Solutions Manual For Financial Reporting, Financial Statement
Analysis and Valuation 9th Edition By James M. Wahlen;
Stephen P. Baginski; Mark Bradshaw 9781337614689 ALL
Chapters .
Bally Corporation purchases an investment in Monte Carlo, Inc. at a purchase price of $7 million cash,
representing 40% of the book value of Monte Carlo, Inc. During the year, Monte Carlo reports net
income of $1,200,000 and pays $295,000 of cash dividends. At the end of the year, the market value
of Bally's investment is $8.5 million. What is the year-end balance of the equity investment in Monte
Carlo? - ANSWER: The year-end balance of the investment account is computed as follows:
Beginning balance $7,000,000
+ Share of investee's net income
($1,200,000 × 40%) = 480,000
- Dividends received from Best Pictures
($295,000 × 40%) = (118,000)
Ending balance $7,362,000
Valley View Corporation reported that short-term investments consisted of the following (in millions)
on December 31, 2018:
Amortized cost Fair value
Short-term investments/
available-for-sale securities: $528.3 $528.4
Short-term investments/
trading securities: $62.2 $51.0
Total short-term investments: $590.5 $579.4
Which of the following is true?
A) Valley View's 2013 balance sheet includes short-term investments of $590.5 million.
B) Unrealized losses of $11.2 million on trading securities are included in 2018 income.
C) There are no net unrealized gains on available-for-sale securities.
D) Accumulated other comprehensive income included no unrealized gains or losses. - ANSWER: (B)
Unrealized gains and losses for trading securities are included in current-year income. Answer Ais not
correct because the investments are recorded at fair value of $579.4 million on the balance sheet.
Answer C and D are not correct since a net unrealized gain of 0.1 million on available-for-sale
securities is included in accumulated other comprehensive income.
Selected 2015 balance sheet and income statement information for The Gap, Inc. (in millions) follows:
Year-end accounts payable: $ 1,242
Average accounts payable: $1,193
Sales: $16,148
Cost of goods sold: $9,855
Accounts payable days outstanding (also called days purchases in accounts payable for our term
project using the Campbell Soup Company handout) for 2015 is: - ANSWER: APDO = Accounts
payable / average daily COGS = $1,242 / [$9, days]
= 46.0 days
, A Contingent Liability must have the following criteria before the loss and liability must be recorded in
the financial statements: - ANSWER: The obligation will probably require payment at some point in
the future and the obligation is estimable.
Watson Electric Corp. sells $200,000 of bonds to private investors. The bonds have a 9% coupon rate
and interest is paid semiannually. The bonds were sold to yield 10%. What periodic (semi-annual)
interest payment does Watson make? - ANSWER: Coupon rates are used to compute the dollar
amount in interest payments paid to the bondholder semiannually.
Watson pays $200,000 × 9% × ½ year = $9,000.
Which one of the following is not correct?
A) For debt issued at par: interest expense reported on the income statement equals the cash paid for
interest.
B) For bond repurchases: Gain (loss) on bond repurchase = Cash paid to repurchase minus Net book
value of bonds.
C) For debt issued at a discount: interest expense reported on the income statement equals cash
interest payment.
D) For debt issued at a premium, interest expense reported on the income statement equals cash
interest payment less amortization of the premium. - ANSWER: (C)
For debt issued at a discount, interest expense reported on the income statement is cash interest paid
plus amortization of the discount.
Credit analysis concerns which of the following?
A) The price of a company's stock
B) The ability of a company to consistently pay dividends
C) The probability a company will make timely payments on its debt
D) An assessment of a company's credit-granting policies - ANSWER: (C)
The probability a company will make timely payments, that is, the potential risk of default. Bond
investors are primarily concerned with a company's ability to make interest and principal payments
per the bond agreement.
Which of the following business factors does not play a role in determining a company's credit rating?
A) Industry characteristics
B) Capital structure
C) Management
D) Corporate marketing
E) Profitability - ANSWER: (D)
Corporate marketing is not a risk factored into the rating agencies' determination of a company's
credit rating.
In general, how do credit analysts determine the risk-free rate? - ANSWER: The risk-free rate is the
yield on U.S. Government borrowings such as treasury bills, notes, and bonds.
Analysis and Valuation 9th Edition By James M. Wahlen;
Stephen P. Baginski; Mark Bradshaw 9781337614689 ALL
Chapters .
Bally Corporation purchases an investment in Monte Carlo, Inc. at a purchase price of $7 million cash,
representing 40% of the book value of Monte Carlo, Inc. During the year, Monte Carlo reports net
income of $1,200,000 and pays $295,000 of cash dividends. At the end of the year, the market value
of Bally's investment is $8.5 million. What is the year-end balance of the equity investment in Monte
Carlo? - ANSWER: The year-end balance of the investment account is computed as follows:
Beginning balance $7,000,000
+ Share of investee's net income
($1,200,000 × 40%) = 480,000
- Dividends received from Best Pictures
($295,000 × 40%) = (118,000)
Ending balance $7,362,000
Valley View Corporation reported that short-term investments consisted of the following (in millions)
on December 31, 2018:
Amortized cost Fair value
Short-term investments/
available-for-sale securities: $528.3 $528.4
Short-term investments/
trading securities: $62.2 $51.0
Total short-term investments: $590.5 $579.4
Which of the following is true?
A) Valley View's 2013 balance sheet includes short-term investments of $590.5 million.
B) Unrealized losses of $11.2 million on trading securities are included in 2018 income.
C) There are no net unrealized gains on available-for-sale securities.
D) Accumulated other comprehensive income included no unrealized gains or losses. - ANSWER: (B)
Unrealized gains and losses for trading securities are included in current-year income. Answer Ais not
correct because the investments are recorded at fair value of $579.4 million on the balance sheet.
Answer C and D are not correct since a net unrealized gain of 0.1 million on available-for-sale
securities is included in accumulated other comprehensive income.
Selected 2015 balance sheet and income statement information for The Gap, Inc. (in millions) follows:
Year-end accounts payable: $ 1,242
Average accounts payable: $1,193
Sales: $16,148
Cost of goods sold: $9,855
Accounts payable days outstanding (also called days purchases in accounts payable for our term
project using the Campbell Soup Company handout) for 2015 is: - ANSWER: APDO = Accounts
payable / average daily COGS = $1,242 / [$9, days]
= 46.0 days
, A Contingent Liability must have the following criteria before the loss and liability must be recorded in
the financial statements: - ANSWER: The obligation will probably require payment at some point in
the future and the obligation is estimable.
Watson Electric Corp. sells $200,000 of bonds to private investors. The bonds have a 9% coupon rate
and interest is paid semiannually. The bonds were sold to yield 10%. What periodic (semi-annual)
interest payment does Watson make? - ANSWER: Coupon rates are used to compute the dollar
amount in interest payments paid to the bondholder semiannually.
Watson pays $200,000 × 9% × ½ year = $9,000.
Which one of the following is not correct?
A) For debt issued at par: interest expense reported on the income statement equals the cash paid for
interest.
B) For bond repurchases: Gain (loss) on bond repurchase = Cash paid to repurchase minus Net book
value of bonds.
C) For debt issued at a discount: interest expense reported on the income statement equals cash
interest payment.
D) For debt issued at a premium, interest expense reported on the income statement equals cash
interest payment less amortization of the premium. - ANSWER: (C)
For debt issued at a discount, interest expense reported on the income statement is cash interest paid
plus amortization of the discount.
Credit analysis concerns which of the following?
A) The price of a company's stock
B) The ability of a company to consistently pay dividends
C) The probability a company will make timely payments on its debt
D) An assessment of a company's credit-granting policies - ANSWER: (C)
The probability a company will make timely payments, that is, the potential risk of default. Bond
investors are primarily concerned with a company's ability to make interest and principal payments
per the bond agreement.
Which of the following business factors does not play a role in determining a company's credit rating?
A) Industry characteristics
B) Capital structure
C) Management
D) Corporate marketing
E) Profitability - ANSWER: (D)
Corporate marketing is not a risk factored into the rating agencies' determination of a company's
credit rating.
In general, how do credit analysts determine the risk-free rate? - ANSWER: The risk-free rate is the
yield on U.S. Government borrowings such as treasury bills, notes, and bonds.
