Appendix C Investments and International Operations Answer Key
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 hold to 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 statements are prepared, the parent company uses the equity
method and the investments in the subsidiaries are reported on the balance sheet.
23.
Equity securities that give 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 are $1,740,000 and its average total
assets are $2,750,000. Its profit margin equals 7.5%.
33.
A company has net income of $130,500. Its net sales are $1,740,000 and its average total
assets are $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.
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.