149)
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. This is the
company’s first and only investment in 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) $103,250. B) $2,245. C) $5,440. D) $3,195. E) $200,110.
150)
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)
Consolidated financial statements
B)
Statement of owner’s equity
C)
Equity financial statements
D)
Investor financial statements
E)
Combined financial statements
83
151)
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 Subsidiary
B)
Parent and Investor
C)
Both are referred to as partners.
D)
Subsidiary and Investee
E)
Consolidator and Parent
SHORT ANSWER QUESTIONS
152)
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.
ESSAY QUESTIONS
153)
Explain the difference between short-term and long-term investments. Cite examples of each.
154)
Discuss the reasons companies make investments.
155)
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?
156)
What are the accounting basics for debt securities, including recording their acquisition, interest
earned, and their disposal?
157)
What is comprehensive income and how is it usually reported in the financial statements?
158)
Explain how investors report investments in equity securities when the investor has a controlling
influence over an investee.
159)
Define the foreign exchange rate between two currencies. Explain its effect on business
transactions conducted in a foreign currency.
160)
Define the return on total assets and explain how it is used to measure a company’s financial
performance.
161)
Explain how to record the sale of trading securities.
162)
Explain how to account for held-to-maturity debt securities at and after acquisition and how they
are reported in the financial statements.
163)
Explain how to account for available-for-sale debt and equity securities at and after acquisition and
how they are reported in financial statements.
164)
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.
165)
Explain how transactions (both sales and purchases) in a foreign currency are recorded and
reported.
166)
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.
167)
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.
168)
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.
169)
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.
170)
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.
171)
On May 1 of the current year, a company paid $200,000 to purchase 7%, 10-year bonds with a par
value of $200,000; interest is paid semiannually on May 1 and November 1. The company intends
to hold the bonds until they mature. Prepare the journal entries to record (1) the bond purchase, (2)
the receipt of the first semiannual interest payment on November 1 of the current year, (3) the
accrual of interest for year-end December 31, and (4) the receipt of the second semiannual payment
on May 1.
SHORT ANSWER QUESTIONS
172)
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.
ESSAY QUESTIONS
173)
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 1 and Year 2. Comment on the results, did the company’s performance improve?
174)
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.
175)
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.
176)
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 1 and Year 2. Comment on the results.
177)
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.
178)
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
179)
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
180)
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.
181)
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.
182)
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.