Financial Accounting Canadian 5th Edition Harrison Solutions Manual

Chapter 8
Long-Term Investments and

International Operations
Short Exercises
(10-15 min.) S 8-1
1.
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2014
Feb. 10 Long-Term Investment (300 × $25) .......... 7,500
Cash ...................................................... 7,500
Dec. 1 Cash (300 × $0.36) .................................... 108

Dividend Revenue ................................ 108
Dec. 31 Other comprehensive income.................. 500

Long-Term Investment ($7,500 − $7,000) 500
2.
ASSETS
Total current assets ............................................... $ XXX
Long-term investments, at fair value..................... 7,000
SHAREHOLDERS’ EQUITY
Common shares ..................................................... $ XXX
Retained earnings .................................................. XXX
Accumulated other comprehensive income:
Unrealized (loss) on investments ..................... (500)
Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 559

Copyright © 2015 Pearson Canada Inc.
(5-10 min.) S 8-2
1.
Journal
2015
May 19 Cash (300 × $26) .............................. 7,800
Long-Term Investment ............... 7,000
Other Comprehensive Income ... 800
2. The realized gain from the sale of investment is reported

through Other Comprehensive Income. The loss
recorded at December 31, 2014 was unrealized because
it resulted from a change in the investment’s fair value,
not from the sale of the investment.
Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

560 Copyright © 2015 Pearson Canada Inc.
(10-15 min.) S 8-3
1. The equity method is appropriate because the investor
(General Motors) holds a 40% investment in the investee
company (ABC).
2.
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
(Millions)
a. Long-Term Investment .................................. 41
Cash ............................................................ 41
To purchase equity-method investment.
b. Long-Term Investment ($6 × 0.40) ................ 2.4

Equity-Method Investment Revenue ........ 2.4
To record investment revenue.
c. Cash ($2 × 0.40) .............................................. 0.8

Long-Term Investment .............................. 0.8
To receive cash dividend on equity-method
investment.
3.
Long-Term Investment
(Amounts in millions)
Purchase 41.0 Dividends received 0.8
Net income 2.4
Balance 42.6

(5 min.) S 8-4
(Millions)
Sale proceeds ......................................................... $ 14.0
− Carrying amount of the investment ($42.6 / 2) ..... (21.3)
= (Loss) on sale of investment ................................. $ (7.3)
(10 min.) S 8-5

1. A parent company is a corporation that owns a controlling
(more than 50%) share and has the ability to exercise
control over another company. A subsidiary company is a
company that is controlled by another corporation.
2. Consolidated financial statements combine the balance

sheets, income statements, and cash-flow statements of a
parent company with those of its subsidiaries as if the
parent and its subsidiaries were one company.
3. The parent company’s name appears on the consolidated

financial statements. To consolidate, the parent company
must own more than 50% of the subsidiary’s shares, and
exercise control over the subsidiary.

(10 min.) S 8-6
1. Goodwill is an intangible asset. Goodwill is the excess of
the purchase price to acquire a subsidiary company over
the sum of the net realizable value of the subsidiary’s net
assets (assets minus liabilities). Only the parent company
reports the goodwill. Goodwill appears as an intangible
asset on the consolidated balance sheet.
2. Non-controlling interest is the portion (less than 50%) of a

subsidiary’s shares that are owned by shareholders other
than the parent company. The parent company should
report Non-controlling Interest on its consolidated balance
sheet as part of shareholders' equity.

(10-15 min.) S 8-7
1. Paid $1,010,000 ($1,000,000 × 1.01)
Will collect $1,000,000 at maturity
2. Annual cash interest = $70,000 ($1,000,000 × 0.07)
3. Annual interest revenue will be less than the amount of

cash interest received each year because the investor
bought the bonds at a premium. However, the investor will
collect only the face amount of the bonds at maturity. The
difference between the purchase price paid and the face
amount collected is a reduction in interest revenue over
the life of the bonds.
4. Cash interest received each year......................... $70,000

− Amortization (1,825)*
= Interest revenue year 1 ..................................... $68,175
Interest Received $70,000

Interest @ Effective Rate $1,010,000 × 0.0675 = 68,175
Amortization YR 1 = $ 1,825

(10 min.) S 8-8
Journal
2014
a. Jan. 2 Long-Term Investment in Bonds
($1,000,000 × 1.01) .............................. 1,010,000
Cash ................................................ 1,010,000
To purchase bond investment.
b. Dec. 31 Cash ($1,000,000 × 0.07) ..................... 70,000

Interest Revenue ............................ 70,000
To receive annual interest.
c. 31 Interest Revenue ................................. 1,825

Long-Term Investment in Bonds
($70,000 − [$1,010,000 × 0.0675]) 1,825
To amortize bond investment.
2019
d. Jan. 2 Cash ..................................................... 1,000,000
Long-Term Investment in Bonds ... 1,000,000
To receive face value at maturity.

(5-10 min.) S 8-9
Req. 1
$10,000 x .681 (PV of $1, 5 periods, 8%) = $6,810
Req. 2
$10,000 x 3.993 (PV of an annuity, 5 periods, 8%) = $39,930

(5-10 min.) S 8-10
$1,000,000 x 6.145 (PV of Annuity of $1, 10 periods, 10%) = $6,145,000

(5 min.) S 8-11
1. A. Operating
B. Investing — Most closely related to this chapter.
C. Financing
2. Purchase of investment (or acquisition of other
companies)
Sale of investment (or sale of other companies)

Exercises
(10-15 min.) E 8-12
Journal
a. Long-Term Investment (400 × $40) .......... 16,000

Cash ....................................................... 16,000
b. Cash (400 × $0.50) ..................................... 200

Dividend Revenue ................................. 200
c. Unrealized loss 2,000

[400 × ($40 − $35)] 2,000
d. Cash (400 × $30)......................................... 12,000

Loss on Sale of Investment ...................... 2,000
Long-Term Investment ......................... 14,000

(15-25 min.) E 8-13
Req. 1
Stock Cost Current Net Realizable Value
Shoppers
Drug Mart (3,000 × $50) = $150,000 (3,000 × $48.05) = $ 144,150
Bank of
Montreal (600 × $42.50) = 25,500 (600 × $31.25) = 18,750
EnCana (1,400 × $93.36) = 130,704 (1,400 × $56.96) = 79,744
Total………………………………… $306,204 ……………………….. $242,644
Req. 2
Dec. 31 Other Comprehensive Income 63,560
($306,204 − $242,644)…………..... 63,560
Req. 3
Income Statement (partial):
Other comprehensive income:

Unrealized (loss) on investments ............... $ (63,560)
Balance Sheet (partial):
ASSETS
Long-term investments, at fair value ............. $242,644
Accumulated other comprehensive income:
Unrealized (loss) on investments ................... $ (63,560)

(10-15 min.) E 8-14
Journal
a. Long-Term Investment ................................. 1,000,000

Cash .......................................................... 1,000,000
Purchased equity-method investment.
b. Long-Term Investment ($640,000 × 0.25) .... 160,000

Equity-Method Investment Revenue....... 160,000
c. Cash ($420,000 × 0.25) .................................. 105,000

Long-Term Investment ............................ 105,000
To receive cash dividend on equity-method investment.
Ending balance in the investment account:

$1,055,000 = ($1,000,000 + $160,000 − $105,000)

(10-15 min.) E 8-15
Long-Term Investment in Thai Software
a. Purchase 1,000,000 c. Dividends 105,000
b. Net income 160,000
Balance 1,055,000
Sale of investment for cash of ............ $2,700,000

Carrying amount of investment .......... (1,055,000)
Gain on sale of investment ................. $1,645,000

(15-20 min.) E 8-16
Req. 1
The equity method is appropriate for a 25% investment in

another company’s common shares. Equity method is used
for 20-50% investments, and the investor is presumed to
exercise significant influence over the investee.
Req. 2
Balance sheet (partial):

ASSETS
Long-term investments, at equity......................... $525,000*
Income statement (partial):

Other revenue
Equity-method investment revenue ..................... $ 50,000
_____
*
Explanation:
Cost 500,000
Share of net income Share of dividends
($200,000 × 0.25) 50,000 ($100,000 × 0.25) 25,000
Balance 525,000

(15-20 min.) E 8-17
Req. 1
Manulife should use the amortized-cost method.
Req. 2
Journal
2014
Sept. 30 Long-Term Investment in Bonds
($20,000 × 0.91) ............................................. 18,200
Cash .......................................................... 18,200
Dec. 31 Interest Receivable

($20,000 × 0.07 × 3/12)................................... 350
Interest Revenue ...................................... 350
To accrue interest revenue.
31 Long-Term Investment in Bonds 14*

Interest Revenue ...................................... 14
*($18,200 × 0.08 × 3/12 = $364: $364 − $350 = $14)
Req. 3
Balance sheet (partial)
ASSETS
Current:
Interest receivable ................................................ $ 350
Long-term investment in bonds

($18,200 + $14) ...................................................... $18,214

(5-10 min.) E 8-18
10 x $1,000 = $10,000 x 0.790 (PV of $1, 6 years, 4%) =

$7,900
$10,000 x 5% = $500 x 5.242 (PV of Annuity of $1, 6 years,

4%) = $2,621
The price of the bond investment = $7,900 + $2,621 =

$10,521
Chapter 10 Long-Term Investments and International Operations 575

(10-15 min.) E 8-19
Spanish Subsidiary:
EXCHANGE
EUROS RATE DOLLARS
Assets 500,000 $1.70 $850,000
Liabilities 300,000 1.70 $510,000

Shareholders’ equity:
Common shares 50,000 1.60 80,000
Retained earnings 150,000 1.58 237,000
Accumulated other
comprehensive income:
Foreign-currency
translation adjustment 23,000
500,000 $850,000
During this period, the euro was stronger than the dollar.
The strong euro produced the positive translation
adjustment.

(15-20 min.) E 8-20
Donuts ‘R’ Us Inc. Statement of
Cash Flows (partial)
For the Fiscal Year 2014
(Millions)
Cash flows from investing activities:
Capital expenditures ........................................... $(10.4)
Sale of property, plant, and equipment ............. 7.3
Sale of other businesses .................................... 1.0
Purchase of long-term investments .................. (12.2)
Sale of investments ............................................. 2.5
Net cash (used) in investing activities ........... $(11.8)
Based on Donuts ‘R’ Us investing activities, it appears that

the company is growing. Acquisitions of long-term assets,
other businesses, and investments are greater than the
sales of long-term assets.

(20-25 min.) E 8-21
Journal Entry
Cash.......................................................... 3,110,000
Notes Receivable ................................ 3,110,000
Short-Term Investments ......................... 3,457,000

Cash ..................................................... 3,457,000
Cash.......................................................... 1,409,000
Accumulated Depreciation ..................... 3,691,000
Equipment ............................................ 5,100,000
Cash.......................................................... 461,000
Investments ......................................... 450,000
Gain on Sale of Investments .............. 11,000
Property, Plant, and Equipment ............. 1,761,000

Cash ..................................................... 1,761,000

(20-25 min.) E 8-22
Req. 1
Amount of 5% Factor Present Value

Cash Flow from Table of Cash Flow
$ 20,000 x .952 = $ 19,040
25,000 x .907 = 22,675
30,000 x .864 = 25,920
25,000 x .823 = 20,575
20,000 x .784 = 15,680
$120,000 $103,890
You should choose the option with the payments over the five
years rather than the one payment of $100,000. The present value
of the payments, $103,890, is higher than the present value of the
single payment, $100,000.
Req. 2
Amount of 10% Factor Present Value

Cash Flow from Table of Cash Flow
$ 20,000 x .909 = $ 18,180
25,000 x .826 = 20,650
30,000 x .751 = 22,530
25,000 x .683 = 17,075
20,000 x .621 = 12,420
$120,000 $ 90,855
If the interest rate is 10%, you should choose the one payment of
$100,000 rather than the five payments over five years. The
present value of the single payment, $100,000, is higher than the
present value of the five payments, $90,855.

(continued) E 8-22
Req. 3
Amount of 10% Present Value

Cash Flow Factor of Cash Flow
from
Table
$20,000 x .909 = $ 18,180
25,000 x .826 = 20,650
30,000 x .751 = 22,530
25,000 x .683 = 17,075
Total through $100,000 x $78,435
Yr. 4
Amt. needed
in Yr. 5 to
bring PV to
$100,000 ÷ PV $34,726 ÷ .621 $21,565*
factor for 5 =
yrs.
_____
*$100,000 - $78,435 = $21,565
You would need a payment of $34,726 in Year 5 to make the

present value of the five payments equal to the present
value of the single payment, $100,000.

(20 min.) E 8-23
Req. 1
The two components of accumulated other comprehensive

income discussed in this chapter are as follows:
1. Unrealized gains (losses) on investments.

2. Foreign-currency translation adjustments.
Req. 2
An unrealized gain (loss) on investments produces a

positive (negative) balance.
A foreign-currency translation adjustment is positive when

the assets of a foreign subsidiary are translated into more
dollars than the equities (liabilities plus shareholders’
equity).
The foreign-currency translation adjustment is negative

when the equities of a foreign subsidiary are translated into
more dollars than the assets.

(continued) E 8-23
Req. 3
(Millions)
Accumulated other comprehensive (loss) at
December 31, 2013 .................................................... $(53)
Foreign-currency translation adjustment ................... 29
*Unrealized loss on investments ................................. (16)
Accumulated other comprehensive (loss) at
December 31, 2014 .................................................... $(40)
*
Could also be recorded as Other Income (Loss)

Quiz
Q8-24 a [(1,000 × $71) + (200 × $11) + (500 × $24) =
$85,200]
Q8-25 d [(1,000 × $2) + (200 × $1.50) + (500 × $1) =
$2,800]
Q8-26 Cash (1,000 × $68) ............................ 68,000
Other Comprehensive Income 3,000
Long-Term Investments
(1,000 × $71) ............................... 71,000
Q8-27 b
Q8-28 c
Q8-29 a
Q8-30 d ($100,000 × 0.07) = $7,000)
Q8-31 b $105,000 × 0.06 = $6,300: $7,000 − $6,300 = $700
Interest income = $7,000 − $700 = $6,300
Q8-32 c
Q8-33 b
Q8-34 d
Q8-35 c

Problems
Group A
(20-30 min.) P 8-36A

Req. 1
Current fair value is used to account for the investment in

Tomassini because the investor expects to sell the shares
at their fair value. Fair value is clearly relevant to the
investor’s decisions about this investment.
Fair value is not used for the equity-method investment in

Fellingham because the investor holds the shares to
influence the operations of the investee company, not to
sell the shares.

(continued) P 8-36A
Req. 2
Balance sheet:
ASSETS
Total current assets ..................................................... $ XXX
Long-term investments, at equity ............................... 523,300*
Long-term investments, at fair value .......................... 30,600
Property, plant, and equipment, net ........................... XXX
Common shares ........................................................... $ XXX
Retained earnings ........................................................ XXX
Accumulated other comprehensive income
[$30,600 − (800 × $41.50)].......................................... (2,600)
Income statement:
Income from operations .............................................. $ XXX
Other revenue:
Equity-method investment revenue ($510,000 × 0.35) 178,500
Dividend revenue (800 × $0.30) ................................ 240
Net income .................................................................... XXX
Other comprehensive income.…………………………. (2,600)
_____
*Long-Term Investment in Fellingham Shares
Purchase 370,000
Net income Dividends received
($510,000 × 0.35) 178,500 (20,000 × $1.26) 25,200
Balance 523,300

(45-60 min.) P 8-37A
Req. 1
Journal
Mar. 16 Long-Term Investments (2,000 × $12.25) .... 24,500
Cash.......................................................... 24,500
Purchased investment.
May 21 Cash (2,000 × $0.75) ..................................... 1,500

Dividend Revenue.................................... 1,500
Received cash dividend.
Aug. 17 Cash .............................................................. 81,000

Long-Term Investments in MSC, Inc ...... 81,000
Received cash dividend on equity-method
investment.
Dec. 31 Long-Term Investments in MSC, Inc.

($550,000 × 0.22) ........................................... 121,000
Equity-Method Investment Revenue ...... 121,000
31 Long-Term Investment ($25,700 − $24,500) 1,200

Other Income ............................................ 1,200
Adjusted investment to fair value.

(continued) P 8-37A
Req. 2
Long-Term Investment in MSC, Inc.

Jan. 1 Balance 619,000 Aug. 17 Dividends 81,000
Dec. 31 Net income 121,000
Dec. 31 Balance 659,000
Req. 3
Total current assets ................................................... $ XXX

Long-term investments, at fair value ........................ 25,700
Long-term investment in MSC Software, at equity .. 659,000

(20-30 min.) P 8-38A
Req. 1
Debt ratio of ABC Total liabilities $68.4

= = = 0.722
considered alone Total assets $94.8
Req. 2
ABC Eliminations Consolidated
ABC Credit Totals
Total assets……………….. $94.8 $179.0 -14.3 $259.5
Total liabilities……………. $68.4 $164.7 $233.1

Total shareholders’ 26.4 14.3 -14.3 26.4
equity.
Total liabilities and equity $94.8 $179.0 -14.3 $259.5
Req. 3
Consolidated debt Total liabilities $233.1
= = = 0.851
ratio of ABC Total assets $273.8
Consolidation of the finance subsidiary increased ABC’s
reported debt ratio from 0.722 to 0.898. Companies would
prefer to report a lower debt ratio, so they would prefer not
to consolidate the financial statements of their financing
subsidiaries when the subsidiary has a high debt load
because that makes their debt ratio appear too high.

(45-60 min.) P 8-39A
Req. 1
Journal
2014
Mar. 1 Long-Term Investment in Bonds
($600,000 × 1.045) ............................. 627,000
Cash .............................................. 627,000
Sept. 1 Cash ($600,000 × 0.05 × 6/12) .......... 15,000

Interest Revenue .......................... 15,000
To receive semiannual interest.
1 Interest Revenue ............................... 2,460

($627,000 × 0.04 × 6/12 = $12,540:
$15,000 − $12,540 = $2,460) 2,460
2015
Feb. 28 Interest Receivable
($600,000 × 0.05 × 6/12) .................... 15,000
Interest Revenue .......................... 15,000
31 Interest Revenue ............................... 2,509

[($627,000 − $2,460 = $624,540)
$15,000 − ($624,540 × 0.04 × 6/12 =
12,491) = $2,509] ............................... 2,509

(continued) P 8-39A
Req. 2
Balance sheet at February 28, 2015:

Current assets:
Interest receivable............................................. $ 15,000
Long-term investments in bonds
($627,000 − $2,460 − $2,509) ............................. 622,031
Property, plant, and equipment, net ................... XXX,XXX
Income statement for the year ended February 28, 2015:

Other revenues:
Interest revenue ($15,000 − $2,460 + $15,000 − $2,509) $25,031

(20-25 min.) P 8-40A
Req. 1
Investment Opportunity A
PV of
Year Cash x Factor = Cash Flow
Flow
1 $10,000 x .893 = $ 8,930
2 8,000 x .797 = 6,376
3 6,000 x .712 = 4,272
$24,000 $19,578
Investment Opportunity B
PV of cash flow = $8,000 x 2.402 = $19,216
Choose investment opportunity A because the present

value of cash flows is higher than the present value of
investment opportunity B.

(20-25 min.) P 8-41A
Req. 1
This situation will generate a positive translation

adjustment, which is like a gain. The gain occurs because
the yen’s current exchange rate, which is used to translate
the subsidiary’s net assets, is greater than the historical
exchange rates at which Blackberry invested in the
Japanese subsidiary.
EXCHANGE
YEN RATE DOLLARS
Assets 300,000,000 $0.0137 $4,110,000
Liabilities 80,000,000 0.0137 $1,096,000

Common shares 20,000,000 0.0134 268,000
Retained earnings 200,000,000 0.0135 2,700,000
Accumulated other
Foreign-currency
300,000,000 $4,110,000

(continued) P 8-41A
Req. 2
The translation adjustment “belongs” to Blackberry, the

parent company. Therefore, the translation adjustment will
be reported on Blackberry’s consolidated balance sheet.

(20-25 min.) P 8-42A
DATE: Early in 2015
TO: Smart Pro Inc. Shareholders
FROM: Chief Executive Officer
RE: Investing Activities During 2014
During 2014, Smart Pro invested $7,309 million in

property, plant, and equipment, up from the level of last
year. We also paid $883 million to acquire other companies
and we invested $7,141 million in securities. During the
year, we sold investments for $15,138 million. Overall
investing activities used cash of $195 million. Most
investing amounts are down from their levels in 2013.
Smart Pro financed its 2014 investments mainly from

profitable operations, which generated cash of $8,654
million — almost enough to pay for our investments in plant
and equipment and other companies.
Student responses may vary.

Problems
Group B
(20-30 min.) P 8-43B

Current fair value is used to account for the investment in
Mercury because the investor expects to sell the shares at
their fair value. Fair value is clearly relevant to the
investor’s decisions about this investment.
Fair value is not used for the equity-method investment in

Mars because the investor holds the shares to influence the
operations of the investee company, not to sell the shares.

(continued) P 8-43B
Req. 2
Balance sheet:
ASSETS
Total current assets ................................................ $ XXX
Long-term investments, at equity .......................... 526,300*
Long-term investments, at fair value .................... 19,200
Property, plant, and equipment, net ...................... XXX
Income statement:
Income from operations ......................................... $ XXX
Other revenue:
Equity-method investment revenue ($350,000 × 0.25) 87,500
Dividend revenue (1,000 × $0.75) ......................... 750
Net income ............................................................... XXX
Other income ...........................................................
(3,300)
_____
*Long-Term Investment in Mars Shares
Purchase 450,000
Net income Dividends received
($350,000 × 0.25) 87,500 (8,000 × $1.40) 11,200
Balance 526,300

(45-60 min.) P 8-44B
Req. 1
Journal
Feb. 16 Long-Term Investments (10,000 × $9.25)... 92,500

Cash ........................................................ 92,500
Purchased investment.
May 14 Cash (10,000 × $0.82) .................................. 8,200

Dividend Revenue .................................. 8,200
Received cash dividend.
Oct. 15 Cash ............................................................. 29,000

Long-Term Investments in Affiliates ..... 29,000
Received cash dividend on equity-method
investment.
Dec. 31 Long-Term Investments in Affiliates

($620,000 × .25) ............................................ 155,000
Equity-Method Investment Revenue ..... 155,000
31 Other Comprehensive Income (Loss) ........ 3,500

($89,000 − $92,500) ................................. 3,500
Adjusted investment to fair value.

(continued) P 8-44B
Req. 2
Long-Term Investments in Affiliates

Jan. 1 Balance 409,000 Oct. 15 Dividends 29,000
Dec. 31 Net income 155,000
Dec. 31 Balance 535,000
Req. 3
Total current assets ............................................. $ XXX

Long-term investments, at fair value ................. 89,000
Long-term investments in affiliates, at equity .. 535,000

(45-60 min.) P 8-45B
Req. 1
Journal
2014
Jan. 1 Long-Term Investment in Bonds
($500,000 × 0.88) .............................. 440,000
Cash ............................................. 440,000
July 1 Cash ($500,000 × 0.06 × 6/12) ......... 15,000

Interest Revenue ........................ 15,000
To receive semiannual interest.
1 Long-Term Investment in Bonds
($440,000 × 0.08 × 6/12 = $17,600:
$17,600 − $15,000 = 2,600)... 2,600
Dec. 31 Interest Receivable
($500,000 × 0.06 × 6/12) ................... 15,000
31 Long-Term Investment in Bonds

[($440,000 + $2,600 = $442,600):
$442,600 × 0.08 × 6/12 = $17,704:
$17,704 − $15,000 = $2,704] ............ 2,704

(continued) P 8-45B
Req. 2
Balance sheet at December 31, 2014:

Current assets:
Interest receivable ........................................ $ 15,000
Long-term investments in bonds
($440,000 + $2,600 + $2,704)........................ 445,304
Property, plant, and equipment, net .............. XXX,XXX
Income statement for the year ended December 31, 2014:

Other revenues:
Interest revenue ($15,000 + $2,600 + $15,000 + $2,704) $35,304

(15-20 min.) P 8-46B
Req. 1
Investment Opportunity X
PV of
Year Cash x Factor = Cash Flow
Flow
1 $15,000 x .909 = $13,635
2 10,000 x .826 = 8,260
3 5,000 x .751 = 3,755
$30,000 $25,650
Investment Opportunity Y
PV of cash flow = $10,000 x 2.487 = $24,870
Choose investment opportunity X because the present

value of cash flows is higher than the present value of
investment opportunity Y.

(20-25 min.) P 8-47B
Req. 1
This situation will generate a positive translation

adjustment, which is like a gain. The gain occurs because
the euro’s current exchange rate, which is used to
translate the subsidiary’s net assets, is greater than the
historical exchange rates at which Arte invested in the
French subsidiary.
EXCHANGE
EUROS RATE DOLLARS
Assets 3,000,000 $1.80 $5,400,000
Liabilities 1,000,000 1.80 $1,800,000

Common shares 300,000 1.60 480,000
Retained earnings 1,700,000 1.70 2,890,000
Accumulated other
Foreign-currency
3,000,000 $5,400,000

(continued) P 8-47B
Req. 2
The translation adjustment “belongs” to Arte, the parent

company. Therefore, the translation adjustment will be
reported on Arte’s consolidated balance sheet.

(20-25 min.) P 8-48B
DATE: Early in 2015
TO: Members of the investment club
FROM: Student name
RE: Investing Activities of Marine Transport Ltd.

During 2014
During 2014, Marine Transport invested $191 million in

ships and $25 million in property and equipment. After
deductions of derecognized assets, the net investments
were $277 less than the previous year’s.
During 2014, Marine Transport had a net decrease in

long-term debt of $15 million, a net repurchase and
issuance of shares of $20 million, and an increase in other
assets of $21 million, for a total financing use of cash of
$59 million. Marine Transport financed its 2014
investments from profitable operations, which generated
cash of $541 million. Because operations generated much
more than the investing needs, the company did not
borrow during 2014, instead paid down debt of $15 million.
In 2013 operations and financing activities contributed to
investments of $477 million.
Cash position in 2014 was increased by $276 million

(2010 $118 million). This is a positive indication of Marine
Transport’s performance in 2014.
Student responses may vary.

Decision Cases
(15-20 min.) Decision Case 1
1. The parentheses signify losses (similar to expenses).
2. These items are contra elements of shareholders’ equity.
3. These items are reason for sorrow because they are

losses. But the sorrow is only moderate because the
losses are unrealized. There is still time for the unrealized
losses to turn into gains.
4. These items are not included in net income or in retained

earnings.
For 2014 Infografix reported net income of $1.8 million

($26.6 − $24.8).
5. These items should probably not scare you away from

investing in Infografix shares. After all, the foreign-
currency translation adjustment and the unrealized loss on
investments haven’t been realized yet. As stated in #3
above, there is still time for the unrealized losses to turn
into gains.
Student responses will vary.

(20-30 min.) Decision Case 2
1. The Prairie Office Systems investment cannot be used to
generate the needed income because the appropriate way
to account for this investment is the equity method. Under
the equity method, Barham records dividends received not
as income, but as a decrease in the investment carrying
amount.
2. The bond investment cannot be used to generate the
needed income because a sale of the bonds would
increase net income by only $6,200, computed as follows:
Sale price of the bond investment ..................... $380,000
Less: Commission to sell ($380,000 × 0.01) .... (3,800)
Amortized carrying amount of the
bond investment∗
[$400,000 × 0.857 = $343,000) +
(($400,000 × 0.04 = $16,000)
$16,000 × 1,783 = $29,000)] (372,000)
Gain on sale of the bond investment ................. $ 4,200
3. The RBC shares can be used to generate the needed
income, as follows:
Sale price of the investment in RBC shares
(5,000 × $53).……………………………………… $265,000
Less: Cost of the RBC shares
(5,000 × $37)………………………………… 185,000
Gain on sale of the RBC shares ……………........ $ 80,000
Recommendation: Sell the RBC shares.

*Students should realize that the easier way to calculate the
amortized carrying amount is to calculate the present value
of the face amount of the bond and the interest payments for
2 periods, the 2 years left in the bond until maturity.
Financial Accounting Fourth Canadian Edition Instructor’s Solutions Manual

Ethical Issue
Req. 1
Cohen is acting within his authority to influence Online to

pay large cash dividends. The board of directors has the
authority to declare and pay dividends.
The ethics of Cohen’s actions are questionable. As the

president of Media One, Cohen is responsible for
stewardship of company resources. As a member of Online’s
board of directors, Cohen is also responsible for the careful
stewardship of Online’s resources. It appears that Cohen is
using his position to pad his own bonus, even if it hurts
Online. His actions could hurt Online’s creditors if Online
fails to pay its debts, especially because of the need to
borrow in order to pay the dividend.

(continued) Ethical Issue
Req. 2
Under the equity method, investor (Media One) income is

increased when the investee company (Online) earns
income. Receipts of dividends have no effect on investor
income (revenue) under the equity method.
Under the fair value method, receipts of dividends

increase investor income (revenue). In this case, Cohen is
manipulating Media One’s income — and his own bonus —
by having Online pay high dividends to Media One.
Investment income under the equity method depends on

the investee company’s net income, which in turn depends
on many factors beyond the investor’s control. Therefore, it
would be more difficult for the investor company to
manipulate its income — and for Cohen to manipulate his
bonus — under the equity method than under the fair-value
method.

Focus in Financials
(15-20 min.) Telus
Note: all amounts are in thousands of dollars

Req. 1
Telus does have subsidiaries.
There are a number of indications that Telus has subsidiaries.

1. The financial statements are consolidated.
2. There is “goodwill” on the Balance Sheet.
3. Note 1. (a) the Notes to the Consolidated Financial
Statements states, “The consolidated financial
statements include the accounts of the Company and all
of the Company’s subsidiaries of which the principal one
is TELUS Communications Inc.”
Req. 2
Telus’s Statement of Cash Flows (investing activities)
indicates that Telus invested $1,847 million in property, plant,
and equipment and had proceeds on derecognition of $4
million during 2011. This investment indicates the company
is expanding its operations. The Balance Sheet shows that
the carrying amount of property, plant, and equipment has
increased in 2011 over 2010. Note 15 of the Notes to the
Consolidated Financial Statements reports the cost,
accumulated depreciation, and the carrying amount. A
comparison of costs in 2011 over 2010 reflects the
investment in equipment reported on the statement of cash
flows.
(continued) Telus
Req. 3
Note 1 (k) of the Notes to the Consolidated Financial
Statements indicates the accounting policies for reporting
foreign currency translation. The policy indicates that Telus
has assets, liabilities, and foreign operations in currencies
other than the currency in which the consolidated financial
statements are reported. Gains and losses in foreign
exchange are recorded in the consolidated statements of
earnings (the Income Statement).

Focus on Analysis
Req. 1
Note 1(a) of the Notes to the Consolidated Financial

Statements indicates that with the exception of non-
controlling interests in an immaterial subsidiary held for sale,
all of the Company’s subsidiaries are wholly owned.
Req. 2
The decrease in their long-term investments was reported at

$37 million in 2010 and $21 million in 2011. According to
MD&A: 6 – “the decrease reflects a reduction due to
acquisition of control and subsequent consolidation of
Transactel (Barbados) Inc., slightly offset by minor changes
in minor investments.”
Req. 3
Goodwill changed during 2011. The balance in goodwill at

December 31, 2011 was $3,661 and $3,572 on December 31,
2011. Note 16 of the Notes to the Consolidated Financial
Statements indicates that the increase in goodwill arose from
the purchase of businesses.


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Chapter 8

Long-Term Investments and

Dec. 1 Cash (300 × $0.36) .................................... 108

Dec. 31 Other comprehensive income.................. 500

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 559

2. The realized gain from the sale of investment is reported

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

b. Long-Term Investment ($6 × 0.40) ................ 2.4

c. Cash ($2 × 0.40) .............................................. 0.8

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 561

(10 min.) S 8-5

2. Consolidated financial statements combine the balance

3. The parent company’s name appears on the consolidated

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

2. Non-controlling interest is the portion (less than 50%) of a

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 563

2. Annual cash interest = $70,000 ($1,000,000 × 0.07)

3. Annual interest revenue will be less than the amount of

4. Cash interest received each year......................... $70,000

Interest Received $70,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

b. Dec. 31 Cash ($1,000,000 × 0.07) ..................... 70,000

c. 31 Interest Revenue ................................. 1,825

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 565

$10,000 x .681 (PV of $1, 5 periods, 8%) = $6,810

$10,000 x 3.993 (PV of an annuity, 5 periods, 8%) = $39,930

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 567

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

(10-15 min.) E 8-12

a. Long-Term Investment (400 × $40) .......... 16,000

b. Cash (400 × $0.50) ..................................... 200

c. Unrealized loss 2,000

d. Cash (400 × $30)......................................... 12,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 569

EnCana (1,400 × $93.36) = 130,704 (1,400 × $56.96) = 79,744

Total………………………………… $306,204 ……………………….. $242,644

Other comprehensive income:

Balance Sheet (partial):

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

a. Long-Term Investment ................................. 1,000,000

b. Long-Term Investment ($640,000 × 0.25) .... 160,000

c. Cash ($420,000 × 0.25) .................................. 105,000

Ending balance in the investment account:

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 571

Sale of investment for cash of ............ $2,700,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

The equity method is appropriate for a 25% investment in

Balance sheet (partial):

Income statement (partial):

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 573

Dec. 31 Interest Receivable

31 Long-Term Investment in Bonds 14*

Long-term investment in bonds

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

10 x $1,000 = $10,000 x 0.790 (PV of $1, 6 years, 4%) =

$10,000 x 5% = $500 x 5.242 (PV of Annuity of $1, 6 years,

The price of the bond investment = $7,900 + $2,621 =

Chapter 10 Long-Term Investments and International Operations 575