Chapter 15
INVESTMENTS AND INTERNATIONAL OPERATIONS
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 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. 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 bonds and holds them to maturity. The investor’s
journal entry to record the proceeds should include a debit to Cash for $50,000 and a credit to
Long-Term Investments for $50,000.
14. A company holds $40,000 of 7% bonds as a held-to-maturity security. Assuming all prior
interest entries have been accounted for, the bondholder’s journal entry to record receipt of the
semiannual interest payment includes a debit to Cash for $2,800 and a credit to Interest
Revenue for $2,800.
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 in accounting 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.
22. Consolidated statements are prepared as if a company is organized as one entity, with the
amounts allocated for subsidiaries reported in the investment accounts.
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 will buy 1.48 worth of 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. Net 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 other securities 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. Long-term investments in available-for-sale securities are reported at fair value on the
balance sheet.
45. 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.
46. On May 1, Franke Co. purchases 2,000 shares of Computech stock for $25,000. This
investment is considered to be an available-for-sale investment. On July 31 (Franke’s year-
end), the stock had a market value of $28,000. Franke should record a credit to Unrealized
Gain–Equity for $3,000.
47. On May 15, Briar Company purchased 10,000 shares of Broder 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 the income statement as
a $5,000 gain.
48. An investor presumed to have significant influence owns as least 20% but not more than
50% of another company’s voting stock.
49. The cost method of accounting is used for long-term investments in equity securities with
significant influence.
50. When using the equity method for investments in equity securities, the investor records
the receipt of cash dividends as revenue.
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.
52. When using the equity method, receipt of cash dividends increases the carrying (book)
value of an investment in equity securities.
53. 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.
54. If a U. S. company’s credit sale to an international customer allows payment to be made in
a foreign currency, the transaction is recorded using the exchange rate on the date of sale.
55. A U. S. Company’s credit sale to an international customer allowing payment to be made
in a foreign currency requires using the same exchange rate for the date of sale and the cash
payment date.
56. 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.
57. 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.
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.
59. 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.
60. 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 convertible to cash.
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.
62. NSC Corporation has invested in 10% of the outstanding stock of VC Corporation. NSC
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.