 15 Received a cash dividend of \)100,000 from Taylor investment. 

         31 Received Taylor’s annual report showing \(100,000 of net income. 

         31 Received Josh’s annual report showing \)620,000 of net income for the year. 

         31 Taylor’s stock fair value at year-end was \(620,000. 

         31 Josh’s common stock fair value at year-end was \)14 per share. 

Requirements 

Where is the unrealized holding gain or loss associated with the Josh stock reported?

Question: P10-25 Accounting for debt and equity investments

This problem continues the Canyon Canoe Company situation from Chapter 9. Amber and Zack Wilson are pleased with the growth of their business and have decided to invest its temporary excess cash in a brokerage account. The company had the following securities transactions in 2019.

Jul. 1 Purchased 8,000 shares in Adobe Outdoor Adventure Company for \(3 per share. Canyon Canoe does not have significant influence over Adobe. 

7 Purchased 35% of the stock of Bison Backpacks consisting of 43,750 shares of stock (out of a total of 125,000 shares) for \)5 per share. Canyon Canoe does have significant influence over Bison. 

10 Purchased a bond from Camelot Canoes with a face value of \(80,000. Canyon Canoe intends to hold the bond to maturity. The bond pays interest semiannually on June 30 and December 31. 

Sep. 30 Received dividends of \)0.15 per share from Adobe. 

Nov. 1 Received dividends of \(0.30 per share from Bison. 

Dec. 31 Received an interest payment of \)3,200 from Camelot Canoes. 

        31 Bison Backpacks reported net income of \(30,000 for the year. 

        31 Adjusted the Adobe stock for a market value of \)2.98 per share. 

Requirements 

1. Journalize the transactions including any entries, if required, at December 31, 2019.

Question: P10-25 Accounting for debt and equity investments

This problem continues the Canyon Canoe Company situation from Chapter 9. Amber and Zack Wilson are pleased with the growth of their business and have decided to invest its temporary excess cash in a brokerage account. The company had the following securities transactions in 2019.

Jul. 1 Purchased 8,000 shares in Adobe Outdoor Adventure Company for \(3 per share. Canyon Canoe does not have significant influence over Adobe. 

7 Purchased 35% of the stock of Bison Backpacks consisting of 43,750 shares of stock (out of a total of 125,000 shares) for \)5 per share. Canyon Canoe does have significant influence over Bison. 

10 Purchased a bond from Camelot Canoes with a face value of \(80,000. Canyon Canoe intends to hold the bond to maturity. The bond pays interest semiannually on June 30 and December 31. 

Sep. 30 Received dividends of \)0.15 per share from Adobe. 

Nov. 1 Received dividends of \(0.30 per share from Bison. 

Dec. 31 Received an interest payment of \)3,200 from Camelot Canoes. 

        31 Bison Backpacks reported net income of \(30,000 for the year. 

        31 Adjusted the Adobe stock for a market value of \)2.98 per share. 

Requirements 

Determine the effect on Canyon Canoe Company’s net income for the year for each of the three investments.

As a result of the recent mortgage crisis, many banks reported record losses to their mortgage receivables and other assets based on the decline in these assets’ fair values. 

Requirements 

1. What would the effect be to stakeholders if such losses were not reported in a timely way? 

As a result of the recent mortgage crisis, many banks reported record losses to their mortgage receivables and other assets based on the decline in these assets’ fair values. 

Requirements  

If a business chooses not to report these losses, is there an ethical issue involved? Who is hurt?

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. 

Requirements 

1. What effect did the adjustments have on the financial statements? What effect did the adjustments have on the current ratio?

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. 

Requirements 

What type of information in the financial reports would have helped the bank detect this reclassification?

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. 

Requirements 

Has a fraud occurred? If so, what is the fraud?

In 150 words or fewer, explain the difference between trading debt investments and available-for-sale debt investments.