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Appendix C
INVESTMENTS AND INTERNATIONAL OPERATIONS
True / False Questions
1. Long-term investments are usually held as an investment of cash for use in current
operations.
2. Long-term investments can include funds earmarked for special purposes such as bond
sinking funds.
3. Bond sinking funds are examples of short-term investments.
4. Equity securities reflect a creditor relationship such as investments in notes, bonds, and
certificates of deposit.
5. Cash equivalents are investments that are readily converted to known amounts of cash and
mature within three months.
6. 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.
7. Long-term investments include investments in land or other assets not used in a company's
operations.
8. Debt securities are recorded at cost when purchased.
9. Debt securities are recorded at cost when purchased, and interest revenue for investments in
debt securities is recorded when earned.
10. Any cash dividends received from equity securities are recorded as Dividend Expense.
11. When an investment in 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.
12. A company received dividends of $0.35 per share on 300 shares of stock it holds as an
investment. The journal entry to record this transaction would be to debit Cash for $105 and
credit Dividend Revenue for $105.
13. An investor purchased $50,000 of 10 year bonds it intends to holdto maturity. The
investor's journal entry to record the purchase should include a debit to Long-Term
Investments for $50,000 and a credit to Cash for $50,000.
14. A company holds $40,000 of 7% bonds as a held-to-maturity security. The journal entry to
record receipt of a semiannual interest payment includes a debit to Cash for $2,800 and a
credit to Interest Revenue for $2,800.
15. A controlling investor is called the parent, and the investee company is called the
subsidiary.
16. When an investor company owns more than 25% of the voting stock of an investee
company, it has a controlling influence.
17. The equity method with consolidation is used to account for long-term investments in
equity securities with controlling influence.
18. When the cost of a short-term held-to-maturity debt security is different from the maturity
value, the difference is amortized over the remaining life of the security.
19. Investments in trading securities are accounted for using the equity method with
consolidation.
20. Comprehensive income refers to all changes in equity during a period except those from
owners’ investments and dividends.
21. Consolidated financial statements show the financial position, results of operations, and
cash flows of all entities under the parent's control, including all subsidiaries.
22. . When consolidated financial statement are prepared, the parent company uses the equity
method and reports the investment accounts for the subsidiaries on the balance sheet.
23. Equity securities giving an investor significant influence over an investee are always
considered short-term investments.
24. If the exchange rate for Canadian and U.S. dollars is 0.7382 to 1, this implies that 2
Canadian dollars can be purchased for $1.48 U.S. dollars.
25. Multinational corporations can be U.S. companies with operations in other countries.
26. Foreign exchange rates fluctuate due to many factors including changing political and
economic conditions.
27. The price of one currency stated in terms of another currency is called a foreign exchange
rate.
28. Return on total assets can be separated into the profit margin ratio and total asset
turnover.
29. Profit margin is net sales divided by net income.
30. Profit margin reflects the percent of net income in each dollar of net sales.
31. All companies desire a low return on total assets.
32. A company has net income of $130,500. Its net sales were $1,740,000 and its average
total assets were $2,750,000. Its profit margin equals 7.5%.
33. A company has net income of $130,500. Its net sales were $1,740,000 and its average
total assets were $2,750,000. Its total asset turnover equals 4.7%.
34. A company should report its portfolio of trading securities at its fair value.
35. Trading securities are securities that are purchased by trading securities with other
companies rather than by paying cash.
36. Trading securities are always reported as current assets.
37. Unrealized gains and losses on trading securities are reported on the income statement.
38. Held-to-maturity securities are equity securities a company intends and is able to hold
until maturity.
39. Investments in held-to-maturity debt securities are always current assets.
40. Accounting for long-term investments in held-to-maturity securities requires companies to
record interest revenue as it is earned.
41. 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.
42. Long-term investments in debt securities not classified as trading or held-to-maturity
securities are classified as available-for-sale securities.
43. Management's intent determines whether an available-for-sale security is classified as
long-term or short-term.
44. Available-for-sale securities are actively managed like trading securities because the
company intends to trade them for profit in the short term.
45. Long-term investments in available-for-sale securities are reported at fair value on the
balance sheet.
46. Any unrealized gain or loss for the portfolio of available-for-sale securities is reported on
the income statement in the other gain or loss section.
47. On May 1, Jorge Co. purchases 2,000 shares of Radiotech stock for $25,000. This
investment is considered to be an available-for-sale investment. On July 31 (Jorge’s year-end),
the stock had a market value of $28,000. Jorge should record a credit to Unrealized Gain—
Equity for $3,000.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
C-18
48. On May 15, Tumbleweed, Inc. purchased 10,000 shares of Dansell Corp. for $80,000. The
securities are considered available-for-sale securities. On September 30, the stock had a
market value of $85,000. The $5,000 difference must be reported on Tumbleweed’s income
statement as a $5,000 gain.
49. An investor presumed to have significant influence owns as least 20% but not more than
50% of another company's voting stock.
50. The cost method of accounting is used for long-term investments in equity securities with
significant influence.
51. When using the equity method for investments in equity securities, the investor records
the receipt of cash dividends as revenue.
52. Hamasaki Company owns 30% of CDW Corp. stock. Hamasaki received $6,500 in cash
dividends from its investment in CDW. 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.
53. When using the equity method, receipt of cash dividends increases the carrying (book)
value of an investment in equity securities.
54. To prepare consolidated financial statements when a U. S. parent company has an
international subsidiary, the international subsidiary's financial statements must be translated
into U.S. dollars.
55. If a U. S. company's credit sale to an international customer allows payment to be made in
a foreign currency, the sale transaction is recorded using the exchange rate on the date of sale.
56. If a U. S. Company's credit sale to an international customer allows payment to be made
in a foreign currency, the same exchange rate must be used for the date of sale and the cash
payment date.
57. Kim Manufacturing 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. Kim must record a gain of $600.
58. Maroon 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. Maroon must record a loss of $450.
59. 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.
60. 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.
61. 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.
62. Long-term investments include:
A. Investments in bonds and stocks that are not readily convertible to cash or not intended to
be converted to cash in the short term.
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.
63. Strickland Corporation has invested in 10% of the outstanding stock of Nez Corporation.
Strickland intends to actively manage this investment for profit. This investment is classified
as:
A. an available-for-sale security.
B. a held-to-maturity security.
C. a trading security.
D. a significant influence security.
E. a controlling influence security.
64. All of the following statements regarding equity securities are true except:
A. Equity securities should be recorded at cost when acquired.
B. Equity securities are valued at fair value if classified as trading securities.
C. Equity securities are valued at fair value if classified as significant influence securities.
D. Equity securities are valued at fair value if classified as available-for-sale securities.
E. Equity securities classified as available-for-sale record the dividend revenue when
received.
65. All of the following are true about debt securities except:
A. They can be short-term investments.
B. They can be long-term investments.
C. They can have a cost higher than the maturity value.
D. They can have a cost lower than the maturity value.
E. The reflect an owner relationship.
66. At acquisition, debt securities are:
A. Recorded at their cost, plus total interest that will be received over the life of the security.
B. Recorded at the amount of interest that will be received over the life of the security.
C. Recorded at cost.
D. Not recorded, because no interest is due yet.
E. Recorded at cost plus the amount of dividend income to be received.
67. 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 record any interest earned on the debt securities during the period.
68. A company has an investment in 9% bonds with a par value of $100,000 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.
69. Roe Corporation owns 2,000 shares of WRJ Corporation stock. WRJ Corporation has
25,000 shares of stock outstanding. WRJ paid $4 per share in cash dividends to its
stockholders. The entry to record the receipt of these dividends is:
A. Debit Cash, $8,000; credit Long-Term Investments, $8,000.
B. Debt Long-Term Investment, $8,000; credit Cash, $8,000.
C. Debit Cash, $8,000; credit Dividend Revenue, $8,000.
D. Debit Unrealized Gain-Equity, $8,000; credit Cash, $8,000.
E. Debit Cash, $8,000; credit Unrealized Gain-Equity, $8,000.
70. A company purchased $60,000 of 5% bonds on May 1 at par value. The bonds pay interest
on March 1 and September 1. The amount of interest accrued on December 31 (the company's
year-end) would be:
A. $ 1,000.
B. $ 500.
C. $1,250.
D. $2,500.
E. $1,500.
71. 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.
72. A company paid $37,800 plus a broker's fee of $525 to acquire 8% bonds with a $40,000
maturity value as a long-term investment. The company intends to hold the bonds to maturity.
The correct entry to record the purchase of the bond investment is:
A. Debit Long-Term Investments—HTM $37,800; credit Cash $37,800.
B. Debit Long-Term Investments—HTM $38,325; credit Cash $38,325.
C. Debit Cash $40,000; credit Long-Term Investments—HTM $40,000.
D. Debit Long-Term Investments—HTM $37,800; debit Investment Expense $525; credit
Cash $38,325
E. Debit Long-Term Investments—HTM $37,800; debit Loss on Investment $525; credit
Cash $38,325.
73. Kendall Corp. purchased at par value $75,000 of Shrem Company’s 8% bonds that mature
in three-years. The bonds pay interest semiannually on June 1 and December 1. Kendall plans
to hold the bonds until they mature. When the bonds mature, Kendall should prepare the
following journal entry:
A. debit Long-Term Investments—HTM, $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 Investments—HTM, $75,000.
D. debit Unrealized Gain-Equity, $6,000; credit Cash, $6,000.
E. debit Cash, $75,000; credit Long-Term Investments—Trading, $75,000.
74. Kendall Corp. purchased at par value $160,000 of Barker Company’s 7% bonds that
mature in 10 months. The bonds pay interest semiannually on June 1 and December 1.
Kendall plans to hold the bonds until they mature. The journal entry to record Kendall’s
purchase of the bonds is:
A. debit Short-Term Investments—HTM $160,000; credit Cash, $160,000.
B. debit Cash, $169,333; credit, Short-Term Investments—HTM $169,333.
C. debit Cash, $160,000; credit Short-Term Investments—HTM $160,000.
D. debit Long-Term Investments-HTM $160,000; credit Cash $160,000.
E. debit Cash, $160,000; credit Long-Term Investments-HTM $160,000.
75. Barnes Company holds $50,000 of 8% bonds that mature in six years 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 Investments—HTM, $4,000.
B. debt Cash, $2,000; credit Long-Term Investments—HTM, $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.
76. 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.
77. The controlling investor is called the:
A. Owner.
B. Subsidiary.
C. Parent.
D. Investee.
E. Senior entity.
78. The investee company in a long term investment with controlling interest is called the:
A. Owner.
B. Subsidiary.
C. Parent.
D. Creditor.
E. Senior entity.
79. 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%.
80. Long-term investments can not include:
A. Held-to-maturity debt securities.
B. Securities with maturity dates within one operating cycle.
C. Available-for-sale equity securities.
D. Equity securities giving an investor significant influence over an investee.
E. Available-for-sale debt securities.
81. Consolidated financial statements:
A. Show the results of operations, cash flows, and the financial position of all entities under a
parent's control, including all subsidiaries.
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 in the subsidiaries on the balance sheet.
E. Do not include a balance sheet.
82. Comprehensive income includes all except:
A. Revenues and expenses reported in the income statement.
B. Dividends paid to shareholders
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. Gains and losses reported in the income statement.
83. Short-term investments in held-to-maturity debt securities are accounted for using the:
A. Fair value method with fair value adjustment to income.
B. Fair value method with fair value adjustment to equity.
C. Cost method with amortization.
D. Cost method without amortization.
E. Equity method.
84. Long-term investments in held-to-maturity debt securities are accounted for using the:
A. Fair value method with fair value adjustment to income.
B. Fair value method with fair value adjustment to equity.
C. Cost method without amortization.
D. Cost method with amortization.
E. Equity method.
85. 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.
86. All of the following statements relating to accounting for international operations are true
except:
A. Foreign exchange gains or losses can occur when accounting for international sales
transactions.
B. Gains and losses from foreign exchange transactions are accumulated in the Fair Value
Adjustment Account and are reported on the balance sheet.
C. Gains and losses from foreign exchange transactions are accumulated in the Foreign
Exchange Gain (or Loss) account.
D. The balance in the Foreign Exchange Gain (or Loss) account is reported on the income
statement.
E. Foreign exchange gains or losses can occur when accounting for international purchases
transactions.
87. Foreign exchange rates fluctuate due to changes in all but which of the following:
A. Political conditions.
B. Economic conditions.
C. Supply and demand for currencies.
D. Expectations of future events.
E. Whether the companies prepare financial statements under U.S. GAAP or IFRS.
88. 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.
89. 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. $ 0.2759
B. $0.82777
C. $1.82777
D. $2.48
E. $1.00
90. Kreighton Manufacturing purchased on credit £50,000 worth of production materials 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. If the liability is still unpaid at that
time, Kreighton 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.
91. Marshall 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. Marshall 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.
92. 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.
93. Cloverton 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%
94. Canberry Corporation had net income of $80,000, beginning total assets of $640,000 and
ending total assets of $580,000. Its return on total assets is:
A. 13.1%
B. 12.5%
C. 13.8%
D. 800%
E. 725%
95. 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 equals:
A. 12.5%.
B. 13.3%.
C. 16.7%.
D. 75.0%.
E. 600.0%.
96. 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 equals:
A. 3.01%.
B. 10.64%.
C. 32.00%.
D. 33.25%.
E. 300.75%.
97. 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.
98. 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%
99. 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.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
C-47
100. Investments can be classified as all but which of the following:
A. Intangible investments.
B. Held-to-maturity debt securities.
C. Available-for-sale debt securities.
D. Available-for-sale equity securities.
E. Trading securities.
101. 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.
102. 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.
103. A decrease in the fair 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.
104. Held-to-maturity securities are:
A. Always classified as Short-Term Investments.
B. Always classified as Long-Term Investments.
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 where significant influence involved.
105. 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 fair value on the balance sheet.
D. Intended to be held to maturity.
E. Always classified as Long-Term Investments.
106. All of the following are true for Available-for-sale equity securities except:
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. Are actively managed like Trading Securities.
107. J.P. Industries purchased 2,000 shares of Yang’s common stock for $143,000 as a long-
term investment. The investment is classified as available-for-sale securities. The par value of
the stock was $1 per share. J.P. paid $375 in commissions on the transaction. J.P.’s entry to
record the purchase 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-AFS for $143,000.
E. Debit to Long-Term Investments-AFS for $143,375.
108. Lessington Corporation purchases 4,000 shares of Gonzalez Company common stock for
$150,000 as a long-term investment. The investment is classified as available-for-sale
securities. Gonzalez has 500,000 shares of stock currently outstanding and the par value of the
stock is $1 per share. Lessington’s entry to record the purchase transaction would include a:
A. Debit to Long-Term Investments-AFS for $150,000.
B. Credit to Common Stock for $150,000.
C. Credit Gain on Long-Term Investment $146,000.
D. Debit to Long-Term Investments-AFS for $4,000.
E. Credit to Common Stock for $4,000.
109. Six months ago, a company purchased an investment in stock for $70,000. The
investment is classified as available-for-sale securities. The current fair value of the stock is
$68,500. The company should record a:
A. Debit to Unrealized Loss—Equity for $1,500.
B. Credit to Unrealized Gain—Equity for $1,500.
C. Debit to Investment Revenue for $1,500.
D. No entry is required.
E. Credit to Investment Revenue for $1,500.
110. On July 31, Potter Co. purchased 2,000 shares of GigaTech stock for $16,000. The
investment is classified as available-for-sale securities. On October 31, which is Potter’s year-
end, the stock had a fair value of $20,000. Potter 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 Unrealized Loss-Equity for $4,000.
E. Debit to Unrealized Gain-Equity for $4,000.
111. On March 15, Alan Company purchased 10,000 shares of Cameo Corp. stock for
$35,000. The investment is classified as available-for-sale securities. On June 30, the stock
had a fair value of $34,000. Alan should do which of the following:
A. Record a decrease to the Fair value Adjustment-AFS account.
B. Record an increase to the Unrealized Loss—Equity account.
C. Report a decrease in the Gain on Sale of Investment income statement account.
D. Report an increase in the asset section of the balance sheet.
E. Record an increase to the Unrealized Gain—Income account.
112. 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. Fair value method.
C. Historical cost method.
D. Cost with amortization method.
E. Effective method.
113. MotorCity, Inc. purchased 40,000 shares of Shaw 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. Debit to Long-Term Investments-HTM for $232,000.
E. Debit to Short-Term Investment-AFS for $232,000.
114. Segmental Manufacturing owns 35% of Glesson Corp stock. Glesson pays a total of
$47,000 in cash dividends for the period. Segmental’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.
115. Zhang Corp. owns 40% of Magnor Company's common stock. Magnor pays $97,000 in
total cash dividends to its shareholders. Zhang’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.
116. McVeigh Corp. owns 40% of Gondor Company's common stock. McVeigh received
$41,200 in cash dividends from Gondor. The entry to record this transaction should include a:
A. Debit to Dividends for $103,000.
B. Credit to Long-Term Investments for $41,200.
C. Debit to Dividend Revenue for $41,200.
D. Credit to Long-Term Investments for $103,000.
E. Credit to Cash for $41,200.
117. Marjam Company owns 51,000 shares of MacKenzie Company's 100,000 outstanding
shares of common stock. MacKenzie Company pays $25,000 in total cash dividends to its
shareholders. Marjam’s entry to record this transaction should include a:
A. Debit to Dividend Revenue for $12,750.
B. Debit to Interest Revenue for $12,750
C. Credit to Long-Term investments for $12,750.
D. Credit to Long-Term Investments for $25,000.
E. Credit to Dividend Revenue for $25,000.
118. Bharrat Corporation purchased 40% of Ferris Corporation for $100,000 on January 1.
On October 17 of the same year, Ferris Corporation declared total cash dividends of $12,000.
At year-end, Ferris Corporation reported net income of $60,000. The balance in the Bharrat
Corporation's Long-Term Investment-Ferris account at December 31 should be:
A. $ 80,800.
B. $100,000.
C. $ 95,200.
D. $119,200.
E. $124,000.
119. Madison Corporation purchased 40% of Jay Corporation for $125,000 on January 1. On
June 20 of the same year, Jay Corporation declared total cash dividends of $30,000. At year-
end, Jay Corporation reported net income of $150,000. The balance in Madison Corporation's
Long-Term Investment-Jay Corporation account as of December 31 should be:
A. $ 77,000.
B. $125,000.
C. $173,000.
D. $197,000.
E. $370,000.
120. Pravis Corporation owns 30% of Kuster Corporation. Pravis Corporation received
$9,000 in cash dividends from Kuster 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 Dividend Revenue, $9,000.
121. On January 4, Year 1, Barber Company purchased 5,000 shares of Convell Company for
$59,500 plus a broker's fee of $1,000. Convell Company has a total of 25,000 shares of
common stock outstanding and it is presumed the Barber Company will have a significant
influence over Convell. During each of the next two years, Convell declared and paid cash
dividends of $0.85 per share, and its net income was $72,000 and $67,000 for Year 1 and Year
2, respectively. The January 12, Year 3, entry to record Barber’s sale of 3,000 shares of
Convell Company stock, which represents 60% of Barber’s total investment, for $39,000 cash
should be:
A. Debit Cash $39,000; debit Loss on Sale of Investment $8,200; credit Long-Term
Investments $47,280.
B. Debit Cash $39,000; debit Loss on Sale of Investment $8,880; credit Long-Term
Investments $47,880.
C. Debit Cash $39,000; credit Gain on Sale of Investment $2,700; credit Long-Term
Investments $36,300.
D. Debit Cash $39,000; credit Gain on Sale of Investment $8,750; credit Long-Term
Investments $30,250.
E. Debit Cash $39,000; debit Loss on Sale of Investment $21,500; credit Long-Term
Investments $60,500.
122. On January 4, Year 1, Barber Company purchased 5,000 shares of Convell Company for
$59,500 plus a broker's fee of $1,000. Convell Company has a total of 25,000 shares of
common stock outstanding and it is presumed the Barber Company will have a significant
influence over Convell. During each of the next two years, Convell declared and paid cash
dividends of $0.85 per share, and its net income was $72,000 and $67,000 for Year 1 and Year
2, respectively. What is the book value of Barber’s investment in Convell at the end of Year
2?
A. $60,500.
B. $79,800.
C. $52,000.
D. $88,300.
E. $87,300.
123. A U.S. company makes a sale to a foreign customer receivable 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.
124. When a U.S. company makes a credit sale to an international customer and the sale terms
are for payment in a foreign currency, the foreign exchange rate used to record the sale is the
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.
125. On June 18, Wyman Company (a U.S. Company) sold merchandise to the Nielsen
Company of Denmark for €60,000 (Euros), with a payment due in 60 days. If the exchange
rate was $1.35 per euro on the date of sale and $1.14 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.
126. On November 12, Higgins, Inc., a U.S. Company, sold merchandise on credit to
Kagomeof 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 Higgins prepared its financial statements, the exchange
rate was $0.00843. Kagomepaid in full on January 12, when the exchange rate was $0.00861.
On December 31, Higgins should prepare the following journal entry:
A. Debit Sales $90; credit Foreign Exchange Gain $90.
B. Debit Foreign Exchange Loss $90; credit Sales $90.
C. Debit Accounts Receivable-Kagome $90; credit Foreign Exchange Gain $90.
D. Debit Foreign Exchange Loss $90; Accounts Receivable-Kagome $90.
E. No journal entry is required until the amount is collected.
127. On November 12, Higgins, Inc., a U.S. Company, sold merchandise on credit to Kagome
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 Higgins prepared its financial statements, the exchange rate was
$0.00843. Kagome paid in full on January 12, when the exchange rate was $0.00861. On
January 12, Higgins should prepare the following journal entry:
A. Debit Cash $12,915; credit Accounts Receivable-Kagome $12,555; credit Foreign
Exchange Gain $360.
B. Debit Cash $12,555; debit Foreign Exchange Loss $360; credit Accounts Receivable-
Kagome $12,915.
C. Debit Cash $12,915; credit Accounts Receivable-Kagome $12,645; credit Foreign
Exchange Gain $90.
D. Debit Cash $12,645; debit Foreign Exchange Loss $90; credit Accounts Receivable-
Kagome $12,915.
E. Debit Cash $12,915; credit Accounts Receivable-Kagome $12,645; credit Foreign
Exchange Gain $270.
128. All of the following statements regarding accounting for noninfluential securities under
U.S. GAAP and IFRS are true except:
A. Trading securities are accounted for using fair values with unrealized gains and losses
reported in other comprehensive income.
B. Trading securities are accounted for using fair values with unrealized gains and losses
reported in net income.
C. Available-for-sale securities are accounted for using fair values with unrealized gains and
losses reported in other comprehensive income.
D. Held-to-maturity securities are accounted for using amortized cost.
E. Both systems examine held-to-maturity securities for impairment.
129. All of the following statements regarding accounting for influential securities under U.S.
GAAP and IFRS are true except:
A. Under the equity method, the share of investee’s net income is reported in the investor’s
income in the same period the investee earns that income.
B. Under the consolidation method, investee and investor revenues and expenses are
combined.
C. Under the equity method, the investment account equals the acquisition cost plus the share
of investee income plus the share of investee dividends.
D. Under the consolidation method, nonintercompany assets and liabilities are combined
(eliminating the need for an investment account).
E. U. S. GAAP companies commonly refer to noncontrolling interests in consolidated
subsidiaries as minority interests whereas IFRS companies use noncontrolling interests.
130. All of the following statements regarding accounting for trading securities under U.S.
GAAP are true except:
A. The entire portfolio of trading securities is reported at is fair value.
B. An unrealized gain or loss from a change in fair value is reported on the income statement.
C. An unrealized gain or loss is recorded with an adjusting entry when the securities are sold.
D. An unrealized gain or loss is recorded with an adjusting entry at the end of each period.
E. Unrealized gains and losses are recorded in a temporary account that is closed to Income
Summary at the end of the period.
131. All of the following statements regarding accounting for trading securities under U.S.
GAAP are true except:
A. The entire portfolio of trading securities is reported at fair value.
B. An unrealized gain or loss from a change in fair value is reported on the income statement.
C. A realized gain or loss is recorded when the securities are sold and reported on the income
statement.
D. When the period-end fair value adjustment for the portfolio of trading securities is
computed, it includes the cost and fair value of any securities sold.
E. Any prior period fair value adjustment to the portfolio is not used to compute the gain or
loss from sale of individual transactions.
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132. All of the following statements regarding other comprehensive income are true except:
A. Other comprehensive income includes unrealized gains and losses on available-for-sale
securities.
B. Other comprehensive income is not considered when calculating comprehensive income.
C. Other comprehensive income includes foreign currency adjustments.
D. Other comprehensive income includes pension adjustments.
E. Accumulated other comprehensive income is defined as the cumulative impact of other
comprehensive income.
133. Landmark Corp. buys $300,000 of Schroeter Company’s 8% five-year bonds at par value
on September 1. Interest payments are made semiannually. All of the following regarding
accounting for the securities are true except:
A. The debt securities should be recorded at the cost $300,000.
B. The securities will have a maturity value of $300,000.
C. The semiannual interest payment amount is $12,000.
D. The semiannual interest payment amount is $24,000.
E. Interest Revenue should be credited when an interest payment is received.
134. Landmark Corp. buys $300,000 of Schroeter Company’s 8% five-year bonds payable at
par value on September 1. Interest payments are made semiannually. Landmark plans to hold
the bonds for the five year life. The journal entry to record the purchase should include:
A. A debit to Long-Term Investments-AFS $300,000.
B. A debit to Short-Term Investments-Trading $300,000.
C. A debit to Long-Term Investments-HTM $300,000.
D. A debit to Short-Term Investments-AFS $300,000.
E. A debit to Cash $300,000.
135. Landmark buys $300,000 of Schroeter Company’s 8% five-year bonds payable at par
value on September 1. Interest payments are made semiannually on March 1 and September
1. The journal entry Landmark should record to accrue interest earned at year-end December
31 is:
A. Debit Interest Receivable $8,000, credit Interest Revenue $8,000.
B. Debit Interest Receivable $12,000, credit Interest Revenue $12,000.
C. Debit Cash $8,000, credit Interest Revenue $8,000.
D. Debit Cash $12,000, credit Interest Revenue $12,000.
E. Debit Interest Revenue $8,000, credit Interest Receivable $8,000.
136. Landmark Corp. buys $300,000 of Schroeter Company’s 8% five-year bonds payable at
par value on September 1. Interest payments are made semiannually. Landmark plans to hold
the bonds for the five year life. When the bonds mature, the journal entry to record the
proceeds will be:
A. Debit Long-Term Investments-HTM $300,000; credit Cash $300,000.
B. Debit Cash $300,000; credit Interest Revenue $300,000.
C. Debit Cash $300,000; credit Long-Term Investments-HTM $300,000.
D. Debit Cash $300,000; credit Interest Receivable $300,000.
E. Debit Cash $300,000; credit Bonds Payable $300,000.
137. On February 15, Jewel Company buys 7,000 shares of Marcelo Corp. common stock at
$28.53 per share plus a brokerage fee of $400. The stock is classified as available-for-sale
securities. On March 15, Marcelo declares a dividend of $1.15 per share payable to
stockholders of record on April 15. Jewel received the dividend on April 15 and ultimately
sells half of the Marcelo stock on November 17 of the current year for $29.30 per share less a
brokerage fee of $250. The journal entry to record the purchase on February 15 is:
A. Debit Long-Term Investments-HTM $199,710; credit Cash $199,710.
B. Debit Long-Term Investments-AFS $199,710; credit Cash $199,710.
C. Debit Long-Term Investments-Trading $199,710; credit Cash $199,710.
D. Debit Long-Term Investments-Trading $200,110; credit Cash $200,110.
E. Debit Long-Term Investments-AFS $200,110; credit Cash $200,110.
138. On February 15, Jewel Company buys 7,000 shares of Marcelo Corp. common stock at
$28.53 per share plus a brokerage fee of $400. The stock is classified as available-for-sale
securities. On March 15, Marcelo Corp. declares a dividend of $1.15 per share payable to
stockholders of record on April 15. Jewel Company received the dividend on April 15 and
ultimately sells half of the Marcelo Corp. stock on November 17 of the current year for
$29.30 per share less a brokerage fee of $250. The journal entry to record the dividend on
April 15 is:
A. Debit Cash $7,350; credit Dividend Revenue $7,350.
B. Debit Cash $8,050; credit Dividend Revenue $8,050.
C. Debit Cash $8,050; credit Interest Revenue $8,050.
D. Debit Cash $7,350; credit Interest Revenue $7,350.
E. Debit Cash $8,050; credit Gain on Sale of Investments $8,050.
139. On February 15, Jewel Company buys 7,000 shares of Marcelo Corp. common stock at
$28.53 per share plus a brokerage fee of $400. The stock is classified as available-for-sale
securities. On March 15, Marcelo Corp. declares a dividend of $1.15 per share payable to
stockholders of record on April 15. Jewel Company received the dividend on April 15 and
ultimately sells half of the Marcelo Corp. stock on November 17 of the current year for
$29.30 per share less a brokerage fee of $250. The journal entry to record the sale of the 3,500
shares of stock on November 17 is:
A. Debit Cash $102,300; credit Long-Term Investments-AFS $99,855; credit Gain on Sale of
Long-Term Investments $2,445.
B. Debit Cash $102,550; credit Long-Term Investments-Trading $99,855; debit Gain on Sale
of Long-Term Investments $2,645.
C. Debit Cash $102,550; credit Long-Term Investments-AFS $100,055; credit Gain on Sale of
Long-Term Investments $2,495.
D. Debit Cash $102,300; credit Long-Term Investments-AFS $100,055; credit Gain on Sale
of Long-Term Investments $2,245.
E. Debit Cash $102,550; credit Long-Term Investments-Trading $99,855; credit Gain on Sale
of Long-Term Investments $2,645.
140. On February 15, Jewel Company buys 7,000 shares of Marcelo Corp. common stock at
$28.53 per share plus a brokerage fee of $400. The stock is classified as available-for-sale
securities. On March 15, Marcelo Corp. declares a dividend of $1.15 per share payable to
stockholders of record on April 15. Jewel Company received the dividend on April 15 and
ultimately sells half of the Marcelo Corp. stock on November 17 of the current year for
$29.30 per share less a brokerage fee of $250. The fair value of the remaining shares is $29.50
per share. The amount that Jewel Company should report on its year-end December 31
income statement related to the investment in Marcelo Corp. is:
A. $10,295.
B. $8,050.
C. $2,245.
D. $3,195.
E. $5,440.
141. On February 15, Jewel Company buys 7,000 shares of Marcelo Corp. common at $28.53
per share plus a brokerage fee of $400. The stock is classified as available-for-sale securities.
On March 15, Marcelo Corp. declares a dividend of $1.15 per share payable to stockholders
of record on April 15. Jewel Company received the dividend on April 15 and ultimately sells
half of the Marcelo Corp. stock on November 17 of the current year for $29.30 per share less
a brokerage fee of $250. The fair value of the remaining shares is $29.50 per share. The
amount that Jewel Company should report in the equity section of its year-end December 31
balance sheet for its investment in Marcelo Corp. is:
A. $10,295.
B. $8,050.
C. $2,245.
D. $3,195.
E. $6,390.
142. On February 15, Jewel Company buys 7,000 shares of Marcelo Corp. common at $28.53
per share plus a brokerage fee of $400. The stock is classified as available-for-sale securities.
On March 15, Marcelo Corp. declares a dividend of $1.15 per share payable to stockholders
of record on April 15. Jewel Company received the dividend on April 15 and ultimately sells
half of the Marcelo Corp. stock on November 17 of the current year for $29.30 per share less
a brokerage fee of $250. The fair value of the remaining 3,500 shares is $29.50 per share. The
amount that Jewel Company should report in the asset section of its year-end December 31
balance sheet for its investment in Marcelo Corp. is:
A. $200,110.
B. $103,250.
C. $2,245.
D. $3,195.
E. $5,440.
143. Financial statements that show the financial position, results of operations, and cash
flows of all entities under the parent company’s control, including all subsidiaries are known
as:
A. Combined financial statements
B. Consolidated financial statements
C. Equity financial statements
D. Statement of owner’s equity
E. Investor financial statements
144. The two business entities involved in an investment in securities with controlling
influence, for which consolidated financial statements are prepared, are known as:
A. Parent and Investor
B. Subsidiary and Investee
C. Consolidator and Parent
D. Parent and Subsidiary
E. Both are referred to as partners.
145. Match the following terms with the appropriate definitions.
A. Equity method
B. Available-for-sale securities
C. Subsidiary
D. Long-term investments
E. Parent company
F. Return on total assets
G. Consolidated financial statements
H. Held-to-maturity securities
I. Trading securities
J. Unrealized gain (loss)
_______ (1) 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.
_______ (2) A corporation controlled by another company when the controlling company
owns more than 50% of the investee’s voting stock.
_______ (3) Change in market value that is not yet realized through an actual sale.
_______ (4) 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.
_______ (5) A company that owns a more than 50% controlling interest in a subsidiary.
_______ (6) Debt and equity securities not classified as trading or held-to-maturity.
_______ (7) Debt securities that a company intends and is able to hold until maturity.
_______ (8) Debt and equity securities that a company intends to actively manage and trade
for profit.
_______ (9) A measure of operating efficiency, computed as net income divided by average
total assets.
_______(10)An accounting method for long-term investments in equity when the investor has
significant influence over the investee.
1. D; 2. C; 3. J; 4. G; 5. E; 6. B; 7. H; 8. I; 9. F; 10. A
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C-78
Blooms: Remember
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: C-A1
Learning Objective: C-C1
Learning Objective: C-C2
Learning Objective: C-P1
Learning Objective: C-P2
Learning Objective: C-P3
Learning Objective: C-P4
Topic: Basics of Investments
Topic: Investment in Securities with Controlling Influence
Topic: Components of Return on Total Assets
Topic: Reporting of Noninfluential Investments
Topic: Held-to-Maturity Securities
Topic: Available-for-Sale Securities
Topic: Reporting of Influential Investments
Short Answer Questions
146. Explain the difference between short-term and long-term investments. Cite examples of
each.
147. Discuss the reasons companies make investments.
148. Identify the classifications for non-influential investments in securities. What are the
accounting basics for non-influential investments in securities, including acquisition,
dividends earned, and disposition?
149. What are the accounting basics for debt securities, including recording their acquisition,
interest earned, and their disposal?
150. What is comprehensive income and how is it usually reported in the financial
statements?
151. Explain how investors report investments in equity securities when the investor has a
controlling influence over an investee.
152. Define the foreign exchange rate between two currencies. Explain its effect on business
transactions conducted in a foreign currency.
153. Define the return on total assets and explain how it is used to measure a company's
financial performance.
154. Explain how to record the sale of trading securities.
155. Explain how to account for held-to-maturity debt securities at and after acquisition and
how they are reported in the financial statements.
156. Explain how to account for available-for-sale debt and equity securities at and after
acquisition and how they are reported in financial statements.
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C-84
157. 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.
158. Explain how transactions (both sales and purchases) in a foreign currency are recorded
and reported.
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C-85
159. On April 1 of the current year, a company paid $150,000 cash to purchase 7%, 10-year
bonds with a par value of $150,000; interest is paid semiannually each April 1 and October 1.
The company intends to hold these bonds until they mature. Prepare the journal entries to
record the bond purchase, the receipt of the first semiannual interest payment on October 1 of
the current year, and the accrual of interest for the year-end December 31.
160. On May 1 of the current year, a company paid $200,000 cash to purchase 6%, 10-year
bonds with a par value of $200,000; interest is paid semiannually each May 1 and November
1. The company intends to hold these bonds until they mature. Prepare the journal entry to
record the bond purchase.
161. On May 1 of the current year, a company paid $200,000 cash to purchase 6%, 10-year
bonds with a par value of $200,000; interest is paid semiannually each May 1 and November
1. The company intends to hold these bonds until they mature. Prepare the journal entry to
record the receipt of the first semiannual interest payment on November 1.
162. On May 1 of the current year, a company paid $200,000 cash to purchase 6%, 10-year
bonds with a par value of $200,000; interest is paid semiannually each May 1 and November
1. The company intends to hold these bonds until they mature. Prepare the journal entry for
the accrual of interest for the year-end December 31.
163. A company paid $600,000 for 10% bonds with a par value of $600,000 on September 1.
The bonds pay 5% 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.
(2) Year-end adjusting entry, December 31.
(3) Receipt of semiannual interest March 1.
(4) Redemption of the bonds at maturity on August 31.
165. A company reported net sales of $850,000, net income of $200,000 and average total
assets of $575,000. Calculate its return on total assets.
166. A company had net income of $350,000 in Year 1 and $520,000 in Year 2. The company
had average total assets of $2,500,000 in Year 1 and $3,000,000 in Year 2. Calculate the return
on total assets for Year 1and Year 2. Comment on the results, did the company’s performance
improve?
167. A company had net income of $45,000, net sales of $390,000, and average total assets of
$450,000 for the current year. Calculate the company's profit margin, total asset turnover, and
return on total assets.
168. A company reported net income of $225,000, 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.
169. A company reported net income for Year 1 of $98,000 and $106,000 for Year 2. It also
reported net sales of $835,000 in Year 1 and $918,000 in Year 2. The company's average total
assets in Year 1 were $1,850,000 and $1,720,000 in Year 2. Calculate the company's profit
margin, total asset turnover and return on total assets for Year 1and Year 2. Comment on the
results.
170. A company had net income of $86,000 in Year 1 and $118,000 in Year 2. Its net sales
were $640,000 in Year 1 and $611,000 in Year 2. Its average total assets in Year 1 were
$1,670,000 and $1,712,000 in Year 2. Calculate the profit margin, total asset turnover and
return on total assets for both years. Comment on the results.
171. Hubbard Company had the following trading securities in its portfolio at December 31.
The Fair Value Adjustment—Trading account had a balance of zero prior to year-end
adjustment. Prepare the appropriate adjusting journal entry.
Short-Term Investments Cost
Fair
Value
XBM................................................................ $ 24,500 $ 25,900
Micro............................................................... 51,000 48,600
Outel................................................................ 62,300 61,000
Dull.................................................................. 29,900 30,200
Totals............................................................... $167,700 $165,700
172. Element Company had the following long-term available-for-sale securities in its
portfolio at December 31 for each of the years listed. The year-end cost and fair values for its
portfolio follow. Beginning with Year 1, prepare the appropriate journal entry to record each
year-end market adjustment for these securities.
Available-for-Sale Securities Cost
Fair
Value
Year 1.............................................................. $ 404,500 $ 389,900
Year 2.............................................................. 406,400 412,600
Year 3.............................................................. 454,800 472,000
173. Scotsland 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 Scotsland purchased 600 shares of Lobe Company stock at $120 per share
plus a $750 brokerage fee.
July 1 Scotsland received a $2.50 per share cash dividend on the Lobe Company
stock.
Sept. 15 Sold 300 shares of Lobe Company stock for $125 per share, less a $450
brokerage fee.
Dec. 31 The fair value of the Lobe Company stock (the only investment that
Scotsland owns) is $124 per share. The balance of the Fair value Adjustment
—Trading account had a zero balance prior to adjustment.
174. Mire Corporation had the following transactions involving investments in trading
securities during the year. Prior to these transactions, Mire had never had any investments in
trading securities. Prepare the required general journal entries to record these transactions.
Feb. 16 Purchased 800 shares of HM Corporation stock at $28 per share plus a $400
brokerage fee.
Feb. 26 Purchased 500 shares of Sugarland Co. stock at $19 per share plus a $300
brokerage fee.
Mar. 2 Received a $0.95 per share dividend from the HM Corporation.
Mar. 28 Sold 200 shares of HM Corporation stock for $31 per share less a $150
brokerage fee.
Apr. 20 Sold 150 shares of Sugarland Co. stock at $17 per share less a $100 brokerage
fee.
Apr. 30 The company is preparing quarterly financial statements; prepare an adjusting
entry for the fair value adjustment on the trading securities. At April 30, the
HM stock has a fair value of $30 per share, and the Sugarland stock has a fair
value of $16 per share.
175. On October 31, Augustas Co. received cash dividends of $0.15 per share from its
investment in Lamb Corp.'s common stock. Augustas owned 1,200 shares of Lamb 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.
176. Landers, Inc., held 1,500 of Shipman Company 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 Lander’s journal entry to record this sale.
177. Washington Corp. held 1,500 of Vashon Company 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 Washington’s sale.
178. In the current year, Logic Co. purchased bonds of Waterford Co. with a cost of $125,000
and a year-end fair value of $123,700. Logic also purchased 1,500 shares of Jasper Co.
common stock with a cost of $25,000 and a year-end fair 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.
179. In the current year, Largo Co. purchased bonds of MacDermott Corp. with a cost of
$125,000 and a market value of $127,000. Largo also purchased 1,500 shares of Armistead
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.
180. Barzetti had no investments prior to the current year. It had the following transactions
involving available-for-sale and held-to-maturity securities during the year. The stock
purchases are considered short-term available-for-sale securities. Prepare Barzetti’s journal
entries to record the transactions and events associated with the investment purchases.
Apr. 18 Purchased 5,000 shares of Lacy Co. stock at $26.50 per share plus a $350
brokerage fee.
May 01 Purchased $200,000 of Butcher’s 7%, two-year bonds payable at par value.
Interest payments are paid semiannually on November 1 and May 1. It is the
company’s intent to hold the bonds until maturity.
Jun. 10 Purchased 4,000 shares of SubCo stock at $48.25 plus a $325 brokerage fee.
Nov. 01 Received a check for the first semiannual interest payment on the Butcher’s
bonds.
Nov. 15 Received a $0.65 per share cash dividend on the Lacy Co. shares.
Nov. 30 Sold 2,000 shares of Lacy Co. stock at $29 less a $300 brokerage fee.
Dec. 15 Received a $1.10 per share cash dividend on the SubCo shares.
Dec. 20 Received a $.075 per share cash dividend on the remaining Lacy Co. shares.
Dec. 31 Prepare an adjusting entry to record the fair value adjustment on the
available-for-sale securities. At December 31, the Lacy Co. stock has a fair
value of $28 per share, and the SubCo stock has a fair value of $49.50 per
share.
181. Weston Company had the following long-term available-for-sale securities in its
portfolio at December 31, Year 1. Weston had several long-term investment transactions
during the next year. After analyzing the effects of each transaction, (1) determine the amount
Weston should report on its December 31, Year 1 balance sheet for its long-term investments
in available-for-sale securities, (2) determine the amount Weston should report on its
December 31, Year 2 balance sheet for its long-term investments in available-for-sale
securities, (3) prepare the necessary adjusting entry to record the fair value adjustment at
December 31, Year 2.
Available-for-Sale Securities (LT) Cost
Fair
Value
40,000 shares of Beach common stock........... $ 497,500 $ 488,900
15,000 shares of Danfield common stock....... 410,200 412,600
18,000 shares of Cardinal common stock....... 399,600 382,500
Jan. 22 Sold 9,000 shares of Cardinal common stock for $203,000 less a brokerage
fee of $850.
Mar. 17 Purchased 30,000 shares of Apex common stock for $995,000 plus a
brokerage fee of $2,500. The shares represent a 30% ownership in Apex.
Jun. 10 Purchased 108,000 shares of Desert Springs common stock for $1,525,000
plus a brokerage fee of $4,200. The shares represent a 54% ownership in
Desert Springs.
Nov. 01 Purchased 12,000 shares of Cliff common stock for $223,500 plus a
brokerage fee of $450. The shares represent a 10% ownership.
Dec. 31 At December 31, Year 2, the fair values of its investments are: Beach,
$502,500; Danfield, $411,800; Cardinal, $203,100; Apex, $1,113,250; Desert
Springs, $1,576,000; Cliff, $224,750.
182. 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 for Froxel to
account for these transactions and events.
183. Cosmos Corporation had the following long-term investment transactions.
Jan 2 Purchased 5,000 shares of Visual, Inc. for $42 per share plus $7,000 in fees
and commission. These shares represent a 35% ownership of Visual.
Oct 15 Received Visual, Inc. cash dividend of $2 per share.
Dec 31 Visual reported a net loss of $66,000 for the year.
Prepare the journal entries Cosmos Corporation should record for these transactions and
events.
Answe
Jan 2 Long—Term Investments……………………….. 217,000
Cash [(5,000 * $42) + $7,000]………………. 217,000
Oct 15 Cash (5,000 * $2)……………………………….. 10,000
Long—Term Investments…………………… 10,000
Dec. 31 Loss from Long—Term Investments
($66,000 * 35%)………………………………… 23,100
Long—Term Investments……………………
23,100
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: C-P4
Topic: Reporting of Influential Investments
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
C-109
184. On January 3, Kostansas Corporation purchased 5,000 shares of Morton, Inc. for $40 per
share plus $700 in broker commissions. These shares represent a 40% ownership in Morton,
Inc. Prepare the journal entry Kostansas Corporation should record for the investment
transaction.
185. On January 3, Kostansas Corporation purchased 5,000 shares of Morton, Inc. for $40 per
share plus $700 in broker commissions. These shares represent a 40% ownership in Morton,
Inc. Prepare the journal entry Kostansas Corporation should record for the receipt of cash
dividends of $2 per share from Morton on July 10.
186. On January 3, Kostansas Corporation purchased 5,000 shares of Morton, Inc. for $40 per
share plus $700 in broker commissions. These shares represent a 40% ownership in Morton,
Inc. Prepare the journal entry Kostansas Corporation should record when Morton reports net
income of $52,000 for the year on December 31.
187. Draft Co. purchased 14,000 shares of Hamburg Corporation's 40,000 shares of common
stock on January 1. This represented 35% of Hamburg’s outstanding shares and gave Draft
Co. significant influence over Hamburg’s management and operations. On October 11,
Hamburg declared and paid cash dividends of $30,000. On December 31, Hamburg reported
net income of $125,000 for the year. Prepare the journal entries Draft Co. should record to
account for the dividends received and the earnings reported by Hamburg Corporation.
188. On January 1, 2014, Rickson Corporation purchased 7,500 shares of AutoTech as a long-
term investment for a total of $235,000. The 7,500 shares represent 30% of the outstanding
(25,000) shares of AutoTech. Prepare the journal entries for Rickson to record the following
transactions and events:
December 31, 2014: AutoTech reported net income of $66,000 for 2014.
February 1, 2015: Sold 1,875 of the AutoTech shares for $34 per share. In addition,
$1,350 in fees and commissions were paid by Rickson on this sale.
November 1, 2015: Rickson received a $0.90 per share cash dividend from AutoTech.
December 31, 2015: AutoTech reported net loss of $46,000 for 2015.
189. Rainier Importers purchases automotive parts from Austria. Prepare journal entries for
the following transactions of Rainier.
Oct 1 Purchased inventory from Klossner Co. for 12,000 euros, terms n/30. The
exchange rate was $1.15 per euro.
Oct 30 Paid Klossner Co. for the October 1 purchase. The exchange rate was $1.13 per
euro.
190. Silver Era Co. exports Southwestern artwork to Japan. Prepare journal entries for the
following transactions.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
C-113
Nov 10 Sold artwork to Ito Company for 10,000,000 , terms n/30. The exchange rate
was $0.009 per yen.
Dec 5 Received payment from Ito Company for the November 10 sale. The exchange
rate was $0.0087 per yen.
Answer
:
Nov 10 Accounts Receivable (10,000,000 * $0.009) 90,000
Sales........................................................ 90,000
Dec 5 Cash (10,000,000 * $0.0087)...................... 87,000
Foreign Exchange Loss.......................... 3,000
Accounts Receivable............................... 90,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Global
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: C-C3
Topic: Investments in International Operations
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
C-114
191. Arkansana Inc. imports inventory from Costa Rica. Prepare the journal entries for
Arkansana to record the following transactions. Include any year-end adjustments.
Dec 21
Purchased inventory from Rojas Co. for 5,000,000 Costa Rican colon. The
exchange rate was $0.002 per colon. The credit terms were n/30.
Dec 31 The exchange rate was $0.0023 per colon.
Jan 20
Paid Rojas Co. for the December 21 purchase. The exchange rate was $0.0021 per
colon.
192. FreshFoods, Inc. sells American gourmet foods to merchandisers in Singapore. Prepare
the journal entries for FreshFoods, to record the following transactions. Include any year-end
adjustments.
Dec 20 Sold items to Tan, Inc., for 60,000 Singapore dollars. The exchange rate was
$0.476 per Singapore dollar. The purchase terms were n/30.
Dec 31 The exchange rate was $0.480 per Singapore dollar.
Jan 17 Received payment from Tan for the December 20 sale. The exchange rate was
$0.495 per Singapore dollar.
193. ___________________________ 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.
194. __________________________ are investments in securities that are not readily
convertible to cash, or are not intended to be converted to cash in the short-term.
195. _________________________ securities reflect a creditor relationship while
____________________ securities reflect an owner relationship.
196. An investing company that owns more than ________ of another (investee) company's
voting stock is presumed to have controlling influence over the investee.
197. Short-term investments in held-to-maturity debt securities are accounted for using the
______________________.
198. Long-term investments in held-to-maturity debt securities are accounted for using the
___________________________.
199. Investments in equity securities where the investor has a significant, but not controlling
influence, are accounted for using the _______________ method.
200. Investments in equity securities where the investor has a controlling influence are
accounted for using the ________________________________.
201. ________________________ refers to all changes in equity for a period except for those
due to investments by and distributions to owners.
202. Foreign exchange rates fluctuate due to changing _______________ and ___________
conditions.
203. Return on total assets is computed by dividing ___________ by __________.
204. ____________________________ are debt and equity securities that a company intends
to actively manage and trade for a profit.
205. Investments in trading securities are always classified as ______________ and are
reported as _______________ on the balance sheet.
206. _________________ are debt securities a company intends and is able to hold until the
maturity date.
207. Long-term investments in available-for-sale securities are reported at their _______ on
the balance sheet.
208. 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.
209. 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 _____________.
210. A company that is a controlling investor in another company is known as the
__________.
211. When one company owns more than 50% of another company’s voting stock and has
control over the investee company, the investee is called the _______________________.
212. ______________________ financial statements show the financial position, results of
operations, and cash flows of all entities under the parent company’s control, including all
subsidiaries.
