Download full Test Bank for Financial and Managerial Accounting … · 2018-09-29 · Download full Test Bank for Financial and Managerial Accounting Information for Decisions 3rd

C-1

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Information for Decisions 3rd Edition by Wild Shaw Chiappetta https://digitalcontentmarket.org/download/test-bank-for-financial-and-managerial-accounting-

information-for-decisions-3rd-edition-by-wild-shaw-chiappetta

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

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https://digitalcontentmarket.org/download/test-bank-for-financial-and-managerial-accounting-information-for-decisions-3rd-edition-by-wild-shaw-chiappetta

C-2

Multiple Choice


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



79. Hard C3 100. Easy P3

80. Hard C3 101. Med P3

Matching


121. Med C1,C3

A1,

P1-P4

C-3

Short Essay


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


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


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


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


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



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




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:





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


$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



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


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:






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





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



D. Credit to Cash for $16,450


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:



C. Debit to Long-Term investments for $97,000


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.


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




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.


$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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


3. Bond sinking funds are examples of short-term investments.

FALSE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-50

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

certificates of deposit.

FALSE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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

mature within three months.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-51

7. Long-term investments include investments in land or other assets not used in a company's

operations.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


8. Management's intent determines whether an available-for-sale security is classified as

long-term or short-term.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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

FALSE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-54

16. A controlling investor is called the parent and the investee company is called the

subsidiary.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


18. The equity method with consolidation is used in accounting for long-term investments in

equity securities with controlling influence.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-55

19. Short-term held-to-maturity debt securities are accounted for using the cost method with

amortization.

FALSE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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

consolidation.

FALSE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


21. Comprehensive income refers to all changes in equity in a period except those due to

investments and distributions to income.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard

Difficulty: Medium



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



AICPA BB: Industry


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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



AICPA BB: Industry


AICPA FN: Reporting


C-57

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

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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

economic conditions.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

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

rate.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

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

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy

Learning Objective: A1

30. Profit margin is sales divided by net income.

FALSE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting


C-59

31. Net profit margin reflects the percent of net income in each dollar of net sales.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


32. All companies desire a low return on total assets.

FALSE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting


were $2,750,000. Its profit margin equals 7.5%.

TRUE

Profit margin = $130,500/$1,740,000 = 7.5%

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-60


were $2,750,000. Its total asset turnover equals 4.7%.

FALSE

Asset turnover = $1,740,000/$2,750,000 = 0.63

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

35. Investments in trading securities are always short-term investments.

TRUE

AACSB: Analytic



AICPA BB: Industry


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



AICPA BB: Industry


AICPA FN: Reporting


C-61

37. Trading securities are securities that are purchased by trading other securities rather than by

paying cash.

FALSE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy

Difficulty: Medium


38. Unrealized gains and losses on trading securities are reported as part of net income.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

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

FALSE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



C-62

40. A long-term investment is recorded at cost when purchased.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

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

maturity.

FALSE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy

Difficulty: Medium


42. Accounting for long-term investments in held-to-maturity securities requires companies to

record interest revenue as it accrues.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

45. Long-term investments in available-for-sale securities are reported at market value on the

balance sheet.

TRUE

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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



AICPA BB: Industry


AICPA FN: Reporting


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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

significant influence.

FALSE

AACSB: Analytic



AICPA BB: Industry


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard

Difficulty: Medium



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



AICPA BB: Industry


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard

Difficulty: Medium



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



AICPA BB: Industry


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-69

Multiple Choice Questions

60. Long-term investments:

A. Are current assets


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



C-73



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium




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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium





A. $37,800

B. $38,325

C. $40,000

D. $40,525

E. $43,200

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-75




A. $60,000

B. $60,400

C. $47,900

D. $64,800

E. $52,300

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



C-76

74. The controlling investor is called the:

A. Owner

B. Subsidiary

C. Parent

D. Investee

E. Senior entity

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


79. Short-term investments in held-to-maturity debt securities are accounted for using the:





E. Equity method

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-79

80. Long-term investments in held-to-maturity debt securities are accounted for using the:





E. Equity method

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



$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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-84



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard




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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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


E. Debit to Long-Term Investments for $143,375

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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


Current market value $68,500 - cost $65,000 = $3,500

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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:






Percent of total stock owned: 3,000 shares/25,000 shares = 12%

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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:






Percent of total stock owned: 4,000 shares/50,000 shares = 8%

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-92





A.

B.

C.

D.

E.

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-93





A.

B.

C.

D.

E.

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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


C. Credit to Long-Term Investments for $92,800


E. Debit to Long-Term Investment for $40,000

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



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



D. Credit to Cash for $16,450


35% x $47,000 = $16,450

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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:



C. Debit to Long-Term investments for $97,000


E. Credit to Cash for $97,000

40% x $97,000 = $38,800

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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.


C-98

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium




Learning Objective: P1-P4


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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: Reflective Thinking


AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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




AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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




AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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




AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



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




AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy

Learning Objective: P!


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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




AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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




AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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




AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



C-112


that had a par value of $150,000 and paid interest semiannually each April 1 and October 1. The


receipt of the first semiannual interest payment on October 1 of the current year.

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy




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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-113




receipt of the semiannual interest payment on April 1 of the following year.

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-114

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



C-115

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



$250,000 for the current year. Calculate this company's profit margin, total asset turnover and

return on total assets.

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-116

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-117

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-118

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




AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-119

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-120

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-121

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.


C-122

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-123

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



C-124

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-125

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-126

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-127

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-128

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-129

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-130

159. Rhone Importers purchases automotive parts from Germany. Prepare journal entries for

the following transactions of Rhone.

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-131

160. Golden Age Co. exports Native American artwork to Japan. Prepare journal entries for the

following transactions.

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-132

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-133

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard



C-134

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


165. _________________________ are investments that are both readily converted to known

amounts of cash and mature within 3 months.

Cash equivalents

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-135

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


167. Short-term investments in held-to-maturity debt securities are accounted for using the

___________________________.

Cost method without amortization

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


168. Long-term investments in held-to-maturity debt securities are accounted for using the

___________________________.

Cost method with amortization

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-136

169. Investments in equity securities where the investor has a significant, but not controlling

influence, are accounted for using the _______________ method.

Equity

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


170. Investments in equity securities where the investor has a controlling influence are

accounted for using the ________________________________.

Equity method with consolidation

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


171. ________________________ refers to all changes in equity for a period except for those

due to investments and distributions to owners.

Comprehensive income

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-137

172. Foreign exchange rates fluctuate due to changing _______________ and ___________

conditions.

economic; political

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


173. Return on total assets is computed by dividing ___________ by __________.

net income; average total assets

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


174. Investments in trading securities are always classified as ______________ and are

reported as _______________ on the balance sheet.

short-term investments; current assets

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy



C-138

175. ____________________________ are debt and equity securities that a company intends

to actively manage and trade for a profit.

Trading securities

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


176. Held-to-maturity securities are ____________ securities a company intends and is able to

hold until maturity.

Debt

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Easy


177. Long-term investments in available-for-sale securities are reported at their _______ on the

balance sheet.

Market value

AACSB: Analytic



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium



C-139

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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Medium


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



AICPA BB: Industry


AICPA FN: Reporting

Difficulty: Hard


Documents

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