C-1
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Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)
True/False
Item DL LO Item DL LO Item DL LO
1. Easy C1 21. Med C3 41. Easy P2
2. Med C1 22. Hard C3 42. Med P2
3. Med C1 23. Hard C3 43. Easy P3
4. Med C1 24. Hard C3 44. Easy P3
5. Med C1 25. Easy C4 45. Med P3
6. Hard C1 26. Easy C4 46. Med P3
7. Hard C1 27. Med C4 47. Hard P3
8. Med C2 28. Hard C4 48. Hard P3
9. Med C2 29. Easy A1 49. Easy P4
10. Med C2 30. Easy A1 50. Easy P4
11. Med C2 31. Med A1 51. Med P4
12. Med C2 32. Med A1 52. Hard P4
13. Med C2 33. Hard A1 53. Hard P4
14. Hard C2 34. Hard A1 54. Med P5
15. Hard C2 35. Easy P1 55. Med P5
16. Easy C3 36. Easy P1 56. Med P5
17. Easy C3 37. Easy P1 57. Med P5
18. Med C3 38. Med P1 58. Hard P5
19. Med C3 39. Easy P2 59. Hard P5
20. Med C3 40. Easy P2
C-2
Multiple Choice
Item DL LO Item DL LO Item DL LO
60. Easy C1 81. Easy C4 102. Hard P3
61. Med C1 82. Easy C4 103. Hard P3
62. Med C1 83. Med C4 104. Hard P3
63. Hard C1 84. Easy A1 105. Hard P3
64. Easy C2 85. Med A1 106. Hard P3
65. Easy C2 86. Med A1 107. Easy P4
66. Easy C2 87. Med A1 108. Easy P4
67. Easy C2 88. Med A1 109. Med P4
68. Med C2 89. Hard A1 110. Med P4
69. Med C2 90. Hard A1 111. Med P4
70. Med C2 91. Hard A1 112. Med P4
71. Hard C2 92. Hard A1 113. Hard P4
72. Hard C2 93. Hard A1 114. Hard P4
73. Easy C3 94. Easy P1 115. Easy P5
74. Easy C3 95. Med P1 116. Easy P5
75. Med C3 96. Med P1 117. Med P5
76. Med C3 97. Med P1 118. Med P5
77. Med C3 98. Easy P2 119. Hard P5
78. Med C3 99. Easy P3 120. Hard P5
79. Hard C3 100. Easy P3
80. Hard C3 101. Med P3
Matching
Item DL LO Item DL LO Item DL LO
121. Med C1,C3
A1,
P1-P4
C-3
Short Essay
Item DL LO Item DL LO Item DL LO
122. Med C1 127. Med C4 132. Hard P3
123. Med C2 128. Med A1 133. Hard P4
124. Med C2 129. Easy P1 134. Hard P5
125. Med C3 130. Med P1
126. Hard C3 131. Hard P1
Problems
Item DL LO Item DL LO Item DL LO
135. Easy C2 145. Hard A1 154. Hard P3
136. Easy C2 146. Med P1 155. Med P4
137. Med C2 147. Hard P1 156. Med P4
138. Med C2 148. Hard P1 157. Med P4
139. Hard C2 149. Easy P3 158. Hard P4
140. Easy A1 150. Easy P3 159. Med P5
141. Easy A1 151. Med P3 160. Med P5
142. Med A1 152. Med P3 161. Hard P5
143. Med A1 153. Hard P3 162. Hard P5
144. Hard A1
Completion Problems
Item DL LO Item DL LO Item DL LO
163. Easy C1 169. Med C3 174. Easy P1
164. Easy C1 170. Med C3 175. Easy P1
165. Med C1 171. Med C3 176. Easy P2
166. Easy C3 172. Easy C4 177. Med P3
167. Med C3 173. Med A1 178. Med P4
168. Med C3 179. Hard P5
C-4
True / False Questions
1. Long-term investments are usually held as an investment of cash for use in current
operations.
True False
2. Long-term investments can include funds earmarked for special purposes such as bond
sinking funds.
True False
3. Bond sinking funds are examples of short-term investments.
True False
4. Equity securities reflect a creditor relationship such as investments in notes, bonds and
certificates of deposit.
True False
5. Cash equivalents are investments that are readily converted to known amounts of cash and
mature within three months.
True 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.
True False
7. Long-term investments include investments in land or other assets not used in a company's
operations.
True False
C-5
8. Management's intent determines whether an available-for-sale security is classified as
long-term or short-term.
True False
9. Management's intent and the marketability of a security determine whether or not a security
is classified as a long-term or short-term investment.
True False
10. Debt securities are recorded at cost when purchased and interest revenue for investments in
debt securities is recorded when earned.
True False
11. Any cash dividends received from equity securities are recorded as Dividend Expense.
True False
12. 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.
True False
13. 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.
True False
14. An investor purchased $50,000 of bonds and held them to maturity. This investor's journal
entry at maturity of the bonds should include a debit to Cash for $50,000 and a credit to
Long-Term Investments for $50,000.
True False
C-6
15. A company holds $40,000 of 7% bonds as a held-to-maturity security. This 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.
True False
16. A controlling investor is called the parent and the investee company is called the
subsidiary.
True False
17. When an investor company owns more than 25% of the voting stock of an investee
company, it has a controlling influence.
True False
18. The equity method with consolidation is used in accounting for long-term investments in
equity securities with controlling influence.
True False
19. Short-term held-to-maturity debt securities are accounted for using the cost method with
amortization.
True False
20. Investments in trading securities are accounted for using the equity method with
consolidation.
True False
21. Comprehensive income refers to all changes in equity in a period except those due to
investments and distributions to income.
True False
C-7
22. Consolidated financial statements show the financial position, results of operations and
cash flows of all entities under the parent's control.
True False
23. Consolidated statements are prepared as if a company is organized as one entity, with the
amounts allocated for subsidiaries reported in the investment accounts.
True False
24. Trading securities, held-to-maturity debt securities and equity securities giving an investor
significant influence over an investee are always considered short-term investments.
True False
25. Multinational corporations can be U.S. companies with operations in other countries.
True False
26. Foreign exchange rates fluctuate due to many factors including changing political and
economic conditions.
True False
27. The price of one currency stated in terms of another currency is called a foreign exchange
rate.
True False
28. 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.
True False
C-8
29. Return on total assets can be separated into the profit margin ratio and total asset turnover.
True False
30. Profit margin is sales divided by net income.
True False
31. Net profit margin reflects the percent of net income in each dollar of net sales.
True False
32. All companies desire a low return on total assets.
True False
33. A company has net income of $130,500. Its net sales were $1,740,000 and its total assets
were $2,750,000. Its profit margin equals 7.5%.
True False
34. A company has net income of $130,500. Its net sales were $1,740,000 and its total assets
were $2,750,000. Its total asset turnover equals 4.7%.
True False
35. Investments in trading securities are always short-term investments.
True False
36. A company should report its portfolio of trading securities at its market value.
True False
C-9
37. Trading securities are securities that are purchased by trading other securities rather than by
paying cash.
True False
38. Unrealized gains and losses on trading securities are reported as part of net income.
True False
39. Investments in held-to-maturity debt securities are always current assets.
True False
40. A long-term investment is recorded at cost when purchased.
True False
41. Held-to-maturity securities are equity securities a company intends and is able to hold until
maturity.
True False
42. Accounting for long-term investments in held-to-maturity securities requires companies to
record interest revenue as it accrues.
True False
43. Long-term investments in debt securities not classified as held-to-maturity securities are
classified as available-for-sale securities.
True False
44. 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.
True False
C-10
45. Long-term investments in available-for-sale securities are reported at market value on the
balance sheet.
True False
46. Any unrealized gain or loss on available-for-sale securities is reported on the income
statement in the other gain or loss section.
True False
47. 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.
True False
48. On May 15, Briar Company purchased 10,000 shares of Broder Corp. for $80,000. 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.
True False
49. An investor with significant influence owns as least 20% but not more than 50% of another
company's voting stock.
True False
50. The cost method of accounting is used for long-term investments in equity securities with
significant influence.
True False
51. When using the equity method for investments in equity securities, the receipt of cash
dividends is recorded as revenue.
True False
C-11
52. 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.
True False
53. When using the equity method, receipt of cash dividends increases the carrying value of an
investment in equity securities.
True False
54. An increase in the price of the U.S. dollar against other currencies puts U.S. companies in a
stronger competitive position internationally.
True False
55. To prepare consolidated financial statements when a company has an international
subsidiary, the international subsidiary's financial statements must be translated into U.S.
dollars.
True False
56. A U.S. company's credit sale to an international customer to be paid in a foreign currency is
recorded using the exchange rate on the date of sale.
True False
57. A U.S. Company's credit sale to an international customer to be paid in a foreign currency
requires using the same exchange rate for the date of sale and the cash payment date.
True False
58. 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.
True False
C-12
59. 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.
True False
Multiple Choice Questions
60. 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
61. 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
62. 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
C-13
63. Long-term investments include:
A. Investments in bonds and stocks that are not marketable
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
64. Debt securities:
A. Can be short-term investments
B. Can be long-term investments
C. Can have a cost higher than the maturity value of the debt security
D. Can have a cost lower than the maturity value of the debt security
E. All of the above
65. At acquisition, debt securities are:
A. Recorded at their cost, plus total interest that will be paid over the life of the security
B. Recorded at the amount of interest that will be paid over the life of the security
C. Recorded at cost
D. Not recorded, because no interest is due yet
E. Recorded at the amount of dividend income to be received
66. 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 accrue interest earned on the debt securities
C-14
67. Equity securities are:
A. Recorded at cost to acquire them plus accrued interest
B. Recorded at cost to acquire them plus dividends earned
C. Recorded at cost to acquire them
D. Not recorded until dividends are received
E. Not recorded until interest is received
68. A company owns $100,000 of 9% bonds 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. A company owns $400,000 of 7% bonds 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. $4,667
B. $7,000
C. $28,000
D. $14,000
E. $9,333
70. A company purchased $60,000 of 5% bonds on May 1. The bonds pay interest on February
1 and August 1. The amount of interest accrued on December 31 (the company's year-end)
would be:
A. $250
B. $500
C. $1,250
D. $2,500
E. $3,000
C-15
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 $47,500 plus a broker's fee of $400 to acquire 8% bonds with a $60,000
maturity value. The company intends to hold the bonds to maturity. The cash proceeds the
company will receive when the bonds mature equal:
A. $60,000
B. $60,400
C. $47,900
D. $64,800
E. $52,300
73. 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
74. The controlling investor is called the:
A. Owner
B. Subsidiary
C. Parent
D. Investee
E. Senior entity
C-16
75. Long-term investments can include:
A. Held-to-maturity debt securities
B. Available-for-sale debt securities
C. Available-for-sale equity securities
D. Equity securities giving an investor significant influence over an investee
E. All of the above
76. Consolidated financial statements:
A. Show the results of operations, cash flows and the financial position of all entities under a
parent's control
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 account on the balance sheet
E. Do not include a balance sheet
77. 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%
78. Comprehensive income includes
A. Revenues and expenses reported in the income statement
B. Gains and losses reported in the income statement
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. All of the above
C-17
79. Short-term investments in held-to-maturity debt securities are accounted for using the:
A. Market value method with market adjustment to income
B. Market value method with market adjustment to equity
C. Cost method with amortization
D. Cost method without amortization
E. Equity method
80. Long-term investments in held-to-maturity debt securities are accounted for using the:
A. Market value method with market adjustment to income
B. Market value method with market adjustment to equity
C. Cost method with amortization
D. Cost method without amortization
E. Equity method
81. 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
82. Foreign exchange rates fluctuate due to changes in:
A. Political conditions
B. Economic conditions
C. Supply and demand for currencies
D. Expectations of future events
E. All of the above
83. 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
C-18
84. Return on total assets measures a company's ability to:
A. Produce net income from net sales
B. Produce sales from net assets
C. Produce net income from net assets
D. Increase its asset base from sales
E. Increase its asset base from net income
85. Doherty 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%
86. 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%
87. 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%
C-19
88. A company had net income of $2,785,000, net sales of $250,000,000, average total assets of
$6,000,000 and equity investments of $40,000. Its return on total assets equals:
A. $3,215,000
B. 41.67%
C. 21.54%
D. 69.63%
E. 46.42%
89. 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. 1.73%; 11.3
E. 19.5%; 11.3
90. 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
91. A company had net income of $82,000, net sales of $781,000 and average total assets of
$300,000. Its profit margin and total asset turnover were respectively:
A. 10.5%; 0.38
B. 10.5%; 2.6
C. 9.52%; 2.6
D. 27.3%; 1
E. 27.3%; 9.52
C-20
92. A company's return on total assets equals 30%. If net income and net sales are $900,000 and
$8,900,000 respectively, what is the amount of total assets?
A. $2,670,000
B. $270,000
C. $29,666,667
D. $3,000,000
E. $2,940,000
93. A company's return on total assets equals 28%. If total assets and net sales are $4,500,000
and $10,000,000 respectively, how much is net income?
A. $2,800,000
B. $4,060,000
C. $1,260,000
D. $14,500,000
E. $2,030,000
94. Investments can be classified as:
A. Trading securities
B. Held-to-maturity debt securities
C. Available-for-sale debt securities
D. Available-for-sale equity securities
E. All of the above
95. 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
C-21
96. A decrease in the fair market 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
97. 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
98. Held-to-maturity securities are:
A. Always classified as Long-Term Liabilities
B. Part of equity
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 that have a maturity value greater than cost
99. 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 market value on the balance sheet
D. Intended to be held to maturity
E. Always classified with Long-Term Liabilities
C-22
100. Available-for-sale equity securities:
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. All of the above
101. Morgan Company purchased 2,000 shares of Asta's common stock for $143,000 as a
long-term investment. This investment is considered available-for-sale. The par value of the
stock was $1 per share. Morgan paid $375 in commissions on the transaction. The entry to
record the 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 for $143,000
E. Debit to Long-Term Investments for $143,375
102. Six months ago, a company purchased an investment in stock for $65,000. This investment
is considered available-for-sale. The current market value of the stock is $68,500. The company
should record a:
A. Debit to Unrealized Loss-Equity for $3,500
B. Credit to Unrealized Gain-Equity for $3,500
C. Debit to Investment Revenue for $3,500
D. Credit to Market Adjustment - Available-for-Sale for $3,500
E. Credit to Investment Revenue for $3,500
103. Micron owns 3,000 shares of JVT. JVT has 25,000 total shares of stock outstanding. JVT
paid $3 per share in cash dividends to its stockholders. Micron should record a:
A. Debit to Dividends for $75,000
B. Debit to Dividends for $9,000
C. Debit to Cash for $9,000
D. Debit to Long-Term Investments for $9,000
E. Credit to Long-Term Investments for $9,000
C-23
104. Acme owns 4,000 shares of XYZ. XYZ has 50,000 total shares of stock outstanding. XYZ
paid $0.82 per share in cash dividends to its stockholders. Acme should record a:
A. Debit to Dividends for $41,000
B. Debit to Dividends for $3,280
C. Debit to Cash for $3,280
D. Debit to Long-Term Investments for $3,280
E. Credit to Long-Term Investments for $3,280
105. A company had investments in long term available-for-sale securities. At the end of the
current year the company's portfolio had a $162,000 cost and $164,000 market value.
What is the current year's adjustment to market value given the following account balances at
the end of the prior year?
A.
B.
C.
D.
E.
C-24
106. A company had investments in long term available-for-sale securities. At the end of the
current year the company's portfolio had a $731,000 cost and $730,000 market value.
What is the current year's adjustment to market value given the following account balances at
the end of the prior year?
A.
B.
C.
D.
E.
107. Vans purchased 40,000 shares of Skechers 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. Credit to Long-Term Investments for $232,000
E. Debit to Long-Term Investment for $40,000
108. 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. Market value method
C. Historical cost method
D. Straight-line method
E. Effective method
C-25
109. Micron owns 35% of Martok. Martok pays a total of $47,000 in cash dividends for the
period. Micron'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
110. Chung owns 40% of Lu's common stock. Lu pays $97,000 in total cash dividends to its
shareholders. Chung'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
111. Parris Corporation purchased 40% of Samitz Corporation for $100,000 on January 1. On
November 17 of the same year, Samitz Corporation declared total cash dividends of $12,000.
At year-end, Samitz Corporation reported net income of $60,000. The balance in the Parris
Corporation's Long-Term Investment in Samitz Corporation at December 31 should be:
A. $80,800
B. $100,000
C. $95,200
D. $119,200
E. $124,000
112. Clark Corporation purchased 40% of IT corporation for $125,000 on January 1. On May
20 of the same year, IT Corporation declared total cash dividends of $30,000. At year-end, IT
Corporation reported net income of $150,000. The balance in Clark Corporation's Long-Term
Investment in IT Corporation account as of December 31 should be:
A. $77,000
B. $125,000
C. $173,000
D. $197,000
E. $370,000
C-26
113. On January 4, 2008, Larsen Company purchased 5,000 shares of Warner Company for
$59,500 plus a broker's fee of $1,000. Warner Company has a total of 25,000 shares of common
stock outstanding and it is presumed the Larsen Company will have a significant influence over
Warner. During each of the next two years, Warner declared and paid cash dividends of $0.85
per share. Its net income was $72,000 and $67,000 for 2008 and 2009, respectively. The
January 12, 2010 entry to record the sale of 3,000 shares of Warner Company stock for $39,000
cash should be:
A.
B.
C.
D.
E.
C-27
114. On January 1, 2008, Posten Company purchased 10,000 shares of Toma Company for
$78,000 plus a broker's fee of $2,000. Toma Company has a total of 40,000 shares of common
stock outstanding and it is presumed the Posten Company will have a significant influence over
Toma. Toma declared and paid cash dividends of $0.93 per share in 2008 and 2009. Toma's net
income was $190,000 and $270,000 for 2008 and 2009 respectively. The January 1, 2010 entry
on the books of Posten Company to record the sale of 4,500 shares of Toma Company stock for
$85,000 cash should be:
A.
B.
C.
D.
E.
115. The price of one currency stated in terms of another currency is referred to as the:
A. Historical exchange rate
B. Foreign exchange rate
C. Consolidated exchange rate
D. General exchange rate
E. Multinational exchange rate
C-28
116. A U.S. company makes a sale to a foreign customer payable 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
117. When a credit sale is denominated in a foreign currency, the foreign exchange rate used to
record the sale is the current 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
118. On June 18, Johnson Company (a U.S. Company) sold merchandise to the Frater
Company of Denmark for 60,000 Euros, with a payment due in 60 days. If the exchange rate
was $1.14 per euro on the date of sale and $1.35 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
C-29
119. On November 12, Kendra, Inc., a U.S. Company, sold merchandise on credit to Nakakura
Company of 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 Kendra prepared its financial statements, the exchange rate
was $0.00843. Nakakura Company paid in full on January 12, when the exchange rate was
$0.00861. On December 31, Kendra should prepare the following journal entry:
A.
B.
C.
D.
E. No journal entry is required until the amount is collected
C-30
120. On November 12, Kera, Inc., a U.S. Company, sold merchandise on credit to Kakura
Company 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 Kera prepared its financial statements, the exchange rate was
$0.00843. Kakura Company paid in full on January 12, when the exchange rate was $0.00861.
On January 12, Kera should prepare the following journal entry:
A.
B.
C.
D.
E.
C-31
Matching Questions
121. Match the following terms a through j with the appropriate definitions 1 through 10.
1. An accounting method for long-term investments
in equity when the investor has significant influence
over the investee
Long-term
investments ____
2. Debt and equity securities not classified as trading
or held-to-maturity Subsidiary ____
3. Debt securities that a company intends and is able
to hold until maturity
Unrealized gain or
loss ____
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
Consolidated
financial statements ____
5. Debt and equity securities that a company intends
to actively manage and trade for profit Parent company ____
6. A company that owns a more than 50%
controlling interest in a subsidiary
Available-for-sale
securities ____
7. A corporation controlled by another company
when the parent owns more than 50% of the
subsidiary's voting stock
Held-to-maturity
securities ____
8. A change in market value that is not yet realized
through an actual sale Trading securities ____
9. A measure of operating efficiency, computed as
net income divided by average total assets
Return on total
assets ____
10. 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 Equity method ____
Short Answer Questions
122. Explain the difference between short-term and long-term investments. Cite examples of
each.
C-32
123. What are the accounting basics for debt securities, including recording their acquisition,
interest earned and their disposal?
124. What are the accounting basics for equity securities, including acquisition, dividends
earned and disposition?
125. What is comprehensive income and how is it usually reported in the financial statements?
126. Explain how investors report investments in equity securities when the investor has a
controlling influence over an investee.
C-33
127. Define the foreign exchange rate between two currencies. Explain its effect on business
transactions conducted in a foreign currency.
128. Define the return on total assets and explain how it is used to measure a company's
financial performance.
129. Identify the four types of classifications for non-influential investments in securities.
130. Explain how to record the sale of trading securities.
C-34
131. Explain how held-to-maturity debt securities are accounted for at and after acquisition and
how they are reported in the financial statements.
132. Explain how available-for-sale debt and equity securities are accounted for at and after
acquisition and how they are reported in financial statements.
133. 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.
134. Explain how transactions (both sales and purchases) in a foreign currency are recorded and
reported.
C-35
Problems
135. On April 1 of the current year, a company paid $150,000 cash to purchase 7%, 10-year
bonds that had a par value of $150,000 and paid interest semiannually each April 1 and October
1. The company intends to hold these bonds until they mature. Prepare the journal entry to
record the bond purchase transaction.
136. On April 1 of the current year, a company paid $150,000 to purchase 7%, 10-year bonds
that had a par value of $150,000 and paid interest semiannually each April 1 and October 1. The
company intends to hold the bonds until they mature. Prepare the journal entry to record the
receipt of the first semiannual interest payment on October 1 of the current year.
137. On April 1 of the current year, a company paid $150,000 to purchase 7%, 10-year bonds
that had a par value of $150,000 and paid interest semiannually on October 1 and April 1. The
company intends to hold the bonds until they mature. Prepare the journal entry to recognize
accrued interest as of December 31 of the current year.
C-36
138. On April 1 of the current year, a company paid $150,000 to purchase 7%, 10-year bonds
that had a par value of $150,000 and paid interest semiannually on October 1 and April 1. The
company intends to hold the bonds until they mature. Prepare the journal entry to record the
receipt of the semiannual interest payment on April 1 of the following year.
139. A company paid $500,000 for 12% bonds with a par value of $500,000. The bonds pay 6%
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, 2009.
(2) Year-end adjusting entry, December 31, 2009.
(3) Receipt of semiannual interest March 1, 2010.
(4) Redemption of the bonds at maturity on August 31, 2016.
140. A company reported net income of $100,000 and average total assets of $425,000.
Calculate its return on total assets.
C-37
141. A company had net income of $450,000 in 2009 and $620,000 in 2010. The company had
average total assets of $2,500,000 in 2009 and $3,000,000 in 2010. Calculate the return on total
assets for 2009 and 2010. Comment on the results.
142. A company had net income of $45,000, net sales of $390,000 and average total assets of
$250,000 for the current year. Calculate this company's profit margin, total asset turnover and
return on total assets.
143. A company reported net income of $275,000, 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.
C-38
144. A company reported net income for 2009 of $98,000 and $106,000 in 2010. It also
reported net sales of $735,000 in 2009 and $798,000 in 2010. The company's average total
assets in 2009 were $1,850,000 and $1,720,000 in 2010. Calculate this company's profit
margin, total asset turnover and return on total assets for 2009 and 2010. Comment on the
results.
145. A company had net income of $76,000 in 2009 and $88,000 in 2010. Its net sales were
$640,000 in 2009 and $611,000 in 2010. Its average total assets in 2009 were $670,000 and
$712,000 in 2010. Calculate the profit margin, total asset turnover and return on total assets for
both years. Comment on the results.
C-39
146. Wiffery Company had the following trading securities in its portfolio at December 31.
The Market Adjustment - Trading account had balance of zero prior to year-end adjustment.
Prepare the appropriate adjusting journal entry.
147. Haladam Company had the following transactions relating to investments in trading
securities during the year. Prepare the required general journal entries for these transactions.
C-40
148. Clarity Corporation had the following transactions involving investments in trading
securities during the year. Prior to these transactions, Clarity had never had any investments in
trading securities. Prepare the required general journal entries to record these transactions.
149. Hector Corp. purchased 1,000 shares of Landmark Corp.'s common stock for $36,850
cash. This purchase is considered a long-term available-for-sale investment by Hector. Prepare
Hector's journal entry to record the purchase.
150. On October 31, Mayfair Co. received cash dividends of $0.15 per share from its
investment in Carter Corp.'s common stock. Mayfair owned 1,200 shares of Carter 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.
C-41
151. Marina, Inc., held 1,500 of Navia 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 the journal entry to record this sale.
152. Columbia Corp. held 1,500 of Vianco 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 this sale.
153. Chrono Co. held bonds of Ayrford Co. with a cost of $125,000 and a year-end market
value of $123,700. Chrono also held 1,500 shares of Avian common stock with a cost of
$25,000 and a year-end market 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.
C-42
154. Detalo Co. held bonds of Schooner Corp. with a cost of $125,000 and a market value of
$127,000. Detalo also held 1,500 shares of Tranco 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.
155. 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 Froxel
Company must make to account for these transactions and events.
156. Kramer Corporation had the following long-term investment transactions.
Prepare the journal entries Kramer Corporation should record for these transactions and events.
C-43
157. Savan Co. purchased 14,000 shares of Briton Corporation's 40,000 shares of common
stock on December 31, 2009. This represented 35% of Briton's outstanding shares and gave
Savan Co. significant influence over Briton's management and operations. On October 11,
2010, Briton declared and paid cash dividends of $30,000. On December 31, 2010, Briton
reported net income of $125,000 for the year. Prepare the journal entries Savan Co. should
record to account for its investment in Briton Corporation during 2010.
158. On January 1, 2009, Frederich Corporation purchased 7,500 shares of Sport Tech, Inc. as a
long-term investment for a total of $235,000. The 7,500 shares represent 30% of the
outstanding (25,000) shares of Sport Tech. Prepare the journal entries for Frederich to record
the following transactions and events:
C-44
159. Rhone Importers purchases automotive parts from Germany. Prepare journal entries for
the following transactions of Rhone.
160. Golden Age Co. exports Native American artwork to Japan. Prepare journal entries for the
following transactions.
C-45
161. Texana Inc. imports inventory from Mexico. Prepare the journal entries for Texana to
record the following transactions. Include any year-end adjustments.
162. Mian, Inc., sells American gourmet foods to merchandisers in Singapore. Prepare the
journal entries for Mian to record the following transactions. Include any year-end adjustments.
C-46
Fill in the Blank Questions
163. ___________________________ 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.
________________________________________
164. __________________________ are investments in securities that are not readily
convertible to cash or are not intended to be converted to cash in the short-term.
________________________________________
165. _________________________ are investments that are both readily converted to known
amounts of cash and mature within 3 months.
________________________________________
166. An investing company that owns more than ________ of another (investee) company's
voting stock is presumed to have controlling influence over the investee.
________________________________________
167. Short-term investments in held-to-maturity debt securities are accounted for using the
___________________________.
________________________________________
168. Long-term investments in held-to-maturity debt securities are accounted for using the
___________________________.
________________________________________
169. Investments in equity securities where the investor has a significant, but not controlling
influence, are accounted for using the _______________ method.
________________________________________
C-47
170. Investments in equity securities where the investor has a controlling influence are
accounted for using the ________________________________.
________________________________________
171. ________________________ refers to all changes in equity for a period except for those
due to investments and distributions to owners.
________________________________________
172. Foreign exchange rates fluctuate due to changing _______________ and ___________
conditions.
________________________________________
173. Return on total assets is computed by dividing ___________ by __________.
________________________________________
174. Investments in trading securities are always classified as ______________ and are
reported as _______________ on the balance sheet.
________________________________________
175. ____________________________ are debt and equity securities that a company intends
to actively manage and trade for a profit.
________________________________________
176. Held-to-maturity securities are ____________ securities a company intends and is able to
hold until maturity.
________________________________________
C-48
177. Long-term investments in available-for-sale securities are reported at their _______ on the
balance sheet.
________________________________________
178. 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.
________________________________________
179. 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 _____________.
________________________________________
Appendix C Investments and International Operations Key
C-49
True / False Questions
1. Long-term investments are usually held as an investment of cash for use in current
operations.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C1
2. Long-term investments can include funds earmarked for special purposes such as bond
sinking funds.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C1
3. Bond sinking funds are examples of short-term investments.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C1
Appendix C Investments and International Operations Key
C-50
4. Equity securities reflect a creditor relationship such as investments in notes, bonds and
certificates of deposit.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C1
5. Cash equivalents are investments that are readily converted to known amounts of cash and
mature within three months.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C1
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.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C1
Appendix C Investments and International Operations Key
C-51
7. Long-term investments include investments in land or other assets not used in a company's
operations.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C1
8. Management's intent determines whether an available-for-sale security is classified as
long-term or short-term.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
9. Management's intent and the marketability of a security determine whether or not a security
is classified as a long-term or short-term investment.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
Appendix C Investments and International Operations Key
C-52
10. Debt securities are recorded at cost when purchased and interest revenue for investments in
debt securities is recorded when earned.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
11. Any cash dividends received from equity securities are recorded as Dividend Expense.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
12. 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.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
Appendix C Investments and International Operations Key
C-53
13. 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.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
14. An investor purchased $50,000 of bonds and held them to maturity. This investor's journal
entry at maturity of the bonds should include a debit to Cash for $50,000 and a credit to
Long-Term Investments for $50,000.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C2
15. A company holds $40,000 of 7% bonds as a held-to-maturity security. This 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.
FALSE
$40,000 x 7% x ½ year = $1,400
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C2
Appendix C Investments and International Operations Key
C-54
16. A controlling investor is called the parent and the investee company is called the
subsidiary.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C3
17. When an investor company owns more than 25% of the voting stock of an investee
company, it has a controlling influence.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C3
18. The equity method with consolidation is used in accounting for long-term investments in
equity securities with controlling influence.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
Appendix C Investments and International Operations Key
C-55
19. Short-term held-to-maturity debt securities are accounted for using the cost method with
amortization.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
20. Investments in trading securities are accounted for using the equity method with
consolidation.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
21. Comprehensive income refers to all changes in equity in a period except those due to
investments and distributions to income.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Difficulty: Medium
Learning Objective: C3
Appendix C Investments and International Operations Key
C-56
22. Consolidated financial statements show the financial position, results of operations and
cash flows of all entities under the parent's control.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
23. Consolidated statements are prepared as if a company is organized as one entity, with the
amounts allocated for subsidiaries reported in the investment accounts.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C3
24. Trading securities, held-to-maturity debt securities and equity securities giving an investor
significant influence over an investee are always considered short-term investments.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Appendix C Investments and International Operations Key
C-57
25. Multinational corporations can be U.S. companies with operations in other countries.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C4
26. Foreign exchange rates fluctuate due to many factors including changing political and
economic conditions.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
27. The price of one currency stated in terms of another currency is called a foreign exchange
rate.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Difficulty: Medium
Learning Objective: C4
Appendix C Investments and International Operations Key
C-58
28. 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.
TRUE
$2 x 0.7382 = $1.48
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
29. Return on total assets can be separated into the profit margin ratio and total asset turnover.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: A1
30. Profit margin is sales divided by net income.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Appendix C Investments and International Operations Key
C-59
31. Net profit margin reflects the percent of net income in each dollar of net sales.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: A1
32. All companies desire a low return on total assets.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
33. A company has net income of $130,500. Its net sales were $1,740,000 and its total assets
were $2,750,000. Its profit margin equals 7.5%.
TRUE
Profit margin = $130,500/$1,740,000 = 7.5%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: A1
Appendix C Investments and International Operations Key
C-60
34. A company has net income of $130,500. Its net sales were $1,740,000 and its total assets
were $2,750,000. Its total asset turnover equals 4.7%.
FALSE
Asset turnover = $1,740,000/$2,750,000 = 0.63
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
35. Investments in trading securities are always short-term investments.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P1
36. A company should report its portfolio of trading securities at its market value.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Appendix C Investments and International Operations Key
C-61
37. Trading securities are securities that are purchased by trading other securities rather than by
paying cash.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Difficulty: Medium
Learning Objective: P1
38. Unrealized gains and losses on trading securities are reported as part of net income.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
39. Investments in held-to-maturity debt securities are always current assets.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P2
Appendix C Investments and International Operations Key
C-62
40. A long-term investment is recorded at cost when purchased.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
41. Held-to-maturity securities are equity securities a company intends and is able to hold until
maturity.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Difficulty: Medium
Learning Objective: P2
42. Accounting for long-term investments in held-to-maturity securities requires companies to
record interest revenue as it accrues.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Appendix C Investments and International Operations Key
C-63
43. Long-term investments in debt securities not classified as held-to-maturity securities are
classified as available-for-sale securities.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P3
44. 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.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
45. Long-term investments in available-for-sale securities are reported at market value on the
balance sheet.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P3
Appendix C Investments and International Operations Key
C-64
46. Any unrealized gain or loss on available-for-sale securities is reported on the income
statement in the other gain or loss section.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
47. 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.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P3
48. On May 15, Briar Company purchased 10,000 shares of Broder Corp. for $80,000. 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.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Appendix C Investments and International Operations Key
C-65
49. An investor with significant influence owns as least 20% but not more than 50% of another
company's voting stock.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P4
50. The cost method of accounting is used for long-term investments in equity securities with
significant influence.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
51. When using the equity method for investments in equity securities, the receipt of cash
dividends is recorded as revenue.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Difficulty: Medium
Learning Objective: P4
Appendix C Investments and International Operations Key
C-66
52. 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.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
53. When using the equity method, receipt of cash dividends increases the carrying value of an
investment in equity securities.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P4
54. An increase in the price of the U.S. dollar against other currencies puts U.S. companies in a
stronger competitive position internationally.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P5
Appendix C Investments and International Operations Key
C-67
55. To prepare consolidated financial statements when a company has an international
subsidiary, the international subsidiary's financial statements must be translated into U.S.
dollars.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P5
56. A U.S. company's credit sale to an international customer to be paid in a foreign currency is
recorded using the exchange rate on the date of sale.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
57. A U.S. Company's credit sale to an international customer to be paid in a foreign currency
requires using the same exchange rate for the date of sale and the cash payment date.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Difficulty: Medium
Learning Objective: P5
Appendix C Investments and International Operations Key
C-68
58. 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.
FALSE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
59. 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.
TRUE
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P5
Appendix C Investments and International Operations Key
C-69
Multiple Choice Questions
60. 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C1
61. 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C1
Appendix C Investments and International Operations Key
C-70
62. 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C1
63. Long-term investments include:
A. Investments in bonds and stocks that are not marketable
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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C1
Appendix C Investments and International Operations Key
C-71
64. Debt securities:
A. Can be short-term investments
B. Can be long-term investments
C. Can have a cost higher than the maturity value of the debt security
D. Can have a cost lower than the maturity value of the debt security
E. All of the above
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C2
65. At acquisition, debt securities are:
A. Recorded at their cost, plus total interest that will be paid over the life of the security
B. Recorded at the amount of interest that will be paid over the life of the security
C. Recorded at cost
D. Not recorded, because no interest is due yet
E. Recorded at the amount of dividend income to be received
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C2
Appendix C Investments and International Operations Key
C-72
66. 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 accrue interest earned on the debt securities
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C2
67. Equity securities are:
A. Recorded at cost to acquire them plus accrued interest
B. Recorded at cost to acquire them plus dividends earned
C. Recorded at cost to acquire them
D. Not recorded until dividends are received
E. Not recorded until interest is received
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C2
Appendix C Investments and International Operations Key
C-73
68. A company owns $100,000 of 9% bonds 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
$100,000 x 9% x 3/12 year = $2,250
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
69. A company owns $400,000 of 7% bonds 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. $4,667
B. $7,000
C. $28,000
D. $14,000
E. $9,333
$400,000 x 7% x 3/12 year = $7,000
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
Appendix C Investments and International Operations Key
C-74
70. A company purchased $60,000 of 5% bonds on May 1. The bonds pay interest on February
1 and August 1. The amount of interest accrued on December 31 (the company's year-end)
would be:
A. $250
B. $500
C. $1,250
D. $2,500
E. $3,000
$60,000 x 5% x 5/12 year = $1,250
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C2
Appendix C Investments and International Operations Key
C-75
72. A company paid $47,500 plus a broker's fee of $400 to acquire 8% bonds with a $60,000
maturity value. The company intends to hold the bonds to maturity. The cash proceeds the
company will receive when the bonds mature equal:
A. $60,000
B. $60,400
C. $47,900
D. $64,800
E. $52,300
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C2
73. 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C3
Appendix C Investments and International Operations Key
C-76
74. The controlling investor is called the:
A. Owner
B. Subsidiary
C. Parent
D. Investee
E. Senior entity
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C3
75. Long-term investments can include:
A. Held-to-maturity debt securities
B. Available-for-sale debt securities
C. Available-for-sale equity securities
D. Equity securities giving an investor significant influence over an investee
E. All of the above
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
Appendix C Investments and International Operations Key
C-77
76. Consolidated financial statements:
A. Show the results of operations, cash flows and the financial position of all entities under a
parent's control
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 account on the balance sheet
E. Do not include a balance sheet
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
77. 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%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
Appendix C Investments and International Operations Key
C-78
78. Comprehensive income includes
A. Revenues and expenses reported in the income statement
B. Gains and losses reported in the income statement
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. All of the above
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
79. Short-term investments in held-to-maturity debt securities are accounted for using the:
A. Market value method with market adjustment to income
B. Market value method with market adjustment to equity
C. Cost method with amortization
D. Cost method without amortization
E. Equity method
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C3
Appendix C Investments and International Operations Key
C-79
80. Long-term investments in held-to-maturity debt securities are accounted for using the:
A. Market value method with market adjustment to income
B. Market value method with market adjustment to equity
C. Cost method with amortization
D. Cost method without amortization
E. Equity method
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C3
81. 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C4
Appendix C Investments and International Operations Key
C-80
82. Foreign exchange rates fluctuate due to changes in:
A. Political conditions
B. Economic conditions
C. Supply and demand for currencies
D. Expectations of future events
E. All of the above
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C4
83. 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C4
Appendix C Investments and International Operations Key
C-81
84. Return on total assets measures a company's ability to:
A. Produce net income from net sales
B. Produce sales from net assets
C. Produce net income from net assets
D. Increase its asset base from sales
E. Increase its asset base from net income
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: A1
85. Doherty 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%
$30,000/$500,000 = 6%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: A1
Appendix C Investments and International Operations Key
C-82
86. 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%
Return on total assets = $250,000/$1,500,000 = 16.7%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: A1
87. 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%
Return on total assets = $2,660,000/$8,000,000 = 33.25%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: A1
Appendix C Investments and International Operations Key
C-83
88. A company had net income of $2,785,000, net sales of $250,000,000, average total assets of
$6,000,000 and equity investments of $40,000. Its return on total assets equals:
A. $3,215,000
B. 41.67%
C. 21.54%
D. 69.63%
E. 46.42%
Return on total assets = $2,785,000/$6,000,000 = 46.42%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: A1
89. 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. 1.73%; 11.3
E. 19.5%; 11.3
Profit margin = $43,000/$380,500 = 11.3%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: A1
Appendix C Investments and International Operations Key
C-84
90. 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
Profit margin = $40,000/$300,000 = 13.3%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: A1
91. A company had net income of $82,000, net sales of $781,000 and average total assets of
$300,000. Its profit margin and total asset turnover were respectively:
A. 10.5%; 0.38
B. 10.5%; 2.6
C. 9.52%; 2.6
D. 27.3%; 1
E. 27.3%; 9.52
Profit margin = $82,000/$781,000 = 10.5%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: A1
Appendix C Investments and International Operations Key
C-85
92. A company's return on total assets equals 30%. If net income and net sales are $900,000 and
$8,900,000 respectively, what is the amount of total assets?
A. $2,670,000
B. $270,000
C. $29,666,667
D. $3,000,000
E. $2,940,000
$900,000/0.30 = $3,000,000
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: A1
93. A company's return on total assets equals 28%. If total assets and net sales are $4,500,000
and $10,000,000 respectively, how much is net income?
A. $2,800,000
B. $4,060,000
C. $1,260,000
D. $14,500,000
E. $2,030,000
$4,500,000 * 0.28 = $1,260,000
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: A1
Appendix C Investments and International Operations Key
C-86
94. Investments can be classified as:
A. Trading securities
B. Held-to-maturity debt securities
C. Available-for-sale debt securities
D. Available-for-sale equity securities
E. All of the above
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P1
95. 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P1
Appendix C Investments and International Operations Key
C-87
96. A decrease in the fair market 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P1
97. 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P1
Appendix C Investments and International Operations Key
C-88
98. Held-to-maturity securities are:
A. Always classified as Long-Term Liabilities
B. Part of equity
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 that have a maturity value greater than cost
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P2
99. 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 market value on the balance sheet
D. Intended to be held to maturity
E. Always classified with Long-Term Liabilities
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P3
Appendix C Investments and International Operations Key
C-89
100. Available-for-sale equity securities:
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. All of the above
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P3
101. Morgan Company purchased 2,000 shares of Asta's common stock for $143,000 as a
long-term investment. This investment is considered available-for-sale. The par value of the
stock was $1 per share. Morgan paid $375 in commissions on the transaction. The entry to
record the 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 for $143,000
E. Debit to Long-Term Investments for $143,375
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P3
Appendix C Investments and International Operations Key
C-90
102. Six months ago, a company purchased an investment in stock for $65,000. This investment
is considered available-for-sale. The current market value of the stock is $68,500. The company
should record a:
A. Debit to Unrealized Loss-Equity for $3,500
B. Credit to Unrealized Gain-Equity for $3,500
C. Debit to Investment Revenue for $3,500
D. Credit to Market Adjustment - Available-for-Sale for $3,500
E. Credit to Investment Revenue for $3,500
Current market value $68,500 - cost $65,000 = $3,500
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P3
103. Micron owns 3,000 shares of JVT. JVT has 25,000 total shares of stock outstanding. JVT
paid $3 per share in cash dividends to its stockholders. Micron should record a:
A. Debit to Dividends for $75,000
B. Debit to Dividends for $9,000
C. Debit to Cash for $9,000
D. Debit to Long-Term Investments for $9,000
E. Credit to Long-Term Investments for $9,000
Percent of total stock owned: 3,000 shares/25,000 shares = 12%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P3
Appendix C Investments and International Operations Key
C-91
104. Acme owns 4,000 shares of XYZ. XYZ has 50,000 total shares of stock outstanding. XYZ
paid $0.82 per share in cash dividends to its stockholders. Acme should record a:
A. Debit to Dividends for $41,000
B. Debit to Dividends for $3,280
C. Debit to Cash for $3,280
D. Debit to Long-Term Investments for $3,280
E. Credit to Long-Term Investments for $3,280
Percent of total stock owned: 4,000 shares/50,000 shares = 8%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P3
Appendix C Investments and International Operations Key
C-92
105. A company had investments in long term available-for-sale securities. At the end of the
current year the company's portfolio had a $162,000 cost and $164,000 market value.
What is the current year's adjustment to market value given the following account balances at
the end of the prior year?
A.
B.
C.
D.
E.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P3
Appendix C Investments and International Operations Key
C-93
106. A company had investments in long term available-for-sale securities. At the end of the
current year the company's portfolio had a $731,000 cost and $730,000 market value.
What is the current year's adjustment to market value given the following account balances at
the end of the prior year?
A.
B.
C.
D.
E.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P3
Appendix C Investments and International Operations Key
C-94
107. Vans purchased 40,000 shares of Skechers 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. Credit to Long-Term Investments for $232,000
E. Debit to Long-Term Investment for $40,000
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P4
108. 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. Market value method
C. Historical cost method
D. Straight-line method
E. Effective method
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P4
Appendix C Investments and International Operations Key
C-95
109. Micron owns 35% of Martok. Martok pays a total of $47,000 in cash dividends for the
period. Micron'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
35% x $47,000 = $16,450
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P4
110. Chung owns 40% of Lu's common stock. Lu pays $97,000 in total cash dividends to its
shareholders. Chung'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
40% x $97,000 = $38,800
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P4
Appendix C Investments and International Operations Key
C-96
111. Parris Corporation purchased 40% of Samitz Corporation for $100,000 on January 1. On
November 17 of the same year, Samitz Corporation declared total cash dividends of $12,000.
At year-end, Samitz Corporation reported net income of $60,000. The balance in the Parris
Corporation's Long-Term Investment in Samitz Corporation at December 31 should be:
A. $80,800
B. $100,000
C. $95,200
D. $119,200
E. $124,000
$100,000 - (40% x $12,000) + (40% x $60,000) = $119,200
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P4
112. Clark Corporation purchased 40% of IT corporation for $125,000 on January 1. On May
20 of the same year, IT Corporation declared total cash dividends of $30,000. At year-end, IT
Corporation reported net income of $150,000. The balance in Clark Corporation's Long-Term
Investment in IT Corporation account as of December 31 should be:
A. $77,000
B. $125,000
C. $173,000
D. $197,000
E. $370,000
$125,000 - (40% x $30,000) + (40% x $150,000) = $173,000
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P4
Appendix C Investments and International Operations Key
C-97
113. On January 4, 2008, Larsen Company purchased 5,000 shares of Warner Company for
$59,500 plus a broker's fee of $1,000. Warner Company has a total of 25,000 shares of common
stock outstanding and it is presumed the Larsen Company will have a significant influence over
Warner. During each of the next two years, Warner declared and paid cash dividends of $0.85
per share. Its net income was $72,000 and $67,000 for 2008 and 2009, respectively. The
January 12, 2010 entry to record the sale of 3,000 shares of Warner Company stock for $39,000
cash should be:
A.
B.
C.
D.
E.
Appendix C Investments and International Operations Key
C-98
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P4
Appendix C Investments and International Operations Key
C-99
114. On January 1, 2008, Posten Company purchased 10,000 shares of Toma Company for
$78,000 plus a broker's fee of $2,000. Toma Company has a total of 40,000 shares of common
stock outstanding and it is presumed the Posten Company will have a significant influence over
Toma. Toma declared and paid cash dividends of $0.93 per share in 2008 and 2009. Toma's net
income was $190,000 and $270,000 for 2008 and 2009 respectively. The January 1, 2010 entry
on the books of Posten Company to record the sale of 4,500 shares of Toma Company stock for
$85,000 cash should be:
A.
B.
C.
D.
E.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P4
Appendix C Investments and International Operations Key
C-100
115. The price of one currency stated in terms of another currency is referred to as the:
A. Historical exchange rate
B. Foreign exchange rate
C. Consolidated exchange rate
D. General exchange rate
E. Multinational exchange rate
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P5
116. A U.S. company makes a sale to a foreign customer payable 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P5
Appendix C Investments and International Operations Key
C-101
117. When a credit sale is denominated in a foreign currency, the foreign exchange rate used to
record the sale is the current 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P5
118. On June 18, Johnson Company (a U.S. Company) sold merchandise to the Frater
Company of Denmark for 60,000 Euros, with a payment due in 60 days. If the exchange rate
was $1.14 per euro on the date of sale and $1.35 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
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P5
Appendix C Investments and International Operations Key
C-102
119. On November 12, Kendra, Inc., a U.S. Company, sold merchandise on credit to Nakakura
Company of 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 Kendra prepared its financial statements, the exchange rate
was $0.00843. Nakakura Company paid in full on January 12, when the exchange rate was
$0.00861. On December 31, Kendra should prepare the following journal entry:
A.
B.
C.
D.
E. No journal entry is required until the amount is collected
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P5
Appendix C Investments and International Operations Key
C-103
120. On November 12, Kera, Inc., a U.S. Company, sold merchandise on credit to Kakura
Company 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 Kera prepared its financial statements, the exchange rate was
$0.00843. Kakura Company paid in full on January 12, when the exchange rate was $0.00861.
On January 12, Kera should prepare the following journal entry:
A.
B.
C.
D.
E.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P5
Appendix C Investments and International Operations Key
C-104
Matching Questions
121. Match the following terms a through j with the appropriate definitions 1 through 10.
1. An accounting method for long-term investments in
equity when the investor has significant influence over
the investee
Long-term
investments 10
2. Debt and equity securities not classified as trading
or held-to-maturity Subsidiary 7
3. Debt securities that a company intends and is able to
hold until maturity
Unrealized gain or
loss 8
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
Consolidated
financial statements 4
5. Debt and equity securities that a company intends to
actively manage and trade for profit Parent company 6
6. A company that owns a more than 50% controlling
interest in a subsidiary
Available-for-sale
securities 2
7. A corporation controlled by another company when
the parent owns more than 50% of the subsidiary's
voting stock
Held-to-maturity
securities 3
8. A change in market value that is not yet realized
through an actual sale Trading securities 5
9. A measure of operating efficiency, computed as net
income divided by average total assets
Return on total
assets 9
10. 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 Equity method 1 AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: A1
Learning Objective: C1
Learning Objective: C3
Learning Objective: P1-P4
Appendix C Investments and International Operations Key
C-105
Short Answer Questions
122. Explain the difference between short-term and long-term investments. Cite examples of
each.
Short-term investments are securities expected to be converted into cash within the longer of
one year or the operating cycle of the company and are readily convertible to cash. All other
investments in securities are long-term investments. Long-term investments may include equity
and debt securities and other assets not used in operations and those held for a special purpose
such as bond sinking funds.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C1
123. What are the accounting basics for debt securities, including recording their acquisition,
interest earned and their disposal?
At acquisition, debt securities are recorded at cost. If the interest periods do not match up with
the investor's accounting period, interest earned and interest receivable must be accrued at
year-end. Interest must also be recorded on the interest payment dates. When the debt matures,
the cash received is debited and the debt is credited.
AACSB: Analytic
AACSB: Communications
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
Appendix C Investments and International Operations Key
C-106
124. What are the accounting basics for equity securities, including acquisition, dividends
earned and disposition?
Equity securities are recorded at their cost when acquired. Any cash dividends received are
credited to Dividend Revenue and reported in the income statement. When the securities are
sold, sale proceeds are compared with the cost and any gain or loss is recorded.
AACSB: Analytic
AACSB: Communications
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
125. What is comprehensive income and how is it usually reported in the financial statements?
Comprehensive income refers to all changes in equity for a period except those due to
investments and distributions to owners. It includes all revenues, expenses, gains and losses
reported in the income statement as well as gains and losses that bypass net income, but affect
equity. An example would be an unrealized gain or loss on long-term available-for-sale
securities. These items are usually reported as a part of the statement of stockholders' equity.
AACSB: Analytic
AACSB: Communications
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
Appendix C Investments and International Operations Key
C-107
126. Explain how investors report investments in equity securities when the investor has a
controlling influence over an investee.
If an investing company controls another company called the investee (such as when the
investor owns more than 50% of another company's voting stock), then the investor's financial
reports are prepared on a consolidated basis. These reports show the financial position, results
of operations and cash flows of all entities under the parent's control, including all subsidiaries.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C3
127. Define the foreign exchange rate between two currencies. Explain its effect on business
transactions conducted in a foreign currency.
A foreign exchange rate is the price of one currency stated in terms of another currency. A
company with transactions in a foreign currency may experience a change in the exchange rate
between the time of a transaction and its payment date. If this occurs, the company will
experience a foreign exchange gain or loss.
AACSB: Analytic
AACSB: Communications
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C4
Appendix C Investments and International Operations Key
C-108
128. Define the return on total assets and explain how it is used to measure a company's
financial performance.
The return on total assets is calculated by dividing net income by average total assets. It can be
computed from the profit margin ratio and total asset turnover. The return on total assets
reflects a company's ability to use its assets to make a profit. It can also be used to assess a
company's performance compared to competitors.
AACSB: Analytic
AACSB: Communications
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: A1
129. Identify the four types of classifications for non-influential investments in securities.
Non-influential investments in securities can be classified as: (1) trading, (2) held-to-maturity
and (3) available for sale.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P!
Appendix C Investments and International Operations Key
C-109
130. Explain how to record the sale of trading securities.
When trading securities are sold, the difference between the net proceeds (sale price less fees)
and the cost of the individual trading securities that are sold is recognized as a gain or loss. Any
prior period market adjustment is not used to compute the gain or loss from the sale. Gains and
losses are included in net income for the period.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P1
131. Explain how held-to-maturity debt securities are accounted for at and after acquisition and
how they are reported in the financial statements.
Held-to-maturity (HTM) debt securities are recorded at cost when purchased. After acquisition,
any interest is recorded as it is earned. A HTM debt security is classified as a current asset if the
maturity date is within the longer of one year or the current operating cycle. A HTM debt
security is classified as a long-term asset if the maturity date extends beyond the longer of one
year or the current operating cycle. HTM debt securities are reported at their amortized cost.
There is no market adjustment made to the portfolio of the HTM securities, whether current or
long-term.
AACSB: Analytic
AACSB: Communications
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P1
Appendix C Investments and International Operations Key
C-110
132. Explain how available-for-sale debt and equity securities are accounted for at and after
acquisition and how they are reported in financial statements.
Available-for-sale debt and equity securities are recorded at cost when purchased. After
acquisition they are reported on the balance sheet at their market values with any unrealized
holding gains or losses shown in the equity section of the balance sheet. Gains and losses
realized on the subsequent sale of these investments are reported in the income statement.
AACSB: Analytic
AACSB: Communications
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P3
133. 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.
The equity method of accounting for securities is used when an investor has a significant
influence over an investee. Significant influence is presumed to exist when an investing
company owns 20% or more of the investee's voting stock, but not more than 50% ownership.
The equity method requires that an investor record its share of the investee's earnings with a
debit to the investment account and a credit to the related revenue account. Cash dividends
received increase the cash account and reduce the balance of the investment account by the
same amount.
AACSB: Analytic
AACSB: Communications
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P4
Appendix C Investments and International Operations Key
C-111
134. Explain how transactions (both sales and purchases) in a foreign currency are recorded and
reported.
When a selling company makes a credit sale to a foreign customer and the sales terms call for
payment in a foreign currency, the selling company must translate the foreign currency into
dollars to record the receivable. If the exchange rate changes before payment is received,
foreign exchange gains or losses are recognized in the year they occur. The same method is
required when a buying company makes a credit purchase from a foreign supplier and is
required to make payment in a foreign currency. Finally, a company with a foreign subsidiary
that maintains its accounts in a foreign currency must translate these account balances into
dollars before they are reported in consolidated statements.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P5
Problems
135. On April 1 of the current year, a company paid $150,000 cash to purchase 7%, 10-year
bonds that had a par value of $150,000 and paid interest semiannually each April 1 and October
1. The company intends to hold these bonds until they mature. Prepare the journal entry to
record the bond purchase transaction.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C2
Appendix C Investments and International Operations Key
C-112
136. On April 1 of the current year, a company paid $150,000 to purchase 7%, 10-year bonds
that had a par value of $150,000 and paid interest semiannually each April 1 and October 1. The
company intends to hold the bonds until they mature. Prepare the journal entry to record the
receipt of the first semiannual interest payment on October 1 of the current year.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C2
137. On April 1 of the current year, a company paid $150,000 to purchase 7%, 10-year bonds
that had a par value of $150,000 and paid interest semiannually on October 1 and April 1. The
company intends to hold the bonds until they mature. Prepare the journal entry to recognize
accrued interest as of December 31 of the current year.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
Appendix C Investments and International Operations Key
C-113
138. On April 1 of the current year, a company paid $150,000 to purchase 7%, 10-year bonds
that had a par value of $150,000 and paid interest semiannually on October 1 and April 1. The
company intends to hold the bonds until they mature. Prepare the journal entry to record the
receipt of the semiannual interest payment on April 1 of the following year.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C2
Appendix C Investments and International Operations Key
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139. A company paid $500,000 for 12% bonds with a par value of $500,000. The bonds pay 6%
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, 2009.
(2) Year-end adjusting entry, December 31, 2009.
(3) Receipt of semiannual interest March 1, 2010.
(4) Redemption of the bonds at maturity on August 31, 2016.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: C2
140. A company reported net income of $100,000 and average total assets of $425,000.
Calculate its return on total assets.
$100,000/$425,000 = 23.5%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: A1
Appendix C Investments and International Operations Key
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141. A company had net income of $450,000 in 2009 and $620,000 in 2010. The company had
average total assets of $2,500,000 in 2009 and $3,000,000 in 2010. Calculate the return on total
assets for 2009 and 2010. Comment on the results.
(a.) 2009: $450,000/$2,500,000 = 18.0%
(b.) 2010: $620,000/$3,000,000 = 20.7%
(c.) The company appears to be more efficient in the use of its assets by generating a higher
return in 2010 than in 2009.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: A1
142. A company had net income of $45,000, net sales of $390,000 and average total assets of
$250,000 for the current year. Calculate this company's profit margin, total asset turnover and
return on total assets.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: A1
Appendix C Investments and International Operations Key
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143. A company reported net income of $275,000, 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.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: A1
Appendix C Investments and International Operations Key
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144. A company reported net income for 2009 of $98,000 and $106,000 in 2010. It also
reported net sales of $735,000 in 2009 and $798,000 in 2010. The company's average total
assets in 2009 were $1,850,000 and $1,720,000 in 2010. Calculate this company's profit
margin, total asset turnover and return on total assets for 2009 and 2010. Comment on the
results.
Comment: This company did not increase its profit margin from 2009 to 2010, however, it did
increase its total asset turnover, mainly because total assets declined with no ill effects on sales.
The effect is an overall increase in return on total assets.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: A1
Appendix C Investments and International Operations Key
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145. A company had net income of $76,000 in 2009 and $88,000 in 2010. Its net sales were
$640,000 in 2009 and $611,000 in 2010. Its average total assets in 2009 were $670,000 and
$712,000 in 2010. Calculate the profit margin, total asset turnover and return on total assets for
both years. Comment on the results.
Comment: This company increased its profit margin, even though sales declined from 2009 to
2010. Total asset turnover decreased, but the increase in profit margin was large enough for
there to be an overall increase in return on total assets.
AACSB: Analytic
AACSB: Communications
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: A1
Appendix C Investments and International Operations Key
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146. Wiffery Company had the following trading securities in its portfolio at December 31.
The Market Adjustment - Trading account had balance of zero prior to year-end adjustment.
Prepare the appropriate adjusting journal entry.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P1
Appendix C Investments and International Operations Key
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147. Haladam Company had the following transactions relating to investments in trading
securities during the year. Prepare the required general journal entries for these transactions.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P1
Appendix C Investments and International Operations Key
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148. Clarity Corporation had the following transactions involving investments in trading
securities during the year. Prior to these transactions, Clarity had never had any investments in
trading securities. Prepare the required general journal entries to record these transactions.
Appendix C Investments and International Operations Key
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AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P1
Appendix C Investments and International Operations Key
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149. Hector Corp. purchased 1,000 shares of Landmark Corp.'s common stock for $36,850
cash. This purchase is considered a long-term available-for-sale investment by Hector. Prepare
Hector's journal entry to record the purchase.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P3
150. On October 31, Mayfair Co. received cash dividends of $0.15 per share from its
investment in Carter Corp.'s common stock. Mayfair owned 1,200 shares of Carter 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.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P3
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151. Marina, Inc., held 1,500 of Navia 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 the journal entry to record this sale.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P3
152. Columbia Corp. held 1,500 of Vianco 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 this sale.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P3
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153. Chrono Co. held bonds of Ayrford Co. with a cost of $125,000 and a year-end market
value of $123,700. Chrono also held 1,500 shares of Avian common stock with a cost of
$25,000 and a year-end market 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.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P3
154. Detalo Co. held bonds of Schooner Corp. with a cost of $125,000 and a market value of
$127,000. Detalo also held 1,500 shares of Tranco 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.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P3
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155. 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 Froxel
Company must make to account for these transactions and events.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P4
Appendix C Investments and International Operations Key
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156. Kramer Corporation had the following long-term investment transactions.
Prepare the journal entries Kramer Corporation should record for these transactions and events.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P4
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157. Savan Co. purchased 14,000 shares of Briton Corporation's 40,000 shares of common
stock on December 31, 2009. This represented 35% of Briton's outstanding shares and gave
Savan Co. significant influence over Briton's management and operations. On October 11,
2010, Briton declared and paid cash dividends of $30,000. On December 31, 2010, Briton
reported net income of $125,000 for the year. Prepare the journal entries Savan Co. should
record to account for its investment in Briton Corporation during 2010.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P4
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158. On January 1, 2009, Frederich Corporation purchased 7,500 shares of Sport Tech, Inc. as a
long-term investment for a total of $235,000. The 7,500 shares represent 30% of the
outstanding (25,000) shares of Sport Tech. Prepare the journal entries for Frederich to record
the following transactions and events:
Carrying value of stock: ($235,000 + $19,800) x 1,875/7,500 = $63,700
Loss on sale = $63,700 - $62,400 = $1,300
[(7,500 - 1,875) x $0.90]
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P4
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159. Rhone Importers purchases automotive parts from Germany. Prepare journal entries for
the following transactions of Rhone.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P5
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160. Golden Age Co. exports Native American artwork to Japan. Prepare journal entries for the
following transactions.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P5
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161. Texana Inc. imports inventory from Mexico. Prepare the journal entries for Texana to
record the following transactions. Include any year-end adjustments.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P5
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162. Mian, Inc., sells American gourmet foods to merchandisers in Singapore. Prepare the
journal entries for Mian to record the following transactions. Include any year-end adjustments.
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P5
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Fill in the Blank Questions
163. ___________________________ 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.
Short-term investments (or temporary investments)
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C1
164. __________________________ are investments in securities that are not readily
convertible to cash or are not intended to be converted to cash in the short-term.
Long-term investments
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C1
165. _________________________ are investments that are both readily converted to known
amounts of cash and mature within 3 months.
Cash equivalents
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C1
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166. An investing company that owns more than ________ of another (investee) company's
voting stock is presumed to have controlling influence over the investee.
50%
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C3
167. Short-term investments in held-to-maturity debt securities are accounted for using the
___________________________.
Cost method without amortization
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
168. Long-term investments in held-to-maturity debt securities are accounted for using the
___________________________.
Cost method with amortization
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
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169. Investments in equity securities where the investor has a significant, but not controlling
influence, are accounted for using the _______________ method.
Equity
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
170. Investments in equity securities where the investor has a controlling influence are
accounted for using the ________________________________.
Equity method with consolidation
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
171. ________________________ refers to all changes in equity for a period except for those
due to investments and distributions to owners.
Comprehensive income
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: C3
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172. Foreign exchange rates fluctuate due to changing _______________ and ___________
conditions.
economic; political
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: C4
173. Return on total assets is computed by dividing ___________ by __________.
net income; average total assets
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: A1
174. Investments in trading securities are always classified as ______________ and are
reported as _______________ on the balance sheet.
short-term investments; current assets
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P1
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175. ____________________________ are debt and equity securities that a company intends
to actively manage and trade for a profit.
Trading securities
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P1
176. Held-to-maturity securities are ____________ securities a company intends and is able to
hold until maturity.
Debt
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Easy
Learning Objective: P2
177. Long-term investments in available-for-sale securities are reported at their _______ on the
balance sheet.
Market value
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P3
Appendix C Investments and International Operations Key
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178. 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.
20% or more
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Medium
Learning Objective: P4
179. 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 _____________.
Sale
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: Hard
Learning Objective: P5