Chapter 8 - Solution Manual

However theoretical arguments can be made for 1

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However, theoretical arguments can be made for (1) reducing sales revenue by the bad debts adjustment in the same manner that sales returns and allowances and trade discounts are considered reductions of the amount to be received from sales of products or (2) classifying the bad debts expense as a financial expense. Case 8-7 a. During the first year Key should report the securities at $550,000 on the balance sheet under the long-term investment category (Original cost of $500,000 and an increase in market valuation of $50,000. (It is possible that some of the portfolio could be disclosed as a current asset if Key
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149 plans on selling some of its investment during the next year.) This $50,000 increase in market valuation would be disclosed on Key’s financial statements as an increase in other comprehensive income. During the second year Key should disclose the securities at $475,000 on the balance sheet under the long-term investment category Since the original cost of the investments remaining at the end of year 1 was $475,000, the cost balance indicates that additional investments of $105,000 (500,000- 80,000-525,000) were purchased in year 2). The decrease in market valuation will be reported on Key's financial statements as a $95,000 decrease in other comprehensive income ($550,000 – 30,000 + 50,000 - 95,000). Additionally, Key should report a gain on the sale of investments of $20,000 during the second year ($100,000 – 80,000). The previously recorded increase in value was reported as an increase in other comprehensive income and is removed from that category and classified as a gain at the time of the sale). b. If these securities had been categorized as trading securities, the asset valuations and method of reporting on the balance sheet will be the same as Part (a) except that the securities will be disclosed under the current assets section of the balance sheet instead of the long-term investments section. In the first year Key will report an unrealized gain of $50,000 on its income statement ($550,000 - 500,000). In the second year Key will report an unrealized loss of $95,000 on its income statement. Key will not record a gain on the sale of the securities in the second year because this gain was reported as an unrealized gain on Key’s income statement in the first year. Case 8-8 a. Arguments for the specific identification method are as follows: (1) It provides an accurate and ideal matching of costs and revenues because the cost is specifically identified with the sales price. (2) The method is realistic and objective since it adheres to the actual physical flow of goods rather than an artificial flow of costs. (3) Inventory is valued at actual cost instead of an assumed cost Objections to the specific identification method include the following: (1) The cost of using it-restricts its use to goods of high unit value. (2) The method is impractical for manufacturing processes or cases in which units are commingled and identity lost.
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