Chapter 15

Chapter 015 Investments and International Operations

Chapter 015 Investments and International Operations

Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

True/False

ItemDLLOItemDLLOItemDLLO

1. MedC121. HardC341. EasyP3

2. MedC122. HardC342. MedP3



5. MedC125. EasyC445. MedP3

6. MedC126. MedC446. HardP3

7. MedC127. MedC447. HardP3

8. EasyC228. MedA148. EasyP4

9. MedC229. MedA149. MedP4

10. MedC230. MedA150. MedP4

11. MedC231. MedA151. HardP4

12. MedC232. HardA152. HardP4

13. MedC233. HardA153. MedP5

14. MedC234. EasyP154. MedP5

15. EasyC335. EasyP155. HardP5

16. EasyC336. MedP156. HardP5

17. MedC337. MedP157. HardP5

18. MedC338. EasyP2

19. MedC339. MedP2

20. MedC340. MedP2

Multiple Choice


58. EasyC178.HardC398.MedP1

59. EasyC179.HardC399.EasyP2

60. MedC180.HardC3100.MedP3

61. MedC181.EasyC4101.MedP3

62. MedC1,P182.EasyC4102.MedP3

63. EasyC283.MedC4103.MedP3

64. MedC284.MedC4104.MedP3

65. MedC285.HardC4105.HardP3

66. MedC286.HardC4106.EasyP4

67. `MedC287.HardC4107.MedP4

68. MedC288.MedA1108.MedP4

69. MedC289.MedA1109.MedP4

70. HardC290.MedA1110.MedP4

71. HardC291.MedA1111.EasyP4

72. HardC292.HardA1112.MedP4

73. EasyC393.HardA1113.MedP4

74. EasyC394.HardA1114.HardP4

75. EasyC395.EasyP1115.MedP5

76. MedC396.EasyP1116.MedP5

77. MedC397.MedP1117.MedP5

118.HardP5

119.HardP5

Matching


120.MedC1,C3 A1,

P1-P4

Short Essay


121.MedC1126.MedC3131.HardP2

122.MedC1127.MedC3132.HardP3

123.EasyC2128.MedC4,P5133.HardP4

124.MedC2129MedA1134.HardP5

125.MedC2130.MedP1

Problems


135.EasyC2145.HardA1154.EasyP4,C2

136.EasyC2146.MedP1155.MedP4

137.MedC2147.HardP1,C2156.MedP4

138.MedC2148.HardP1,C2157.MedP4

138.HardC2149.EasyP3,C2158.HardP4

140.EasyA1150.MedP3,C2159.MedP5

141.MedA1151.MedP3,C2160.MedP5

142.MedA1152.HardP3161.HardP5

143.MedA1152.HardP3162.HardP5

144.HardA1

Completion Problems


163.EasyC1169.MedC3174.EasyP1

164.EasyC1170.MedC3175.MedP1

165.MedC1171.MedC3176.EasyP2

166.EasyC3172.MedC4177.MedP3

167.MedC3173.MedA1178.EasyP4

168.MedC3179.HardP5

True / False Questions

1.Long-term investments are usually held as an investment of cash for use in current operations.FALSE

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C12.Long-term investments can include funds earmarked for special purposes such as bond sinking funds.TRUE

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C13.Bond sinking funds are examples of short-term investments.FALSE

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C14.Equity securities reflect a creditor relationship such as investments in notes, bonds, and certificates of deposit.FALSE

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C1

5.Cash equivalents are investments that are readily converted to known amounts of cash and mature within three months.TRUE

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C16.Short-term investments are intended to be converted into cash within the longer of one year or the current operating cycle of the business, and are readily convertible to cash.TRUE

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C17.Long-term investments include investments in land or other assets not used in a company's operations.TRUE

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C18.Debt securities are recorded at cost when purchased.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: ReportingDifficulty: EasyLearning Objective: C2

9.Debt securities are recorded at cost when purchased, and interest revenue for investments in debt securities is recorded when earned.TRUE

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: ReportingDifficulty: MediumLearning Objective: C210.Any cash dividends received from equity securities are recorded as Dividend Expense.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C211.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.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: ReportingDifficulty: MediumLearning Objective: C212.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.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: ReportingDifficulty: MediumLearning Objective: C2

13.An investor purchased $50,000 of bonds and held them to maturity. This 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.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: ReportingDifficulty: MediumLearning Objective: C214.A company holds $40,000 of 7% bonds as a held-to-maturity security. This 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.FALSE

$40,000 x 7% x year = $1,400

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C215.A controlling investor is called the parent, and the investee company is called the subsidiary.TRUE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: MeasurementDifficulty: EasyLearning Objective: C3

16.When an investor company owns more than 25% of the voting stock of an investee company, it has a controlling influence.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: EasyLearning Objective: C317.The equity method with consolidation is used in accounting for long-term investments in equity securities with controlling influence.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty: MediumLearning Objective: C318.Short-term held-to-maturity debt securities are accounted for using the cost method with amortization.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: C319.Investments in trading securities are accounted for using the equity method with consolidation.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: C3

20.Comprehensive income refers to all changes in equity in a period except those due to investments and distributions to income.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: C321.Consolidated financial statements show the financial position, results of operations, and cash flows of all entities under the parent's control.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty: HardLearning Objective: C322.Consolidated statements are prepared as if a company is organized as one entity, with the amounts allocated for subsidiaries reported in the investment accounts.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty: HardLearning Objective: C323.Trading securities, held-to-maturity debt securities, and equity securities giving an investor significant influence over an investee are always considered short-term investments.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: HardLearning Objective: C3

24.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.TRUE

$2 x 0.7382 = $1.48

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: C325.Multinational corporations can be U.S. companies with operations in other countries.TRUE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: MeasurementDifficulty: EasyLearning Objective: C426.Foreign exchange rates fluctuate due to many factors including changing political and economic conditions.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C427.The price of one currency stated in terms of another currency is called a foreign exchange rate.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C4

28.Return on total assets can be separated into the profit margin ratio and total asset turnover.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: A129.Profit margin is sales divided by net income.FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: A130.Net profit margin reflects the percent of net income in each dollar of net sales.TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: A131.All companies desire a low return on total assets.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: A1

32.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%.TRUE

Profit margin = $130,500/$1,740,000 = 7.5%

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: A133.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 equals 4.7%.FALSE

Asset turnover = $1,740,000/$2,750,000 = 0.63

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: A134.A company should report its portfolio of trading securities at its market value.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: P1

35.Trading securities are securities that are purchased by trading other securities rather than by paying cash.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: P136.Investments in trading securities are always short-term investments.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P137.Unrealized gains and losses on trading securities are reported as part of net income.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: ReportingDifficulty: MediumLearning Objective: P138.Held-to-maturity securities are equity securities a company intends and is able to hold until maturity.FALSE


39.Investments in held-to-maturity debt securities are always current assets.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P240.Accounting for long-term investments in held-to-maturity securities requires companies to record interest revenue as it accrues.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P241.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.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: P342.Long-term investments in debt securities not classified as held-to-maturity securities are classified as available-for-sale securities.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P3

43.Management's intent determines whether an available-for-sale security is classified as long-term or short-term.TRUE

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P344.Long-term investments in available-for-sale securities are reported at market value on the balance sheet.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P345.Any unrealized gain or loss on available-for-sale securities is reported on the income statement in the other gain or loss section.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P346.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 GainEquity for $3,000.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P3

47.On May 15, Briar Company purchased 10,000 shares of Broder Corp. for $80,000. These securities are considered available-for-sale. 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.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P348.An investor with significant influence owns as least 20% but not more than 50% of another company's voting stock.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: P449.The cost method of accounting is used for long-term investments in equity securities with significant influence.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P450.When using the equity method for investments in equity securities, the receipt of cash dividends is recorded as revenue.FALSE


51.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 includes a debit to Cash for $6,500 and a credit to Long-Term Investments for $6,500.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P452.When using the equity method, receipt of cash dividends increases the carrying (book) value of an investment in equity securities.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P453.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.TRUE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P554.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.TRUE


55.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.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P556.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.FALSE

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P557.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.TRUE


Multiple Choice Questions

58.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: C159.Short-term investments:A.Are securities that management intends to convert to cash within the longer of one year or the current operating cycle, and are readily convertible to cash.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: C160.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.


61.Long-term investments include:A.Investments in bonds and stocks that are not readily 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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C162.NSC Corporation has invested in 10% of the outstanding stock of VC Corporation. NSC intends to actively manage this investment. This investment is classified as:A.a long-term equity investmentB.a long-term debt investmentC.a short-term equity investmentD.a short-term debt investmentE.a consolidated investment

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C1Learning Objective: P163.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: C2

64.Debt securities:A.Can be short-term investments.B.Can be long-term investments.C.Can have a cost higher than the maturity value of the debt security.D.Can have a cost lower than the maturity value of the debt security.E.All of these.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C265.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C266.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.


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.

$100,000 x 9% x 3/12 year = $2,250

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C268.Everrine Corporation owns 3,000 shares of JRW Corporation. JRW Corporation has 25,000 shares of stock outstanding. JRW paid $4 per share in cash dividends to its stockholders. The entry to record the receipt of these dividends is:A.Debit Cash, $12,000; credit Long-Term Investments, $12,000.B.Debt Long-Term Investment, $12,000; credit Cash, $12,000.C.Debit Cash, $12,000; credit Dividend Revenue, $12,000.D.Debit Unrealized Gain-Equity, $12,000; credit Cash, $12,000.E.Debit Cash, $12,000; credit Unrealized Gain-Equity, $12,000.

3,000 x $4 = $12,000


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.

$60,000 x 5% x 5/12 year = $1,250

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C270.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 when the bonds mature equal:A.$37,800.B.$38,325.C.$40,000.D.$40,525.E.$43,200.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: C2

71.An investor purchased $75,000 Cort's 8%, three-year bonds payable on April 1, 2008. The bonds pay interest semiannually on June 1 and December 1. Cort plans to hold the bonds until they mature. When the bonds mature, Cort should prepare the following journal entry:A.debit Long-Term InvestmentsHTM, $75,000; credit Cash, $75,000.B.debit Cash, $6,000; credit, Unrealized Gain-Equity, $6,000.C.debit Cash, $75,000; credit Long-Term InvestmentsHTM, $75,000.D.debit Unrealized Gain-Equity, $6,000; credit Cash, $6,000.E.debit Cash, $75,000; credit Long-Term InvestmentsAFS, $75,000.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: C272.Griggs Company holds $50,000 of 8% bonds as a held-to-maturity security. Which of the following is the correct journal entry to record the receipt of the semiannual interest payment?A.debit Cash, $4,000; credit Long-Term InvestmentsHTM, $4,000.B.debt Cash, $2,000; credit Long-Term InvestmentsHTM, $2000.C.debit Cash, $2,000; credit Interest Revenue, $2,000.D.debit Unrealized Gain-Equity, $2,000; credit Cash, $2,000.E.debit Cash, $4,000; credit Unrealized Gain-Equity, $4,000.

$50,000 x 8% = $4,000$ 4,000 x 1/2 = $2,000


73.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: ReportingDifficulty: EasyLearning Objective: C374.The controlling investor is called the:A.Owner.B.Subsidiary.C.Parent.D.Investee.E.Senior entity.

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: C375.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%.


76.Long-term investments can include:A.Held-to-maturity debt securities.B.Available-for-sale debt securities.C.Available-for-sale equity securities.D.Equity securities giving an investor significant influence over an investee.E.All of these.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C377.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: ReportingDifficulty: MediumLearning Objective: C378.Comprehensive income includesA.Revenues and expenses reported in the income statement.B.Gains and losses reported in the income statement.C.Unrealized gains and losses on long-term available-for-sale securities.D.All changes in equity for a period except those due to investments and distributions to owners.E.All of these.


79.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: C380.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: C381.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.


82.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: C483.Foreign exchange rates fluctuate due to changes in :A.Political conditions.B.Economic conditions.C.Supply and demand for currencies.D.Expectations of future events.E.All of these.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C484.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.


85.If the exchange rate for Canadian and U.S. dollars is 0.82777 to 1, this implies that 3 Canadian dollars will buy ____ worth of U.S. dollars.A.$ 0.2759B.$0.82777C.$1.82777D.$2.48E.None of these.

$3 x 0.82777 = $2.48

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: C486.Breanna Boutique purchased on credit 50,000 worth of clothing from a British company when the exchange rate was $1.97 per British pound. At the year-end balance sheet date the exchange rate increased to $2.76. Breanna Boutique must record a:A.gain of $39,500.B.loss of $39,500.C.gain of $138,000.D.loss of $138,000.E.neither a gain nor loss.


87.Rosser Company sold supplies in the amount of 25,000 euros to a French company when the exchange rate was $1.21 per euro. At the time of payment, the exchange rate decreased to $0.82. Rosser must record a:A.gain of $9,750.B.gain of $20,500.C.loss of $9,750.D.loss of $20,500.E.neither a gain nor loss.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: C488.Select the correct statement from the following:A.Profit margin reflects a company's ability to produce net sales from total assets.B.Total asset turnover reflects the percent of net income in each dollar of net sales.C.Return on total assets can be separated into gross margin ratio and price-earnings ratio.D.High returns on total assets are desirable.E.Return on total assets analysis is beneficial in evaluating a company but is not useful for competitor analysis.


89.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:A.3%B.200%C.6%D.17%E.1.5%

$30,000/$500,000 = 6%

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: A190.A company has net income of $250,000, net sales of $2,000,000, and total assets of $1,500,000. Its return on total assets equals:A.12.5%.B.13.3%.C.16.7%.D.75.0%.E.600.0%.

Return on total assets = $250,000/$1,500,000 = 16.7%


91.A company had net income of $2,660,000, net sales of $25,000,000, and total assets of $8,000,000. Its return on total assets equals:A.3.01%.B.10.64%.C.32.00%.D.33.25%.E.300.75%.

Return on total assets = $2,660,000/$8,000,000 = 33.25%

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: A192.A company had net income of $43,000, net sales of $380,500, and 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.

Profit margin = $43,000/$380,500 = 11.3%Total asset turnover = $380,500/$220,000 = 1.73

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: A1

93.A company had a profit margin of 10.5% and total asset turnover of 1.84. Its return on total assets was:A.5.71%B.8.66%C.12.34%D.13.61%E.19.32%

Return on total assets = 10.5% x 1.84 = 19.32%

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: A194.A company had net income of $40,000, net sales of $300,000, and 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.

Profit margin = $40,000/$300,000 = 13.3%Total asset turnover $300,000/$200,000 = 1.5


95.Investments can be classified as:A.Trading securities.B.Held-to-maturity debt securities.C.Available-for-sale debt securities.D.Available-for-sale equity securities.E.All of these.

AACSB: CommunicationsAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: P196.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: P197.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.


98.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P199.Held-to-maturity securities are:A.Always classified as LongTerm 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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: P2100.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 LongTerm Liabilities.


101.Available-for-sale equity securities:A.Are recorded at cost when acquired.B.May earn dividends that are reported in that year's income statement.C.May be classified as either short-term or long-term securities.D.Are reported at market value on the balance sheet.E.All of these.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P3102.Morgan Company purchased 2,000 shares of Asta's common stock for $143,000 as a long-term investment. This investment 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 LongTerm Investments for $143,000.E.Debit to LongTerm Investments for $143,375.


103.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 LossEquity for $3,500.B.Credit to Unrealized GainEquity 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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P3104.On July 31, Beatrice Co. purchased 2,000 shares of SimmTech stock for $16,000. This investment is considered to be an available-for-sale investment. On October 31, which is Beatrice's year-end, the stock had a market value of $20,000. Beatrice should record a:A.Credit to Unrealized Gain-Equity for $4,000.B.Credit to Market Adjustment Available-for-Sale for $4,000.C.Credit to Investment Revenue for $4,000.D.Debit to Investment Revenue for $4,000.E.Debit to Unrealized Gain-Equity for $4,000.


105.On March 15, Carter Company purchased 10,000 shares of Tonya Corp. stock for $35,000. This investment is considered to be an available-for-sale investment. On June 30, the stock had a market value of $38,000. Carter must report:A.The $3,000 difference on the income statement as a gain.B.The $3,000 difference as an adjustment to the market value at year-end.C.The $3,000 difference in the equity section of the balance sheet.D.A & CE.B & C

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P3106.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.


107.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 LongTerm Investments for $92,800.B.Debit to LongTerm Investments for $232,000.C.Credit to LongTerm Investments for $92,800.D.Credit to LongTerm Investments for $232,000.E.Debit to LongTerm Investment for $40,000.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P4108.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 LongTerm Investments for $16,450.B.Debit to LongTerm 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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P4109.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 LongTerm investments for $97,000.D.Credit to LongTerm Investments for $38,800.E.Credit to Cash for $97,000.


110.Hamilton Company owns 51,000 of Hennie Company's 100,000 outstanding shares of common stock. Hennie Company pays $25,000 in total cash dividends to its shareholders. Hamilton's entry to record this transaction should include a:A.Debit to Dividend Revenue for $12,750.B.Debit to Interest Revenue for $12,750C.Credit to LongTerm investments for $12,750.D.Credit to LongTerm Investments for $25,000.E.Credit to Dividend Revenue for $25,000.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P4111.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 $60,000. The balance in the Parris Corporation's LongTerm Investment in Samitz Corporation at December 31 should be:A.$ 80,800.B.$100,000.C.$ 95,200.D.$119,200.E.$124,000.

$100,000 - (40% x $12,000) + (40% x $60,000) = $119,200


112.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 $150,000. The balance in Clark Corporation's LongTerm Investment in IT Corporation account as of December 31 should be:A.$ 77,000.B.$125,000.C.$173,000.D.$197,000.E.$370,000.

$125,000 - (40% x $30,000) + (40% x $150,000) = $173,000

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P4113.Everrine Corporation owns 30% of JRW Corporation. Everrine Corporation received $9,000 in cash dividends from JRW Corporation. The entry to record receipt of these dividends is:A.Debit Cash, $9,000; credit Long-Term Investments, $9,000.B.Debt Long-Term Investment, $9,000; credit Cash, $9000.C.Debit Cash, $9,000; credit Interest Revenue, $9,000.D.Debit Unrealized Gain-Equity, $9,000; credit Cash, $9,000.E.Debit Cash, $9,000; credit Unrealized Gain-Equity, $9,000.


114.On January 4, 2009, 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, and its net income was $72,000 and $67,000 for 2009 and 2010, respectively. The January 12, 2011, entry to record the sale of 3,000 shares of Warner Company stock for $39,000 cash should be:A.B.C.D.E.


115.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P5116.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.


117.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.


118.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:A.B.C.D.E.No journal entry is required until the amount is collected.


119.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:A.B.C.D.E.


Matching Questions

120.Match the following terms with the appropriate definitions.

1.Unrealized gain or lossAn accounting method for long-term investments in equity when the investor has significant influence over the investee.10

2.Trading securitiesDebt and equity securities not classified as trading or held-to-maturity.4

3.Return on total assetsA corporation controlled by another company when the parent owns more than 50% of the subsidiary's voting stock.9

4.Available-for-sale securitiesInvestments 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.5

5.Long-term investmentsA company that owns a more than 50% controlling interest in a subsidiary.8

6.Consolidated financial statementsA measure of operating efficiency, computed as net income divided by average total assets.3

7.Held-to-maturity securitiesFinancial 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.6

8.Parent companyDebt securities that a company intends and is able to hold until maturity.7

9.SubsidiaryDebt and equity securities that a company intends to actively manage and trade for profit.2

10.Equity methodChange in market value that is not yet realized through an actual sale.1

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: A1Learning Objective: C1Learning Objective: C3Learning Objective: P1Learning Objective: P2Learning Objective: P3Learning Objective: P4

Short Answer Questions

121.Explain the difference between short-term and long-term investments. Cite examples of each.

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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C1122.Discuss the reasons companies make investments.

Companies make investments for several reasons. Three common reasons for investments are 1) to transfer excess cash into investments in order to produce higher income; 2) to produce income from investments if the company is set up to manage mutual funds or pension funds; 3) for strategic reasons such as investments in competitors or suppliers.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C1123.Identify the four types of classifications for non-influential investments in securities.

Non-influential investments in securities can be classified as: (1) trading, (2) held-to-maturity, and (3) available for sale.


124.What are the accounting basics for debt securities, including recording their acquisition, interest earned, and their disposal?

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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C2125.What are the accounting basics for equity securities, including acquisition, dividends earned, and disposition?

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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C2126.What is comprehensive income and how is it usually reported in the financial statements?

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.


127.Explain how investors report investments in equity securities when the investor has a controlling influence over an investee.

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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: ReportingDifficulty: MediumLearning Objective: C3128.Define the foreign exchange rate between two currencies. Explain its effect on business transactions conducted in a foreign currency.

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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C4Learning Objective: P5

129.Define the return on total assets and explain how it is used to measure a company's financial performance.

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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: A1130.Explain how to record the sale of trading securities.

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.


131.Explain how held-to-maturity debt securities are accounted for at and after acquisition and how they are reported in the financial statements.

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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P2132.Explain how available-for-sale debt and equity securities are accounted for at and after acquisition and how they are reported in financial statements.

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.


133.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.

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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P4134.Explain how transactions (both sales and purchases) in a foreign currency are recorded and reported.

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.


Problems

135.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 bond purchase transaction.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: C2136.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.


137.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C2138.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, 2019.


139.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: C2140.A company reported net income of $100,000 and average total assets of $425,000. Calculate its return on total assets.

$100,000 / $425,000 = 23.5%

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: A1141.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.

(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.


142.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: A1143.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.


144.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: A1145.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.


146.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.


147.Haladam Company had the following transactions relating to investments in trading securities during the year. Prepare the required general journal entries for these transactions.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: C2Learning Objective: P1

148.Clarity Corporation had the following transactions involving investments in trading securities during the year. Prior to these transactions, Clarity had never had any investments in trading securities. Prepare the required general journal entries to record these transactions.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: C2Learning Objective: P1

149.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: C2Learning Objective: P3150.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 journal entry to record this sale.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C2Learning Objective: P3

151.Columbia Corp. held 1,500 of Vianco common stock with a cost of $74,387. These shares were classified as a longterm available-for-sale investment. It sold the shares on December 13 for $55,275. Prepare the journal entry to record this sale.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C2Learning Objective: P3152.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.


153.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P3154.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.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: C2Learning Objective: P4

155.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.


156.Kramer Corporation had the following long-term investment transactions.

Prepare the journal entries Kramer Corporation should record for these transactions and events.


157.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.


158.On January 1, 2009, Frederich Corporation purchased 7,500 shares of SportTech, 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 SportTech. Prepare the journal entries for Frederich to record the following transactions and events:


159.Rhone Importers purchases automotive parts from Germany. Prepare journal entries for the following transactions of Rhone.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P5160.Golden Age Co. exports Native American artwork to Japan. Prepare journal entries for the following transactions.


161.Texana Inc. imports inventory from Mexico. Prepare the journal entries for Texana to record the following transactions. Include any year-end adjustments.


162.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.


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.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.Long-term investments

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: C1165._________________________ securities reflect a creditor relationship while ____________________ securities reflect an owner relationship.debt, equity

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C1166.An investing company that owns more than ________ of another (investee) company's voting stock is presumed to have controlling influence over the investee.50%

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: C3167.Short-term investments in held-to-maturity debt securities are accounted for using the ___________________________.Cost method without amortization


168.Long-term investments in held-to-maturity debt securities are accounted for using the ___________________________.Cost method with amortization

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C3169.Investments in equity securities where the investor has a significant, but not controlling influence, are accounted for using the _______________ method.Equity

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C3170.Investments in equity securities where the investor has a controlling influence are accounted for using the ________________________________.Equity method with consolidation

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C3171.________________________ refers to all changes in equity for a period except for those due to investments and distributions to owners.Comprehensive income


172.Foreign exchange rates fluctuate due to changing _______________ and ___________ conditions.economic; political

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: C4173.Return on total assets is computed by dividing ___________ by __________.net income; average total assets

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: A1174.____________________________ are debt and equity securities that a company intends to actively manage and trade for a profit.Trading securities

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: P1175.Investments in trading securities are always classified as ______________ and are reported as _______________ on the balance sheet.short-term investments; current assets


176.Held-to-maturity securities are ____________ securities a company intends and is able to hold until maturity.Debt

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: P2177.Long-term investments in available-for-sale securities are reported at their _______ on the balance sheet.Market value

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: MediumLearning Objective: P3178.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.20% or more

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: EasyLearning Objective: P4179.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 _____________.Sale.

AACSB: AnalyticAICPA BB: Resource ManagementAICPA FN: MeasurementDifficulty: HardLearning Objective: P515-54

Chapter 15

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Transcript of Chapter 15