Problem 12-5 Various transactions related to trading securities [LO12-1, 12-3]

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. The company buys debt securities, intending to profit from short-term differences in price and maintaining them in an active trading portfolio. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2017.

(Hint: Interest must be accrued.)

Required:
1. Prepare the appropriate journal entry for each transaction or event during 2018, as well as any adjusting entries necessary at year end.
2. Indicate any amounts that Ornamental Insulation would report in its 2018 income statement, 2018 statement of comprehensive income, and 12/31/2018 balance sheet as a result of these investments.

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. The company buys debt securities, not intending to profit from short-term differences in price and not necessarily to hold debt securities to maturity, but to have them available for sale when circumstances warrant. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2017.

(Hint: Interest must be accrued.)

Required:
1. Prepare the appropriate journal entry for each transaction or event during 2018, as well as any adjusting entries necessary at year end. For any sales, prepare entries to update the fair-value adjustment, record any reclassification adjustment, and record the sale.
2. Indicate any amounts that Ornamental Insulation would report in its 2018 income statement, 2018 statement of comprehensive income, and 12/31/2018 balance sheet as a result of these investments.

In FY 2007, what Lovallo & Sibony counter-balancing practice did the Blockbuster Board deploy? What cognitive bias was the practice intended to address? What is Blockbuster's value proposition and what L&S cognitive bias best describes it? Select the single best available answer from those presented below.

A) Shaking things up by firing Mr. Antioco and hiring Mr Keyes as CEO; Anchoring and insufficient adjust bias; a value-priced entertainment experience, combining the broad product depth of a specialty retailer with local neighborhood convenience; inappropriate attachment.

B) Purchased MovieLink, LLC; Champion bias; a value-priced entertainment experience, combining the broad product depth of a specialty retailer with local neighborhood convenience; inappropriate attachment.

C) Shaking things up by firing Mr. Antioco and hiring Mr Keyes as CEO; Anchoring and insufficient adjust bias; 4,855 stores in the United States; Overconfidence.

D) Purchased MovieLink, LLC; Excessive Optimism; a value-priced entertainment experience, combining the broad product depth of a specialty retailer with local neighborhood convenience; inappropriate attachment.

In FY 2007, what Lovallo & Sibony counter-balancing practice did the Blockbuster Board deploy? What cognitive bias was the practice intended to address? What is Blockbuster's value proposition and what L&S cognitive bias best describes it? Select the single best available answer from those presented below.

A) Shaking things up by firing Mr. Antioco and hiring Mr Keyes as CEO; Anchoring and insufficient adjust bias; a value-priced entertainment experience, combining the broad product depth of a specialty retailer with local neighborhood convenience; inappropriate attachment.

B) Purchased MovieLink, LLC; Champion bias; a value-priced entertainment experience, combining the broad product depth of a specialty retailer with local neighborhood convenience; inappropriate attachment.

C) Shaking things up by firing Mr. Antioco and hiring Mr Keyes as CEO; Anchoring and insufficient adjust bias; 4,855 stores in the United States; Overconfidence.

D) Purchased MovieLink, LLC; Excessive Optimism; a value-priced entertainment experience, combining the broad product depth of a specialty retailer with local neighborhood convenience; inappropriate attachment.

Suppose you are acting as a financial adviser for a client. The client wishes to build aportfolio of sharesand has sought your service. The client wishes to invest in the following companies' shares, and you have the following information (sourced from https://au.finance.yahoo.com/) about these shares:

The client will purchase 500 shares of WBC.AX, 1,000 shares of CBA.AX, and 800 shares of NAB.AX at respective closing prices of 28 Feb 2020.

Then answer the following.

1. Suppose an investor bought some shares of each of these companies on 2 Jul 2018 for the respective closing prices. The investor then sold these shares on 28 Feb 2020for the respective closing prices. The investor also received any dividends paid between these dates for each of the companies. What is the holding period return for each of these companiesconsideringthe stated purchase and sale prices and dividends?                                                           [3 Companies x 1 marks = 3 marks]
2. Assume that the holding period returns for these companies' shares, as determined in (a), are also the expected returns of these shares (i.e., assets) for the foreseeable future. With such an assumption, determine the expected return of your client's portfolio.                                [4.5 marks]
3. Suppose the risk-free rate of return is 2.50%, and the expected rate of return from the market is 17%. For the expected return of the portfolio determined in (b), determine the beta of the portfolio.      
                                                                                                                                                                                   [3 marks]
4. You may have noted that your client wishes to invest in companies all belonging to the same industry (i.e., banking and financial institutions). Do you think such type of diversification with all investments in the same industry is a good idea to reduce risks? Why or why not? Explain.       [4.5 marks]

Hrubec Products, Inc., operates a Pulp Division that manufactures wood pulp for use in the production of various paper goods. Revenue and costs associated with a ton of pulp follow:

Hrubec Products has just acquired a small company that manufactures paper cartons. This company will be treated as a division of Hrubec with full profit responsibility. The newly formed Carton Division is currently purchasing 32,000 tons of pulp per year from a supplier at a cost of $23 per ton, less a 10% purchase discount. Hrubec’s president is anxious for the Carton Division to begin purchasing its pulp from the Pulp Division if an acceptable transfer price can be worked out.

Required:

For (1) below, assume the Pulp Division can sell all of its pulp to outside customers for $23 per ton.

1. If the Pulp Division meets the price that the Carton Division is currently paying to its supplier and sells 32,000 tons of pulp to the Carton Division each year, what will be the effect on the profits of the Pulp Division, the Carton Division, and the company as a whole?

For (2)–(4) below, assume that the Pulp Division is currently selling only 63,000 tons of pulp each year to outside customers at the stated $23 price.

2. What is the lowest acceptable transfer price from the perspective of the Pulp Division? What is the highest acceptable transfer price from the perspective of the Carton Division? What is the range of acceptable transfer prices (if any) between the two divisions? Are the managers of the Carton and Pulp Divisions likely to voluntarily agree to a transfer price for 32,000 tons of pulp next year?

3. If the Pulp Division does not meet the $19 price, what will be the effect on the profits of the company as a whole?

4. Refer to (3) above. Assume that due to inflexible management policies, the Carton Division is required to purchase 32,000 tons of pulp each year from the Pulp Division at $23 per ton. What will be the effect on the profits of the company as a whole?

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