Accounting Chapter 15 Long-term investments are usually held as an investment

Chapter 15 Investments

MULTIPLE CHOICE QUESTIONS

1)

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

A)

True

B)

False

2)

Land used in the company’s operations is reported as a long-term investment.

A)

True

B)

False

3)

Short-term investments are also called temporary investments or marketable securities.

A)

True

B)

False

4)

Equity securities reflect a creditor relationship such as investments in notes, bonds, and certificates

of deposit.

A)

True

B)

False

5)

Cash equivalents are investments that are readily converted to known amounts of cash and mature

within three months.

A)

True

B)

False

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.

A)

True

B)

False

7)

Long-term investments include investments in land or other assets not used in a company’s

operations.

A)

True

B)

False

8)

Debt securities are recorded at cost when purchased.

A)

True

B)

False

9)

Debt securities are recorded at cost when purchased, and interest revenue for investments in debt

securities is recorded when earned.

A)

True

B)

False

10)

Any cash dividends received from equity securities are recorded as Dividend Expense.

A)

True

B)

False

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.

A)

True

B)

False

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.

A)

True

B)

False

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 is a debit to Long-Term Investments for $50,000 and a credit

to Cash for $50,000.

A)

True

B)

False

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.

A)

True

B)

False

15)

A controlling investor is called the parent, and the investee company is called the subsidiary.

A)

True

B)

False

16)

When an investor company owns more than 25% of the voting stock of an investee company, it has

a controlling influence.

A)

True

B)

False

17)

The equity method with consolidation is used to account for long-term investments in equity

securities with controlling influence.

A)

True

B)

False

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.

A)

True

B)

False

19)

Investments in trading securities are accounted for using the equity method with consolidation.

A)

True

B)

False

20)

Comprehensive income refers to all changes in equity during a period except those from owners’

investments and dividends.

A)

True

B)

False

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.

A)

True

B)

False

22)

When consolidated financial statements are prepared, the parent company uses the equity method

and reports the investment accounts for the subsidiaries on the balance sheet.

A)

True

B)

False

23)

Equity securities giving an investor significant influence over an investee are always considered

short-term investments.

A)

True

B)

False

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.

A)

True

B)

False

25)

Multinational corporations can be U.S. companies with operations in other countries.

A)

True

B)

False

26)

Foreign exchange rates fluctuate due to many factors including changing political and economic

conditions.

A)

True

B)

False

27)

The price of one currency stated in terms of another currency is called a foreign exchange rate.

A)

True

B)

False

28)

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

A)

True

B)

False

29)

Profit margin is net sales divided by net income.

A)

True

B)

False

30)

Profit margin reflects the percent of net income in each dollar of net sales.

A)

True

B)

False

31)

All companies desire a low return on total assets.

A)

True

B)

False

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%.

A)

True

B)

False

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%.

A)

True

B)

False

34)

A company should report its portfolio of trading securities at its fair value.

A)

True

B)

False

35)

Trading securities are securities that are purchased by trading securities with other companies

rather than by paying cash.

A)

True

B)

False

36)

Trading securities are always reported as current assets.

A)

True

B)

False

37)

Unrealized gains and losses on trading securities are reported on the income statement.

A)

True

B)

False

38)

Held-to-maturity securities are equity securities a company intends and is able to hold until

maturity.

A)

True

B)

False

39)

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

A)

True

B)

False

40)

Accounting for long-term investments in held-to–maturity securities requires companies to record

interest revenue as it is earned.

A)

True

B)

False

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.

A)

True

B)

False

42)

Long-term investments in debt securities not classified as trading or held-to-maturity securities are

classified as available-for-sale securities.

A)

True

B)

False

43)

Management’s intent determines whether an available-for-sale security is classified as long-term or

short-term.

A)

True

B)

False

44)

Unrealized Loss—Equity and Unrealized Gain—Equity are permanent equity accounts.

A)

True

B)

False

45)

Both U.S. GAAP and IFRS permit companies to use fair value in reporting available-for-sale and

held-to-maturity securities.

A)

True

B)

False

46)

Security prices are sometimes listed in fractions. For example, a debt security with a price of 22¾

is the same as $22.25.

A)

True

B)

False

47)

Available-for-sale securities are actively managed like trading securities because the company

intends to trade them for profit in the short term.

A)

True

B)

False

48)

Long-term investments in available-for-sale securities are reported at fair value on the balance

sheet.

A)

True

B)

False

49)

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.

A)

True

B)

False

50)

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. This is the company’s first and only investment

in available-for-sale securities. 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.

A)

True

B)

False

51)

On May 15, Tumbleweed, Inc. purchased 10,000 shares of Dansell Corp. for $80,000. The

securities are considered available-for-sale securities. This is the company’s first and only

investment in 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.

A)

True

B)

False

52)

An investor presumed to have significant influence owns at least 20% but not more than 50% of

another company’s voting stock.

A)

True

B)

False

53)

The cost method of accounting is used for long-term investments in equity securities with

significant influence.

A)

True

B)

False

54)

When using the equity method for investments in equity securities, the investor records the receipt

of cash dividends as revenue.

A)

True

B)

False

55)

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.

A)

True

B)

False

56)

When using the equity method, receipt of cash dividends increases the carrying (book) value of an

investment in equity securities.

A)

True

B)

False

57)

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.

A)

True

B)

False

58)

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.

A)

True

B)

False

59)

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.

A)

True

B)

False

60)

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.

A)

True

B)

False