Download Investments and International Operations

Investments and International Operations
True / False Questions
1. Long-term investments are usually held as an investment of cash for the use of current
operations.
Answer: FALSE
2. Long-term investments can include funds set aside for special purposes such as bond sinking
funds.
Answer: TRUE
3. Bond sinking funds are examples of short-term investments.
Answer: FALSE
4. Equity securities reflect a creditor relationship such as investments in notes, bonds and
certificates of deposit.
Answer: FALSE
5. Cash equivalents are investments that are readily converted to known amounts of cash that
mature within three months.
Answer: TRUE
6. Short-term investments are readily convertible to cash that are intended to be converted into
cash within one year or the operating cycle, whichever is longer.
Answer: TRUE
7. Long-term investments include investments in land or other assets not used in a company's
operations.
Answer: TRUE
8. Management's intent determines whether an available-for-sale security is classified as
long-term or short-term.
Answer: TRUE
9. Management's intent and the marketability of a security determine whether or not a security
is classified as a long-term or short-term investment.
Answer: TRUE
10. Debt securities are recorded at cost when purchased and interest revenue for investments in
debt securities is recorded when earned.
Answer: TRUE
11. Any cash dividends received from equity securities are recorded as Dividend Expense.
Answer: FALSE
12. When an equity security is sold, the sale proceeds are compared with the cost and if the cost
is greater than the proceeds, a gain on the sale of the security is recorded.
Answer: FALSE
13. A company received dividends of $0.35 per share on 300 shares of stock. The journal entry
to record this transaction would be to debit Cash for $105 and credit Dividend Revenue for
$105.
Answer: TRUE
14. An investor purchased $50,000 of bonds that were held to maturity. The investor's journal
entry at maturity of the bonds should include a debit to Cash for $50,000 and a credit to
Long-Term Investments for $50,000.
Answer: TRUE
15. A company holds $40,000 of 7% bonds as a held-to-maturity security. The bondholder's
journal entry to record receipt of the semiannual interest payment includes a debit to Cash for
$2,800 and a credit to Interest Revenue for $2,800.
Answer: FALSE
Feedback: $40,000 x 7% x ½ year = $1,400
16. A controlling investor is referred to as the parent and the investee company is referred to as
the subsidiary.
Answer: TRUE
17. When an investor company owns more than 25% of the voting stock of an investee
company, it has a controlling influence.
Answer: FALSE
18. The equity method with consolidation is used in accounting for long-term investments in
equity securities with controlling influence.
Answer: TRUE
19. IFRS requires uniform accounting policies to be used throughout the group
of consolidated subsidiaries.
Answer: TRUE
20. Investments in trading securities are accounted for using the equity method with
consolidation.
Answer: FALSE
21. Comprehensive income refers to all changes in equity during a period except those due to
investments and distributions to income.
Answer: TRUE
22. Consolidated financial statements show the financial position, results of operations and
cash flows of all entities under the parent's control.
Answer: TRUE
23. Consolidated statements are prepared as if a company is organized as one entity, with the
amounts allocated for subsidiaries reported in the investment accounts.
Answer: FALSE
24. Trading securities, held-to-maturity debt securities and equity securities giving an investor
significant influence over an investee are always considered short-term investments.
Answer: FALSE
25. Multinational corporations can be U.S. companies with operations in other countries.
Answer: TRUE
26. Foreign exchange rates fluctuate due to many factors including changing political and
economic conditions.
Answer: TRUE
27. The price of one currency stated in terms of another currency is called a foreign exchange
rate.
Answer: TRUE
28. If the exchange rate for Canadian and U.S. dollars is 0.7382 to 1, this implies that 2
Canadian dollars will buy 1.48 worth of U.S. dollars.
Answer: TRUE
Feedback: $2 x 0.7382 = $1.48
29. Return on total assets can be separated into the profit margin ratio and total asset turnover.
Answer: TRUE
30. Profit margin is calculated by sales divided by net income.
Answer: FALSE
31. Net profit margin reflects the percent of net income in each dollar of net sales.
Answer: TRUE
32. All companies desire a low return on total assets.
Answer: FALSE
33. A company has net income of $130,500. Its net sales were $1,740,000 and its total assets
were $2,750,000. Its profit margin equals 7.5%.
Answer: TRUE
Feedback: Profit margin = $130,500/$1,740,000 = 7.5%
34. A company has net income of $130,500. Its net sales were $1,740,000 and its total assets
were $2,750,000. Its total asset turnover is equal to 4.7%.
Answer: FALSE
Feedback: Asset turnover = $1,740,000/$2,750,000 = 0.63
35. Investments in trading securities are always short-term investments.
Answer: TRUE
36. A company should report its portfolio of trading securities at its market value.
Answer: TRUE
37. Trading securities are securities that are purchased by trading other securities rather than by
paying cash.
Answer: FALSE
38. Unrealized gains and losses on trading securities are reported as part of net income.
Answer: TRUE
39. Investments in held-to-maturity debt securities are always current assets.
Answer: FALSE
40. A long-term investment is recorded at cost when purchased.
Answer: TRUE
41. Held-to-maturity securities are equity securities a company intends and is able to hold until
maturity.
Answer: FALSE
42. Accounting for long-term investments in held-to-maturity securities requires companies to
record interest revenue as it accrues.
Answer: TRUE
43. Long-term investments in debt securities not classified as held-to-maturity securities are
classified as available-for-sale securities.
Answer: TRUE
44. If a long-term investment in an equity security gives the investor significant influence over
the investee, the investment is classified as available-for-sale.
Answer: FALSE
45. Long-term investments in available-for-sale securities are reported at market value on the
balance sheet.
Answer: TRUE
46. Any unrealized gain or loss on available-for-sale securities is reported on the income
statement in the other gain or loss section.
Answer: FALSE
47. On May 1, Franke Co. purchases 2,000 shares of Computech stock for $25,000. This
investment is considered to be an available-for-sale investment. On July 31 (Franke's year-end),
the stock had a market value of $28,000. Franke should record a credit to Unrealized
Gain-Equity for $3,000.
Answer: TRUE
48. On May 15, Briar Company purchased 10,000 shares of Broder Corp. for $80,000. On
September 30, the stock had a market value of $85,000. The $5,000 difference must be reported
on the income statement as a $5,000 gain.
Answer: FALSE
49. An investor with significant influence owns as least 20%, but not more than 50% of another
company's voting stock.
Answer: TRUE
50. The cost method of accounting is used for long-term investments in equity securities with
significant influence.
Answer: FALSE
51. When using the equity method of accounting for investments in equity securities, the receipt
of cash dividends is recorded as revenue.
Answer: FALSE
52. Micron owns 30% of JVT stock. Micron received $6,500 in cash dividends from its
investment in JVT. The entry to record receipt of these dividends would include a debit to Cash
for $6,500 and a credit to Long-Term Investments for $6,500.
Answer: TRUE
53. When using the equity method, receipt of cash dividends increases the carrying value of an
investment in equity securities.
Answer: FALSE
54. An increase in the price of the U.S. dollar against other currencies puts U.S. companies in a
stronger competitive position internationally.
Answer: FALSE
55. To prepare consolidated financial statements when a company has an international
subsidiary, the international subsidiary's financial statements must be translated into U.S.
dollars.
Answer: TRUE
56. A U.S. company's credit sale to an international customer to be paid in a foreign currency is
recorded using the exchange rate on the date of sale.
Answer: TRUE
57. A U.S. Company's credit sale to an international customer to be paid in a foreign currency
requires using the same exchange rate for the date of sale and the cash payment date.
Answer: FALSE
58. Sanuk purchased on credit £20,000 worth of parts from a British company when the
exchange rate was $1.66 per British pound. At the year-end balance sheet date the exchange
rate increased to $1.69. Sanuk must record a gain of $600.
Answer: FALSE
Feedback:
Value of liability at date of purchase
$33,200
£20,000 x $1.66 =
Value of liability at balance sheet date
Loss
£ 20,000 x $1.69 =
33,800
$600
59. Brown Company sold supplies in the amount of 15,000 euros to a French company when
the exchange rate was $1.15 per euro. At the time of payment, the exchange rate decreased to
$1.12. Brown must record a loss of $450.
Answer: TRUE
Feedback:
Value of receivable at date of sale
Value of receivable at balance of payment
Loss
15,000 euros x $1.15 =
15,000 euros x $1.12 =
Multiple Choice Questions
60. Long-term investments:
A. Are current assets
B. Include funds earmarked for a special purpose such as bond sinking funds
C. Must be readily convertible to cash
D. Are expected to be converted into cash within one year
E. Include only equity securities
Answer: B
$17,250
16,800
$450
61. Short-term investments:
A. Are securities that management intends to convert to cash within one year or an operating
cycle, whichever is longer.
B. Include funds earmarked for a special purpose such as bond sinking funds
C. Include stocks not intended to be converted into cash
D. Include bonds not intended to be converted into cash
E. Include sinking funds not intended to be converted into cash
Answer: A
62. Long-term investments are reported in the:
A. Current asset section of the balance sheet
B. Intangible asset section of the balance sheet
C. Non-current section of the balance sheet called long-term investments
D. Plant assets section of the balance sheet
E. Equity section of the balance sheet
Answer: C
63. Long-term investments include:
A. Investments in bonds and stocks that are not marketable
B. Investments in marketable stocks that are intended to be converted into cash in the
short-term
C. Investments in marketable bonds that are intended to be converted into cash in the short-term
D. Only investments readily convertible to cash
E. Investments intended to be converted to cash within one year
Answer: A
64. At acquisition, debt securities are:
A. Recorded at their cost, plus total interest that will be paid over the life of the security
B. Recorded at the amount of interest that will be paid over the life of the security
C. Recorded at cost
D. Not recorded, because no interest is due yet
E. Recorded at the amount of dividend income to be received
Answer: C
65. At the end of the accounting period, the owners of debt securities:
A. Must report the dividend income accrued on the debt securities
B. Must retire the debt
C. Must record a gain or loss on the interest income earned
D. Must record a gain or loss on the dividend income earned
E. Must accrue interest earned on the debt securities
Answer: E
66. Equity securities are:
A. Recorded at cost to acquire them plus accrued interest
B. Recorded at cost to acquire them plus dividends earned
C. Recorded at cost to acquire them
D. Not recorded until dividends are received
E. Not recorded until interest is received
Answer: C
67. A company owns $100,000 of 9% bonds that pay interest on October 1 and April 1. The
amount of interest accrued on December 31 (the company's year-end) would be:
A. $750
B. $1,500
C. $2,250
D. $4,500
E. $9,000
Answer: C
Feedback: $100,000 x 9% x 3/12 year = $2,250
68. A company owns $400,000 of 7% bonds that pay interest on October 1 and April 1. The
amount of interest accrued on December 31 (the company's year-end) would be:
A. $4,667
B. $7,000
C. $28,000
D. $14,000
E. $9,333
Answer: B
Feedback: $400,000 x 7% x 3/12 year = $7,000
69. A company purchased $60,000 of 5% bonds on May 1. The bonds pay interest on February
1 and August 1. The amount of interest accrued on December 31 (the company's year-end)
would be:
A. $250
B. $500
C. $1,250
D. $2,500
E. $3,000
Answer: C
Feedback: $60,000 x 5% x 5/12 year = $1,250
70. A company paid $37,800 plus a broker's fee of $525 to acquire 8% bonds with a $40,000
maturity value. The company intends to hold the bonds to maturity. The cash proceeds the
company will receive upon the maturity of the bond is:
A. $37,800
B. $38,325
C. $40,000
D. $40,525
E. $43,200
Answer: C
71. A company paid $47,500 plus a broker's fee of $400 to acquire 8% bonds with a $60,000
maturity value. The company intends to hold the bonds to maturity. The cash proceeds the
company will receive upon maturity of the bonds is:
A. $60,000
B. $60,400
C. $47,900
D. $64,800
E. $52,300
Answer: A
72. Accounting for long-term investments in equity securities with controlling influence uses
the:
A. Controlling method
B. Equity method with consolidation
C. Investor method
D. Investment method
E. Consolidated method
Answer: B
73. The controlling investor is referred to as the:
A. Owner
B. Subsidiary
C. Parent
D. Investee
E. Senior entity
Answer: C
74. In accounting for non-influential securities:
A. The GAAP concept of “trading securities” is commonly referred to as “financial
assets at fair value through profit and loss” under IFRS
B. The IFRS concept of “trading securities” is commonly referred to as “financial
assets at fair value through profit and loss” under GAAP
C. The GAAP concept of “available-for-sale securities” is commonly referred to as
“available-for-sale financial assets” under IFRS
D. The IRFS concept of “available-for-sale securities” are commonly referred to as
“available-for-sale financial assets” under GAAP
E. Both A and C above are true statements
Answer: E
75. Consolidated financial statements:
A. Show the results of operations, cash flows and the financial position of all entities under a
parent's control
B. Show the results of operations, cash flows and the financial position of the parent only
C. Show the results of operations, cash flows and the financial position of the subsidiary only
D. Include the investments account on the balance sheet
E. Do not include a balance sheet
Answer: A
76. A controlling influence over the investee is based on the investor owning voting stock
exceeding:
A. 10%
B. 20%
C. 30%
D. 40%
E. 50%
Answer: E
77. Short-term investments in held-to-maturity debt securities are accounted for using the:
A. Market value method with market adjustment to income
B. Market value method with market adjustment to equity
C. Cost method with amortization
D. Cost method without amortization
E. Equity method
Answer: D
78. Long-term investments in held-to-maturity debt securities are accounted for using the:
A. Market value method with market adjustment to income
B. Market value method with market adjustment to equity
C. Cost method with amortization
D. Cost method without amortization
E. Equity method
Answer: C
79. The price of one currency stated in terms of another currency is called a(n):
A. Foreign exchange rate
B. Currency transaction
C. Historical exchange rate
D. International conversion rate
E. Currency rate
Answer: A
80. The currency in which a company presents its financial statements is known as the:
A. Multinational currency
B. Price-level-adjusted currency
C. Specific currency
D. Reporting currency
E. Historical cost currency
Answer: D
81. Return on total assets measures a company's ability to:
A. Produce net income from net sales
B. Produce sales from net assets
C. Produce net income from net assets
D. Increase its asset base from sales
E. Increase its asset base from net income
Answer: C
82. Doherty Corporation had net income of $30,000, net sales of $1,000,000 and average total
assets of $500,000. Its return on total assets is equal to:
A. 3%
B. 200%
C. 6%
D. 17%
E. 1.5%
Answer: C
Feedback: $30,000/$500,000 = 6%
83. A company has net income of $250,000, net sales of $2,000,000 and average total assets of
$1,500,000. Its return on total assets is equal to:
A. 12.5%
B. 13.3%
C. 16.7%
D. 75.0%
E. 600.0%
Answer: C
Feedback: Return on total assets = $250,000/$1,500,000 = 16.7%
84. A company had net income of $2,660,000, net sales of $25,000,000 and average total assets
of $8,000,000. Its return on total assets is equal to:
A. 3.01%
B. 10.64%
C. 32.00%
D. 33.25%
E. 300.75%
Answer: D
Feedback: Return on total assets = $2,660,000/$8,000,000 = 33.25%
85. A company had net income of $2,785,000, net sales of $250,000,000, average total assets of
$6,000,000 and equity investments of $40,000. Its return on total assets equals:
A. $3,215,000
B. 41.67%
C. 21.54%
D. 69.63%
E. 46.42%
Answer: E
Feedback: Return on total assets = $2,785,000/$6,000,000 = 46.42%
86. A company had net income of $43,000, net sales of $380,500 and average total assets of
$220,000. Its profit margin and total asset turnover were, respectively:
A. 11.3%; 1.73
B. 11.3%; 19.5
C. 1.7%; 19.5
D. 1.7%; 11.3
E. 19.5%; 11.3
Answer: A
Feedback: Profit margin: $43,000/$380,500 = 11.3%
Asset turnover: $380,500/$220,000 = 1.73
87. A company had net income of $40,000, net sales of $300,000 and average total assets of
$200,000. Its profit margin and total asset turnover were respectively:
A. 13.3%; 0.2
B. 13.3%; 1.5
C. 2.0%; 1.5
D. 1.5%; 0.2
E. 1.5%; 13.3
Answer: B
Feedback: Profit margin: $40,000/$300,000 = 13.3%
Asset turnover: $300,000/$200,000 = 1.5
88. A company had net income of $82,000, net sales of $781,000 and average total assets of
$300,000. Its profit margin and total asset turnover were respectively:
A. 10.5%; 0.38
B. 10.5%; 2.6
C. 9.52%; 2.6
D. 27.3%; 1
E. 27.3%; 9.52
Answer: B
Feedback: Profit margin: $82,000/$781,000 = 10.5%
Asset Turnover: $781,000/$300,000 = 2.6
89. A company's return on total assets equals 30%. If net income and net sales are $900,000 and
$8,900,000 respectively, what is the amount of total assets?
A. $2,670,000
B. $270,000
C. $29,666,667
D. $3,000,000
E. $2,940,000
Answer: D
Feedback: $900,000/0.30 = $3,000,000
90. A company's return on total assets equals 28%. If total assets and net sales are $4,500,000
and $10,000,000 respectively, how much is net income?
A. $2,800,000
B. $4,060,000
C. $1,260,000
D. $14,500,000
E. $2,030,000
Answer: C
Feedback: $4,500,000 * 0.28 = $1,260,000
91. Investments in trading securities:
A. Include only equity securities
B. Are reported as current assets
C. Include only debt securities
D. Are reported at their cost, no matter what their market value
E. Are long-term investments
Answer: B
92. A decrease in the fair market value of a security that has not yet been realized through an
actual sale of the security is called a(n):
A. Contingent loss
B. Realizable loss
C. Unrealized loss
D. Capitalized loss
E. Market loss
Answer: C
93. Investments in debt and equity securities that the company actively manages and trades for
profit are referred to as short-term investments in:
A. Available-for-sale securities
B. Held-to-maturity securities
C. Trading securities
D. Realizable securities
E. Liquid securities
Answer: C
94. Held-to-maturity securities are:
A. Always classified as Long-Term Liabilities
B. Part of equity
C. Debt securities that a company intends and is able to hold to maturity
D. Equity securities that a company intends and is able to hold to maturity
E. Equity securities that have a maturity value greater than cost
Answer: C
95. Available-for-sale debt securities are:
A. Recorded at cost and remain at cost over the life of the investment
B. Reported at historical cost, adjusted for the amortized amount of any difference between cost
and maturity value
C. Reported at market value on the balance sheet
D. Intended to be held to maturity
E. Always classified with Long-Term Liabilities
Answer: C
96. Morgan Company purchased 2,000 shares of Asta's common stock for $143,000 as a
long-term investment and is considered available-for-sale. The par value of the stock was $1
per share. Morgan paid $375 in commissions on the transaction. The entry to record the
transaction would include a:
A. Credit to Common Stock for $2,000
B. Credit to Common Stock for $143,000
C. Credit to Common Stock for $143,375
D. Debit to Long-Term Investments for $143,000
E. Debit to Long-Term Investments for $143,375
Answer: E
97. Six months ago, a company purchased an investment in stock for $65,000. This investment
is considered available-for-sale. The current market value of the stock is $68,500. The company
should record a:
A. Debit to Unrealized Loss-Equity for $3,500
B. Credit to Unrealized Gain-Equity for $3,500
C. Debit to Investment Revenue for $3,500
D. Credit to Market Adjustment - Available-for-Sale for $3,500
E. Credit to Investment Revenue for $3,500
Answer: B
Feedback: Current market value $68,500 - cost $65,000 = $3,500
Question]
98. Micron owns 3,000 shares of JVT. JVT has 25,000 total shares of stock outstanding. JVT
paid $3 per share in cash dividends to its stockholders. Micron should record a:
A. Debit to Dividends for $75,000
B. Debit to Dividends for $9,000
C. Debit to Cash for $9,000
D. Debit to Long-Term Investments for $9,000
E. Credit to Long-Term Investments for $9,000
Answer: C
Feedback: Percent of total stock owned: 3,000 shares/25,000 shares = 12%
3,000 x $3 = $9,000
99. Acme owns 4,000 shares of XYZ. XYZ has 50,000 total shares of stock outstanding. XYZ
paid $0.82 per share in cash dividends to its stockholders. Acme should record a:
A. Debit to Dividends for $41,000
B. Debit to Dividends for $3,280
C. Debit to Cash for $3,280
D. Debit to Long-Term Investments for $3,280
E. Credit to Long-Term Investments for $3,280
Answer: C
Feedback: Percent of total stock owned: 4,000 shares/50,000 shares = 8%
4,000 x $0.82 = $3,280
100. A company had investments in long-term available-for-sale securities. At the end of the
current year the company's portfolio had a $162,000 cost and $164,000 market value.
What is the current year's adjustment to market value given the following account balances at
the end of the prior year?
Market Adjustment
Unrealized Gain Equity
Available-for-Sale
3,000
3,000
A.
Market Adjustment – Available-for-Sale...............
2,000
Unrealized Gain Equity..........................................
B.
Market Adjustment – Available-for-Sale...............
1,000
Unrealized Gain Equity..........................................
2,000
1,000
C.
Unrealized Gain Equity..........................................
1,000
Market Adjustment – Available-for-Sale...............
1,000
D.
Unrealized Gain Equity..........................................
Market Adjustment – Available-for-Sale...............
2,000
2,000
E.
Unrealized Gain Equity..........................................
3,000
Market Adjustment – Available-for-Sale...............
Answer: C
Feedback:
Prior Year Balances
Desired Current Year Balances
Amount of decrease
$3,000 excess of market over cost
2,000 excess of market over cost
1,000
3,000
101. A company had investments in long-term available-for-sale securities. At the end of the
current year the company's portfolio had a $731,000 cost and $730,000 market value.
What is the current year's adjustment to market value given the following account balances at
the end of the prior year?
Market Adjustment
Available-for-Sale
5,000
Unrealized Gain (Loss)
Equity
5,000
A.
Market Adjustment – Available-for-Sale...............
Unrealized Gain Equity..........................................
B.
Market Adjustment – Available-for-Sale...............
Unrealized Gain Equity..........................................
C.
Unrealized Gain Equity..........................................
Market Adjustment – Available-for-Sale...............
D.
Unrealized Gain (Loss)
-Equity..........................................
Market Adjustment – Available-for-Sale...............
E.
Unrealized Gain (Loss) - Equity..................................
Market Adjustment – Available-for-Sale...............
Answer: D
Feedback:
Prior Year Balances
Desired Current Year Balances
Amount of decrease
1,000
1,000
6,000
6,000
1,000
1,000
6,000
6,000
4,000
$5,000 excess of market over cost
1,000 excess of cost over market
6,000
4,000
102. Vans purchased 40,000 shares of Skechers common stock for $232,000. This represents
40% of the outstanding stock. The entry to record the transaction includes a:
A. Debit to Long-Term Investments for $92,800
B. Debit to Long-Term Investments for $232,000
C. Credit to Long-Term Investments for $92,800
D. Credit to Long-Term Investments for $232,000
E. Debit to Long-Term Investment for $40,000
Answer: B
103. If a company owns more than 20% of the stock of another company and the stock is being
held as a long-term investment, which method would the investor normally use to account for
this investment?
A. Equity method
B. Market value method
C. Historical cost method
D. Straight-line method
E. Effective method
Answer: A
104. Micron owns 35% of Martok. Martok pays a total of $47,000 in cash dividends for the
period. Micron's entry to record the dividend transaction would include a:
A. Credit to Long-Term Investments for $16,450
B. Debit to Long-Term Investments for $16,450
C. Debit to Cash for $47,000
D. Credit to Cash for $16,450
E. Credit to Investment Revenue for $47,000
Answer: A
Feedback: 35% x $47,000 = $16,450
105. Chung owns 40% of Lu's common stock. Lu pays $97,000 in total cash dividends to its
shareholders. Chung's entry to record this transaction should include a:
A. Debit to Dividends for $97,000
B. Debit to Dividends for $38,800
C. Debit to Long-Term investments for $97,000
D. Credit to Long-Term Investments for $38,800
E. Credit to Cash for $97,000
Answer: D
Feedback: 40% x $97,000 = $38,800
106. Parris Corporation purchased 40% of Samitz Corporation for $100,000 on January 1. On
November 17 of the same year, Samitz Corporation declared total cash dividends of $12,000.
At year-end, Samitz Corporation reported net income of $60,000. The balance in the Parris
Corporation's Long-Term Investment in Samitz Corporation at December 31 should be:
A. $80,800
B. $100,000
C. $95,200
D. $119,200
E. $124,000
Answer: D
Feedback: $100,000 - (40% x $12,000) + (40% x $60,000) = $119,200
107. Clark Corporation purchased 40% of IT corporation for $125,000 on January 1. On May
20 of the same year, IT Corporation declared total cash dividends of $30,000. At year-end, IT
Corporation reported net income of $150,000. The balance in Clark Corporation's Long-Term
Investment in IT Corporation account as of December 31 should be:
A. $77,000
B. $125,000
C. $173,000
D. $197,000
E. $370,000
Answer: C
Feedback: $125,000 - (40% x $30,000) + (40% x $150,000) = $173,000
108. On January 4, 2008, Larsen Company purchased 5,000 shares of Warner Company for
$59,500 plus a broker's fee of $1,000. Warner Company has a total of 25,000 shares of common
stock outstanding and it is presumed the Larsen Company will have a significant influence over
Warner. During each of the next two years, Warner declared and paid cash dividends of $0.85
per share. Its net income was $72,000 and $67,000 for 2008 and 2009, respectively. The
January 12, 2010 entry to record the sale of 3,000 shares of Warner Company stock for $39,000
cash should be:
A.
Cash......................................................... 39,000
Loss on Sale of Investments................... 2,400
Long-Term Investments.................
B.
Cash.........................................................
Loss on Sale of Investments...................
Long-Term Investments...................
41,400
39,000
8,800
47,880
C.
Cash......................................................... 39,000
Loss on Sale of Investments...................
60
Long-Term Investments..................
D.
Cash......................................................... 39,000
Gain on Sale of Investments..............
Long-Term Investments....................
E.
Cash.........................................................
Loss on Sale of Investments...................
Long-Term Investments...................
8,750
30,250
39,000
21,500
60,500
Answer: B
Feedback:
Purchase price of investment:
Dividends received:
2008 ($0.85 x 5,000)
2009 ($0.85 x 5,000)
2008 Income (20% x $72,000)
2009 Income (20% x $67,000)
Book Value of Investment at 1/12/10
Book Value of 60% of Investment
Cash received
Loss on sale
38,940
$60,500
(4,250)
(4,250)
14,400
13,400
$79,800
$47,880
39,000
$8,880
109. On January 1, 2008, Posten Company purchased 10,000 shares of Toma Company for
$78,000 plus a broker's fee of $2,000. Toma Company has a total of 40,000 shares of common
stock outstanding and it is presumed the Posten Company will have a significant influence over
Toma. Toma declared and paid cash dividends of $0.93 per share in 2008 and 2009. Toma's net
income was $190,000 and $270,000 for 2008 and 2009 respectively. The January 1, 2010 entry
on the books of Posten Company to record the sale of 4,500 shares of Toma Company stock for
$85,000 cash should be:
A)
Cash ............................................................. 85,000
Loss on Sale of Investments........................ 110,000
Long-Term Investments ........................
195,000
B)
Cash .............................................................
Gain on Sale of Investments .................
Long-Term Investments ........................
85,000
57,370
27,630
C)
Cash .............................................................
85,000.00
Gain on Sale of Investments .................
Long-Term Investments ........................
76,195.75
8,804.25
D)
Cash .............................................................
Gain on Sale of Investments .................
Long–Term Investments .......................
85,000
Cash .............................................................
Gain on Sale of Investments .................
Long–Term Investments .......................
85,000
5,620
79,380
E)
Answer: E
Feedback:
5,000
80,000
Purchase price of investment:
Dividends received:
2008 ($0.93 x 10,000)
2009 ($0.93 x 10,000)
2008 Income (25% x $190,000)
2009 Income (25% x $270,000)
Book Value of Investment at 1/01/10
Book Value of 45% of Investment
Cash received
Gain on sale
$80,000
(9,300)
(9,300)
47,500
67,500
$176,400
$79,380
85,000
$5,620
110. The price of one currency stated in terms of another currency is referred to as the:
A. Historical exchange rate
B. Foreign exchange rate
C. Consolidated exchange rate
D. General exchange rate
E. Multinational exchange rate
Answer: B
111. A U.S. company makes a sale to a foreign customer payable in 30 days in the customer's
currency. The sale would be recorded by the U.S. company on the date:
A. Of sale using a projected estimate of the U.S. dollar value at payment date
B. Of sale using a 30-day average U.S. dollar value
C. Of sale using the current dollar value
D. Of sale using the foreign currency value
E. When payment is received
Answer: C
112. When a credit sale is denominated in a foreign currency, the foreign exchange rate used to
record the sale is the current exchange rate:
A. Thirty days from the date of sale
B. At the end of the seller's fiscal year
C. At the end of the buyer's fiscal year
D. On the date final payment is made
E. On the date of the sale
Answer: E
113. On June 18, Johnson Company (a U.S. Company) sold merchandise to the Frater
Company of Denmark for 60,000 Euros, with a payment due in 60 days. If the exchange rate
was $1.14 per euro on the date of sale and $1.35 per euro on the date of payment, Johnson
Company should recognize a foreign exchange gain or loss in the amount of:
A. $60,000 gain
B. $60,000 loss
C. $68,400 loss
D. $12,600 gain
E. $12,600 loss
Answer: D
Feedback:
Value of receivable at date of sale: 60,000 euros x $1.14/euro = $68,400
Amount collected:
60,000 euros x $1.35/euro = 81,000
Foreign exchange gain:
$12,600
114. On November 12, Kendra, Inc., a U.S. Company, sold merchandise on credit to Nakakura
Company of Japan at a price of 1,500,000 yen. The exchange rate was $0.00837 per yen on the
date of sale. On December 31, when Kendra prepared its financial statements, the exchange rate
was $0.00843. Nakakura Company paid in full on January 12, when the exchange rate was
$0.00861. On December 31, Kendra should prepare the following journal entry for this
transaction:
A.
Sales...................................
Foreign Exchange Gain.....
B.
Foreign Exchange Loss.......
Sales.....................................
C.
Accounts Receivable – Nakakura Company...........
Foreign Exchange Gain.......................................
D.
Foreign Exchange Gain or Loss.......................
Accounts Receivable – Nakakura Company....
90
90
90
90
90
90
90
90
E. No journal entry is required until the amount is collected
Answer: C
Feedback:
Value of receivable at date of sale:
1,500,000 x .00837= $12,555
Value of receivable at year end:
1,500,000 x .00843= 12,645
Gain
$
90
115. On November 12, Kera, Inc., a U.S. Company, sold merchandise on credit to Kakura
Company of Japan at a price of 1,500,000 yen. The exchange rate was $0.00837 on the date of
sale. On December 31, when Kera prepared its financial statements, the exchange rate was
$0.00843. Kakura Company paid in full on January 12, when the exchange rate was $0.00861.
On January 12, Kera should prepare the following journal entry for this transaction:
A.
Cash................................................................ 12,915
Accounts Receivable – Kakura Company..
12,555
Foreign Exchange.......................................
360
B.
Cash...............................................................
12,555
Foreign Exchange Loss.............................
360
Accounts Receivable – Kakura Company.
12,915
C.
Cash...............................................................
12,915
Accounts Receivable – Kakura Company.
12,645
Foreign Exchange Gain.............................
90
D.
Cash...............................................................
12,645
Foreign Exchange Loss........................
90
Accounts Receivable – Kakura Company...
12,915
E.
Cash................................................................. 12,915
Foreign Exchange Gain...........................
270
Accounts Receivable – Kakura Co….
12,645
Answer: E
Feedback:
Value of receivable at December 31: 1,500,000 x .00843=
Amount collected:
1,500,000 x .00861=
Foreign exchange gain
$12,645
12,915
$ 270
Matching Questions
116. Match the following terms with the appropriate definitions.
1. A corporation controlled by another company
when the parent owns more than 50% of the
Long-term
subsidiary's voting stock
investments
2. A company that owns a more than 50% controlling
interest in a subsidiary
Subsidiary
3. A measure of operating efficiency, computed as
Unrealized gain or
net income divided by average total assets
loss
4. Debt securities that a company intends and is able
Consolidated
to hold until maturity
financial statements
5. An accounting method for long-term investments
in equity when the investor has significant influence
over the investee
Parent company
6. Debt and equity securities not classified as trading
Available-for-sale
or held-to-maturity
securities
7. Debt and equity securities that a company intends
Held-to-maturity
to actively manage and trade for profit
securities
8. A change in market value that is not yet realized
through an actual sale
Trading securities
9. Investments in equity and debt securities that are
not readily convertible to cash or are not intended to
be converted to cash in the short term
Return on total assets
10. Financial statements that show the financial
position, results of operations and cash flows of all
entities under the parent's control, including those of
any subsidiaries
Equity method
9
1
8
10
2
6
4
7
3
5
Essay Questions
117. Explain the difference between short-term and long-term investments and give examples
of each.
Answer:
Short-term investments are securities expected to be converted into cash within the longer of
one year or the operating cycle of the company and are readily convertible to cash. All other
investments in securities are long-term investments. Long-term investments may include equity
and debt securities and other assets not used in operations and those held for a special purpose
such as bond sinking funds.
118. What are the accounting basics for debt securities, including recording their acquisition,
interest earned and their disposal?
Answer:
At acquisition, debt securities are recorded at cost. If the interest periods do not match up with
the investor's accounting period, interest earned and interest receivable must be accrued at
year-end. Interest must also be recorded on the interest payment dates. When the debt matures,
the cash received is debited and the debt is credited.
119. What are the accounting basics for equity securities, including acquisition, dividends
earned and disposition?
Answer:
Equity securities are recorded at their cost when acquired. Any cash dividends received are
credited to Dividend Revenue and reported in the income statement. When the securities are
sold, sale proceeds are compared with the cost and any gain or loss is recorded.
120. What is comprehensive income and how is it usually reported in the financial statements?
Answer:
Comprehensive income refers to all changes in equity for a period except those due to
investments and distributions to owners. It includes all revenues, expenses, gains and losses
reported in the income statement as well as gains and losses that bypass net income, but affect
equity. An example would be an unrealized gain or loss on long-term available-for-sale
securities. These items are usually reported as a part of the statement of stockholders' equity.
121. Explain how investors report investments in equity securities when the investor has a
controlling influence over an investee.
Answer:
If an investing company controls another company called the investee (such as when the
investor owns more than 50% of another company's voting stock), then the investor's financial
reports are prepared on a consolidated basis. These reports show the financial position, results
of operations and cash flows of all entities under the parent's control, including all subsidiaries.
122. Define the foreign exchange rate between two currencies. Explain its effect on business
transactions conducted in a foreign currency.
Answer:
A foreign exchange rate is the price of one currency stated in terms of another currency. A
company with transactions in a foreign currency may experience a change in the exchange rate
between the time of a transaction and its payment date. If this occurs, the company will
experience a foreign exchange gain or loss.
123. Define the return on total assets and explain how it is used to measure a company's
financial performance.
Answer:
The return on total assets is calculated by dividing net income by average total assets. It can be
computed from the profit margin ratio and total asset turnover. The return on total assets
reflects a company's ability to use its assets to make a profit. It can also be used to assess a
company's performance compared to competitors.
124. Identify the three types of classifications for non-influential investments in securities.
Answer:
Non-influential investments in securities can be classified as: (1) trading, (2) held-to-maturity
and (3) available for sale.
125. Explain how to record the sale of trading securities.
Answer:
When trading securities are sold, the difference between the net proceeds (sale price less fees)
and the cost of the individual trading securities that are sold is recognized as a gain or loss. Any
prior period market adjustment is not used to compute the gain or loss from the sale. Gains and
losses are included in net income for the period.
126. Explain how held-to-maturity debt securities are accounted for at and after acquisition and
how they are reported in the financial statements.
Answer:
Held-to-maturity (HTM) debt securities are recorded at cost when purchased. After acquisition,
any interest is recorded as it is earned. A HTM debt security is classified as a current asset if the
maturity date is within the longer of one year or the current operating cycle. A HTM debt
security is classified as a long-term asset if the maturity date extends beyond the longer of one
year or the current operating cycle. HTM debt securities are reported at their amortized cost.
There is no market adjustment made to the portfolio of the HTM securities, whether current or
long-term.
127. Explain how available-for-sale debt and equity securities are accounted for at and after
acquisition and how they are reported in financial statements.
Answer:
Available-for-sale debt and equity securities are recorded at cost when purchased. After
acquisition they are reported on the balance sheet at their market values with any unrealized
holding gains or losses shown in the equity section of the balance sheet. Gains and losses
realized on the subsequent sale of these investments are reported in the income statement.
128. Explain how equity securities having significant influence are accounted for and reported
in the financial statements. Include a discussion of the criterion for these securities in terms of
an investee's voting stock.
Answer:
The equity method of accounting for securities is used when an investor has a significant
influence over an investee. Significant influence is presumed to exist when an investing
company owns 20% or more of the investee's voting stock, but not more than 50% ownership.
The equity method requires that an investor record its share of the investee's earnings with a
debit to the investment account and a credit to the related revenue account. Cash dividends
received increase the cash account and reduce the balance of the investment account by the
same amount.
129. Explain how transactions (both sales and purchases) in a foreign currency are recorded and
reported.
Answer:
When a selling company makes a credit sale to a foreign customer and the sales terms call for
payment in a foreign currency, the selling company must translate the foreign currency into
dollars to record the receivable. If the exchange rate changes before payment is received,
foreign exchange gains or losses are recognized in the year they occur. The same method is
required when a buying company makes a credit purchase from a foreign supplier and is
required to make payment in a foreign currency. Finally, a company with a foreign subsidiary
that maintains its accounts in a foreign currency must translate these account balances into
dollars before they are reported in consolidated statements.
Short Answer Questions
130. On April 1 of the current year, a company paid $150,000 cash to purchase 7%, 10-year
bonds that had a par value of $150,000 and paid interest semiannually each April 1 and October
1. The company intends to hold these bonds until they mature. Prepare the journal entry to
record the purchase of the bond.
Answer:
4/1
Long-Term Investments...........................
Cash...................................................
150,000
150,000
131. On April 1 of the current year, a company paid $150,000 to purchase 7%, 10-year bonds
that had a par value of $150,000 and paid interest semiannually each April 1 and October 1. The
company intends to hold the bonds until they mature. Prepare the journal entry to record the
receipt of the first semiannual interest payment on October 1 of the current year.
Answer:
10/1
Cash (150,000 x .07 x ½).............................
5,250
Interest Earned.........................................
5,250
132. On April 1 of the current year, a company paid $150,000 to purchase 7%, 10-year bonds
that had a par value of $150,000 and paid interest semiannually on October 1 and April 1. The
company intends to hold the bonds until they mature. Prepare the journal entry to recognize
accrued interest as of December 31 of the current year.
Answer:
Dec 31
Interest Receivable ($150,000 x .07 x 3/12)......
2,625
Interest Earned..............................................
2,625
133. On April 1 of the current year, a company paid $150,000 to purchase 7%, 10-year bonds
that had a par value of $150,000 and paid interest semiannually on October 1 and April 1. The
company intends to hold the bonds until they mature. Prepare the journal entry to record the
receipt of the semiannual interest payment on April 1 of the following year.
Answer:
Apr 1
Cash ($150,000 x .07 x 6/12)............................
5,250
Interest Earned ($150,000 x .07 x 3/12).........
2,625
Interest Receivable ($150,000 x .07 x 3/12)...
2,625
134. A company paid $500,000 for 12% bonds with a par value of $500,000. The bonds pay 6%
interest semiannually on September 1 and March 1. The company intends to hold the bonds
until they mature. Prepare the journal entries for the following dates and transactions related to
this bond acquisition.
(1) Bonds purchased on September 1, 2009.
(2) Year-end adjusting entry, December 31, 2009.
(3) Receipt of semiannual interest March 1, 2010.
(4) Redemption of the bonds at maturity on August 31, 2016.
Answer:
(1)
9/1/09
Long-Term Investments (HTM)......
500,000
Cash.............................................
500,000
(2)
12/31/09
(3)
3/1/10
(4)
8/31/16
Interest Receivable..................................... 20,000
Interest Earned ($500,000 x .06 x 4/6)...
20,000
Cash ($500,000 x .06)...................
Interest Receivable..............
Interest Earned......................
20,000
10,000
30,000
Cash.................................................. 500,000
Long-Term Investments (HTM)...
500,000
135. A company reported net income of $100,000 and average total assets of $425,000.
Calculate its return on total assets.
Answer: $100,000/$425,000 = 23.5%
136. A company had net income of $450,000 in 2009 and $620,000 in 2010. The company had
average total assets of $2,500,000 in 2009 and $3,000,000 in 2010. Calculate the return on total
assets for 2009 and 2010. Comment on the results.
Answer:
(a.) 2009: $450,000/$2,500,000 = 18.0%
(b.) 2010: $620,000/$3,000,000 = 20.7%
(c.) The company appears to be more efficient in the use of its assets by generating a higher
return in 2010 than in 2009.
137. A company had net income of $45,000, net sales of $390,000 and average total assets of
$250,000 for the current year. Calculate this company's profit margin, total asset turnover and
return on total assets.
Answer:
Profit margin: $45,000 / $390,000 =
11.5%
Total asset turnover: $390,000 / $250,000 = 1.56
Return on total assets: $45,000 / $250,000 = 18.0%
138. A company reported net income of $275,000, net sales of $2,500,000 and average total
assets of $2,100,000 for the current year. Calculate this company's profit margin, total asset
turnover and return on total assets.
Answer:
Profit margin: $275,000 / $2,500,000 =
11%
Total asset turnover: $2,500,000 / $2,100,000 =
Return on total assets: $275,000 / $2,100,000 =
1.19
13.1%
139. A company reported net income for 2009 of $98,000 and $106,000 in 2010. It also
reported net sales of $735,000 in 2009 and $798,000 in 2010. The company's average total
assets in 2009 were $1,850,000 and $1,720,000 in 2010. Calculate this company's profit
margin, total asset turnover and return on total assets for 2009 and 2010. Comment on the
results.
Answer:
2009:
Profit margin: $98,000 / $735,000 =
13.3%
Total asset turnover: $735,000 / $1,850,000 =
0.397
Return on total assets: $98,000 / $1,850,000 =
5.3%
2010:
Profit margin: $106,000 / $798,000 =
Total asset turnover: $798,000 / $1,720,000 =
Return on total assets: $106,000 / $1,720,000 =
13.3%
0.464
6.2%
Comment: This company did not increase its profit margin from 2009 to 2010, however, it did
increase its total asset turnover, mainly because total assets declined with no ill effects on sales.
The effect is an overall increase in return on total assets.
140. A company had net income of $76,000 in 2009 and $88,000 in 2010. Its net sales were
$640,000 in 2009 and $611,000 in 2010. Its average total assets in 2009 were $670,000 and
$712,000 in 2010. Calculate the profit margin, total asset turnover and return on total assets for
both years. Comment on the results.
Answer:
2009:
Profit margin: $76,000 / $640,000 =
11.9%
Total asset turnover: $640,000 / $670,000 =
0.955
Return on total assets: $76,000 / $670,000 =
11.3%
2010:
Profit margin: $88,000 / $611,000 =
Total asset turnover: $611,000 / $712,000 =
Return on total assets: $88,000 / $712,000 =
14.4%
0.858
12.4%
Comment: This company increased its profit margin, even though sales declined from 2009 to
2010. Total asset turnover decreased, but the increase in profit margin was large enough for
there to be an overall increase in return on total assets.
141. Wiffery Company had the following trading securities in its portfolio at December 31. The
Market Adjustment - Trading account had balance of zero prior to year-end adjustment. Prepare
the appropriate adjusting journal entry.
Answer:
Short-Term Investments
IBM....................................................................
Microsoft............................................................
Intel.....................................................................
Dell......................................................................
Totals
Feedback: $167,700 - $165,700 = $2,000 unrealized loss
Dec. 31
Unrealized loss – Income.................... 2,000
Market Adjustment – Trading..........
Cost
$ 24,500
51,000
62,300
29,900
$167,700
2,000
Market Value
$ 25,900
48,600
61,000
30,200
$165,700
142. Haladam Company had the following transactions relating to investments in trading
securities during the year. Prepare the required general journal entries for these transactions.
May 4 Haladam purchased 600 shares of Cob Company stock at $120 per share plus a $750
brokerage fee.
July 1
Haladam received a $2.50 per share cash dividend on the Cob Company stock.
Sept. 15 Sold 300 shares of the Cob Company stock for $125 per share, less a $450
brokerage fee.
Dec. 31 The market value of the Cob Company stock (the only investment that Haladam
owns) is $124 per share. The balance of the Market Adjustment – Trading a zero
balance prior to adjustment.
Answer:
May 4
July 1
Sept. 15
Short term investments – Trading........................
Cash [(600 x $120) + $750]...........................
72,750
Cash (600 x $2.50)...............................................
Dividend revenue............................................
Cash [($300 x 125) - $450]..................................
Short term investments – Trading....................
Gain on sale of short term investments.............
1,500
72,750
1,500
37,050
36,375
675
Short term investment sold = $72,750 / 2 =$36,375
Gain = $37,050 - $36,375 = $675
Dec. 31
Market adjustment – Trading.................................
Unrealized gain – Income.................................
Unrealized gain – ($124 x 300) - $36,375 = $825
825
825
143. Clarity Corporation had the following transactions involving investments in trading
securities during the year. Prior to these transactions, Clarity never had any investments in
trading securities. Prepare the required general journal entries to record these transactions.
Feb. 16
Purchased 800 shares of GN Corporation stock at $28 per plus a $400 brokerage
fee
Feb. 26
Purchased 500 shares of Honeyville Co. stock at $19 per share plus a $300
brokerage fee.
Mar. 2
Received a $0.95 per share dividend from the GN Corporation.
Mar. 28
Sold 200 shares of GN Corporation stock for $31 per share less a $150 brokerage
fee.
Apr. 20
Sold 150 shares of Honeyville Co. stock at $17 per share less a $100 brokerage
fee.
Apr. 30
The company is preparing quarterly financial statements, so it must prepare an
adjusting entry for the market adjustment on the trading securities. At April 30,
the GN stock has a market value of $30 per share, and the Honeyville stock has a
market value of $16 per share.
Answer:
Feb. 16
Feb. 26
Mar. 2
Mar. 28
Apr. 20
Apr. 30
Short term investments – Trading........................
Cash [(800 x $28) + $400].............................
Short term investments – Trading........................
Cash [(500 x $19) + $300].............................
Cash (800 x $0.95)..............................................
Dividend revenue...........................................
Cash [(200 x $31) - $150]..................................
Short term investments – Trading.................
Gain on sale of Short term investments........
Cash [(150 x $17) - $100].................................
Loss on sale of Short term investments.............
Short term investments – Trading................
Short term investment = $9,800 x (150/500) = $2,940
Loss on sale = $2,940 - $2,450 = $490
Unrealized loss – Income..................................
Market adjustment – Trading.......................
22,800
22,800
9,800
9,800
760
760
6,050
5,700
350
2,450
490
2,940
360
360
Investment
Cost
Market
GN
$22,800 - $5,700 = $17,100
600 x $30 = $18,000
Honeyville
$ 9,800 - $2,940 = 6,860
350 x $16 = 5,600
Totals
$23,960
$23,600
Unrealized loss = $23,960 - $23,600 = $360
144. Hector Corp. purchased 1,000 shares of Landmark Corp.'s common stock for $36,850
cash. This purchase is considered a long-term available-for-sale investment by Hector. Prepare
Hector's journal entry to record the purchase.
Answer:
Long Term Investments (AFS)...........................................
36,850
Cash...............................................................................
36,850
145. On October 31, Mayfair Co. received cash dividends of $0.15 per share from its
investment in Carter Corp.'s common stock. Mayfair owned 1,200 shares of Carter Corp.'s
stock on October 31. The investment is considered available for sale. Prepare the investor's
journal entry to record the receipt of the cash dividends.
Answer:
Oct. 31
Cash (1,200 x $0.15)...........................
180
Dividend Revenue..........................
180
146. Marina, Inc., held 1,500 of Navia common stock with a cost of $36,900. These shares were
classified as a long-term available-for-sale investment. It sold the shares on December 13 for
$42,100. Prepare the necessary journal entry to record this sale.
Answer:
Dec. 13 Cash.......................................................................
42,100
Long Term Investments (AFS)........................
36,900
Gain on Sale of Long-Term Investment...........
5,200
147. Columbia Corp. held 1,500 of Vianco common stock with a cost of $74,387. These shares
were classified as a long-term available-for-sale investment. It sold the shares on December 13
for $55,275. Prepare the journal entry to record this sale.
Answer:
Dec. 13 Cash.........................................................................
55,275
Loss on Sale of Long-Term Investment..................
19,112
Long-Term Investments (AFS)..........................
74,387
148. Chrono Co. held bonds of Ayrford Co. with a cost of $125,000 and a year-end market
value of $123,700. Chrono also held 1,500 shares of Avian common stock with a cost of
$25,000 and a year-end market value of $26,100. These are classified as long-term
available-for-sale securities. Prepare the journal entry to record the market value of the
investments as of its December 31 year-end.
Answer:
Cost
Ayrford Co. bonds..........................
Avian Co. common stock................
Total.................................................
Market
Holding
Value
Gain (loss)
$125,000
$123,700
$(1,300)
25,000
26,100
1,100
$150,000
$149,800
$ (200)
Feedback:
Dec. 31 Unrealized Loss Equity..............................................
Market Adjustment – Available-for-Sale (LT).....
200
200
149. Detalo Co. held bonds of Schooner Corp. with a cost of $125,000 and a market value of
$127,000. Detalo also held 1,500 shares of Tranco common stock with a cost of $25,000 and a
market value of $24,700. These are classified as long-term available-for-sale securities. Prepare
the journal entry to record the market value of the investments as of December 31.
Answer:
Dec. 31 Market Adjustment – Available-for-Sale......................
1,700
Unrealized Gain-Equity...........................................
1,700
Schooner Co. bonds.............................
Trance common stock..........................
Total.....................................................
Cost
$125,000
25,000
$150,000
Market
value
$127,000
24,700
$151,700
Holding gain
(loss)
$2,000
(300)
$1,700
150. On January 2, Froxel Company purchased 10,000 shares of Sandia Corp. Common Stock
at $19 per share plus a $3,000 commission. This represents 30% of Sandia Corp.'s outstanding
stock. On August 6, Sandia Corp. declared and paid cash dividends of $1.75 per share and on
December 31 it reported net income of $150,000. Prepare the necessary entries Froxel
Company must make to account for these transactions and events.
Answer:
Jan. 2
Aug. 6
Dec. 31
Long-Term Investments...........................................
Cash [(10,000 x $19) + $3,000]..........................
Cash [10,000 x $1.75]..............................................
Long-Term Investments......................................
Long-Term Investments...........................................
Earnings from Investments ($150,000 x 30%)...
193,000
193,000
17,500
17,500
45,000
45,000
151. Kramer Corporation had the following long-term investment transactions.
Jan. 2
Oct. 15
Dec. 31
Purchased 5,000 shares of Optic, Inc. for $42 per share plus $7,000 in fees and
commission. These shares represent a 35% ownership of Optic.
Received Optic, Inc. cash dividend of $2 per share.
Optic reported a net loss of $66,000 for the year.
Prepare the journal entries Kramer Corporation should record for these transactions and events.
Answer:
Jan. 2
Oct.15
Dec. 31
Long-Term Investments.................................
Cash [(5,000 x $42) + $7,000].................
Cash (5,000 x $2).........................................
Long-Term Investments.................................
Loss from Long-Term Investments
($66,000 x 35%)........................................
Long-Term Investments..............................
217,000
217,000
10,000
10,000
23,100
23,100
152. Savan Co. purchased 14,000 shares of Briton Corporation's 40,000 shares of common
stock on December 31, 2009. This represented 35% of Briton's outstanding shares and gave
Savan Co. significant influence over Briton's management and operations. On October 11,
2010, Briton declared and paid cash dividends of $30,000. On December 31, 2010, Briton
reported net income of $125,000 for the year. Prepare the journal entries Savan Co. should
record to account for its investment in Briton Corporation during 2010.
Answer:
Oct. 11
Dec. 31
Cash [$30,000 x 35%]...................................
Long-Term Investments...........................
Long-Term Investments................................
Earnings From Long-Term Investments
($125,000 x 35%)...............................
10,500
10,500
43,750
43,750
153. On January 1, 2009, Frederich Corporation purchased 7,500 shares of Sport Tech, Inc. as a
long-term investment for a total of $235,000. The 7,500 shares represent 30% of the
outstanding (25,000) shares of Sport Tech. Prepare the journal entries for Frederich to record
the following transactions and events:
December 31, 2009
February 1, 2010
November 1, 2010
December 31, 2010
Answer:
12/31/09
2/1/10
SportTech reported net income of $66,000 for 2009.
Sold 1,875 of the SportTech shares for $34 per share. In addition,
$1,350 in fees and commissions were paid by Frederich on this
sale.
Frederich received a $0.90 per share cash dividend from
SportTech.
SportTech reported net income of $146,000 for 2010
Long-Term Investments.................................
Earnings from Long-Term Investment.....
19,800
19,800
Cash [(1,875 x $34) - $1,350]...............................
62,400
Loss on sale of Investment....................................
1,300
Long-Term Investments...................................
63,700
Carrying value of stock: ($235,000 + $19,800) x 1,875/7,500 = $63,700
Loss on sale = $63,700 - $62,400 = $1,300
12/31/10 Long Term Investments......................................
$32,850
Earnings from Long-Term Investment...........
32,850
$146,000 x [(7,500 – 1,875) / 25,000]
154. Rhone Importers purchases automotive parts from Germany. Prepare journal entries for
the following transactions of Rhone.
Oct 1
Oct. 30
Purchased inventory from Weimar Co for 12,000 euros, terms n/30. The
exchange rate was $1.15 per euro.
Paid Weimar Co. for the October 1 purchase. The exchange rate was $1.13 per
euro
Answer:
Oct. 1
Oct. 30
Merchandise Inventory (12,000 euros x $1.15/euro)..
Accounts Payable...................................................
Accounts Payable........................................................
Cash (12,000 euros x $1.13/euro)..........................
Foreign Exchange Gain.........................................
13,800
13,800
13,800
13,560
240
155. Golden Age Co. exports Native American artwork to Japan. Prepare journal entries for the
following transactions.
Nov 10
Dec 5
Sold artwork to Tanaka Company for 10,000,000 yen, terms n/30. The exchange
rate was $0.0084 per yen.
Received payment from Tanaka Company for the November 10 sale. The
exchange rate was $0.009 per yen.
Answer:
Nov 10
Dec 5
Accounts Receivable (10,000,000 x $0.0084)..........
Sales......................................................................
Cash (10,000,000 x $0.009).......................................
Foreign Exchange Gain.........................................
Accounts Receivable..............................................
84,000
84,000
90,000
6,000
84,000
156. Texana Inc. imports inventory from Mexico. Prepare the journal entries for Texana to
record the following transactions. Include any year-end adjustments.
Dec 21
Dec 31
Jan 20
Purchased inventory from Acquilla Co. for 500,000 Mexican pesos. The exchange
rate was $0.0914 per peso. The credit terms were n/30.
The exchange rate was $0.0917 per peso.
Paid Acquilla Co. for the December 21 purchase. The exchange rate was $0.0920
per peso.
Answer:
Dec 21
Dec 31
Jan 20
Merchandise Inventory (500,000 pesos x $.0914/peso)
Accounts Payable......................................................
Foreign Exchange Loss..................................................
Accounts Payable [500,000 x ($0.0914 - $0.0917)].
Accounts Payable ($45,700 + $150).............................
Foreign Exchange Loss.................................................
Cash (500,000 x $0.0920)........................................
45,700
45,700
150
150
45,850
150
46,000
157. Mian, Inc., sells American gourmet foods to merchandisers in Singapore. Prepare the
journal entries for Mian to record the following transactions. Include any year-end adjustments.
Dec 20
Dec 31
Jan 17
Sold items to Solingen, Inc., for 60,000 Singapore dollar. The exchange rate was
$0.476 per Singapore dollar. The purchase terms were n/30.
The exchange rate was $0.480 per Singapore dollar.
Received payment from Solingen for the December 20 sale. The exchange rate
was $0.495 per Singapore dollar.
Answer:
Dec 20 Accounts Receivable (60,000 x $0.476).......................
Sales.........................................................................
Dec 31 Accounts Receivable [60,000 x ($0.476 - $0.480)]......
Foreign Exchange gain.............................................
Jan 17
Cash (60,000 x $0.495).................................................
Foreign Exchange Gain............................................
Accounts Receivable (28,560 + 240).......................
28,560
28,560
240
240
29,700
900
28,800
158. The following information is available from the financial statements of Cosmotropolis
2009
2010
2011
Total assets, December 31
$341,585
$395,412
$922,357
Net income
35,550
49,512
68,149
What is Cosmotropolis’ return on total assets for 2010?
Answer: 13.44
Feedback: 49,512/((341,585+395,412)/2) = 13.44 (rounded)
159. The following information is available from the financial statements of Cosmotropolis
Total assets, December 31
Net income
2009
$341,585
35,550
2010
$395,412
49,512
2011
$922,357
68,149
What is Cosmotropolis’ return on total assets for 2011?
Answer: 10.34
Feedback: 68,149((922,357+395,412)/2) = 10.34 (rounded)
160. As a long-term investment, Elmer's Equipment Enterprise purchased 35% of Sticky
Supplies Inc.'s 300,000 shares for $350,000 at the beginning of the fiscal year of both
companies. On the purchase date, the fair value and book value of Sticky’s net assets were
equal. During the year, Sticky’s earned net income of $430,000 and distributed cash dividends
of 0.42 cents per share. The fair value of Sticky’s assets at the end of the year totaled $349,450.
What is Elmer’s balance for this investment at the end of the year?
Answer: $456,400
Feedback: 350,000+(430,000*.35)-((300,000*.42)*.35) = 456,400
161. As a long-term investment, Elmer's Equipment Enterprise purchased 20% of Sticky
Supplies Inc.'s 300,000 shares for $350,000 at the beginning of the fiscal year of both
companies. On the purchase date, the fair value and book value of Sticky’s net assets were
equal. During the year, Sticky’s earned net income of $430,000 and distributed cash dividends
of 0.42 cents per share. The fair value of Sticky’s assets at the end of the year totaled $349,450.
What is Elmer’s balance for this investment at the end of the year, assuming there is no
significant control?
Answer: $349,450
Feedback: 350,000+(349,450-350,000) = 349,450
162. As a long-term investment, Elmer's Equipment Enterprise purchased 35% of Sticky
Supplies Inc.'s 300,000 shares for $350,000 at the beginning of the fiscal year of both
companies. On the purchase date, the fair value and book value of Sticky’s net assets were
equal. During the year, Sticky’s earned net income of $430,000 and distributed cash dividends
of 0.42 cents per share. The fair value of Sticky’s assets at the end of the year totaled $349,450.
What is the journal entry, if any to record the net income for the investment in Sticky?
Answer: Investment in Sticky, common shares………….150,500
Investment Revenue…………………………………..150,500
Feedback: 430,000*.35 = 150,500
Fill in the Blank Questions
163. ___________________________ are investments in securities that management intends
to convert to cash within the longer of one year or the operating cycle and are readily
convertible to cash.
Answer: Short-term investments (or temporary investments)
164. __________________________ are investments in securities that are not readily
convertible to cash or are not intended to be converted to cash in the short-term.
Answer: Long-term investments
165. _________________________ are investments that are both readily converted to known
amounts of cash and mature within 3 months.
Answer: Cash equivalents
166. An investing company that owns more than ________ of another (investee) company's
voting stock is presumed to have controlling influence over the investee.
Answer: 50%
167. Short-term investments in held-to-maturity debt securities are accounted for using the
___________________________.
Answer: Cost method without amortization
168. Long-term investments in held-to-maturity debt securities are accounted for using the
___________________________.
Answer: Cost method with amortization
169. Investments in equity securities where the investor has a significant, but not controlling
influence, are accounted for using the _______________ method.
Answer: Equity
170. Investments in equity securities where the investor has a controlling influence are
accounted for using the ________________________________.
Answer: Equity method with consolidation
171. ________________________ refers to all changes in equity for a period except for those
due to investments and distributions to owners.
Answer: Comprehensive income
172. Foreign exchange rates fluctuate due to changing _______________ and ___________
conditions.
Answer: economic; political
173. Return on total assets is computed by dividing ___________ by __________.
Answer: net income; average total assets
174. Investments in trading securities are always classified as ______________ and are
reported as _______________ on the balance sheet.
Answer: short-term investments; current assets
175. ____________________________ are debt and equity securities that a company intends
to actively manage and trade for a profit.
Answer: Trading securities
176. Held-to-maturity securities are ____________ securities a company intends and is able to
hold until maturity.
Answer: Debt
177. Long-term investments in available-for-sale securities are reported using their _______ on
the balance sheet.
Answer: Market value
178. An investing company that owns _________ of another (investee) company's voting stock
(but not more than 50%) is presumed to have a significant influence over the investee.
Answer: 20% or more
179. If a U.S. company makes a credit sale to a foreign company, the sales price must be
translated into dollars as of the date of _____________.
Answer: Sale