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Questions
Q:
Explain how investors report investments in equity securities when the investor has a controlling influence over an investee.
Q:
What is comprehensive income and how is it usually reported in the financial statements?
Q:
What are the accounting basics for equity securities, including acquisition, dividends earned, and disposition?
Q:
What are the accounting basics for debt securities, including recording their acquisition, interest earned and their disposal?
Q:
Explain the difference between short-term and long-term investments and give examples of each.
Q:
1. A corporation controlled by another company when the parent owns more than 50% of the subsidiary's voting stock. Long-term investments 2. A company that owns a more than 50% controlling interest in a subsidiary. Subsidiary 3. A measure of operating efficiency, computed as net income divided by average total assets. Unrealized gain or loss 4. Debt securities that a company intends and is able to hold until maturity. Consolidated financial statements 5. An accounting method for long-term investments in equity when the investor has significant influence over the investee. Parent company 6. Debt and equity securities not classified as trading or held-to-maturity. Available-for-sale securities 7. Debt and equity securities that a company intends to actively manage and trade for profit. Held-to-maturity securities 8. A change in market value that is not yet realized through an actual sale. Trading securities 9. 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. Return on total assets 10. 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. Equity method
Q:
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 for this transaction:
A. Cash................................................................ 12,915 Accounts Receivable Kakura Company.. Foreign Exchange.......................................
12,555 360 B. Cash............................................................... Foreign Exchange Loss.............................
12,555 360 Accounts Receivable Kakura Company. 12,915 C. Cash............................................................... Accounts Receivable Kakura Company.
12,915
12,645 Foreign Exchange Gain............................. 90 D. Cash............................................................... 12,645 Foreign Exchange Loss........................ 90 Accounts Receivable Kakura Company...
12,915 E. Cash.................................................................
12,915 Foreign Exchange Gain........................... 270 Accounts Receivable Kakura Co. 12,645
Q:
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 for this transaction:
A. Sales...................................
90 Foreign Exchange Gain..... 90 B. Foreign Exchange Loss.......
90 Sales..................................... 90 C. Accounts Receivable Nakakura Company...........
90 Foreign Exchange Gain....................................... 90 D. Foreign Exchange Gain or Loss.......................
90 Accounts Receivable Nakakura Company.... 90 E. No journal entry is required until the amount is collected
Q:
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
Q:
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.
Q:
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.
Q:
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
Q:
On January 1, 2011, 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 2011 and 2012. Toma's net income was $190,000 and $270,000 for 2011 and 2012 respectively. The January 1, 2013, 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) Cash
85,000 Loss on Sale of Investments
110,000 Long-Term Investments 195,000 B) Cash
85,000 Gain on Sale of Investments 57,370 Long-Term Investments 27,630 C) Cash
85,000.00 Gain on Sale of Investments 76,195.75 Long-Term Investments 8,804.25 D) Cash
85,000 Gain on Sale of Investments 5,620 LongTerm Investments 79,380 E) Cash
85,000 Gain on Sale of Investments 5,000 LongTerm Investments 80,000
Q:
On January 4, 2011, 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 2011 and 2012, respectively. The January 12, 2013, entry to record the sale of 3,000 shares of Warner Company stock for $39,000 cash should be:
A. Cash.........................................................
39,000 Loss on Sale of Investments...................
2,400 Long-Term Investments................. 41,400 B. Cash.........................................................
39,000 Loss on Sale of Investments...................
8,800 Long-Term Investments................... 47,880 C. Cash.........................................................
39,000 Loss on Sale of Investments...................
60 Long-Term Investments.................. 38,940 D. Cash.........................................................
39,000 Gain on Sale of Investments.............. 8,750 Long-Term Investments.................... 30,250 E. Cash.........................................................
39,000 Loss on Sale of Investments...................
21,500 Long-Term Investments................... 60,500
Q:
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
Q:
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
Q:
Chung owns 40% of Lu's common stock. Lu pays $97,000 in total cash dividends to its shareholders. Chung's entry to record this transaction should include a:
A. Debit to Dividends for $97,000.
B. Debit to Dividends for $38,800.
C. Debit to Long-Term investments for $97,000.
D. Credit to Long-Term Investments for $38,800.
E. Credit to Cash for $97,000.
Q:
Micron owns 35% of Martok. Martok pays a total of $47,000 in cash dividends for the period. Micron's entry to record the dividend transaction would include a:
A. Credit to Long-Term Investments for $16,450.
B. Debit to Long-Term Investments for $16,450.
C. Debit to Cash for $47,000.
D. Credit to Cash for $16,450.
E. Credit to Investment Revenue for $47,000.
Q:
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
Q:
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.
Q:
A company had investments in long-term available-for-sale securities. At the end of the current year, the company's portfolio had a $731,000 cost and $730,000 market value.
What is the current year's adjustment to market value given the following account balances at the end of the prior year? Market Adjustment Available-for-Sale Unrealized Gain (Loss) Equity 5,000 5,000 A. Market Adjustment Available-for-Sale...............
1,000 Unrealized Gain Equity.......................................... 1,000 B. Market Adjustment Available-for-Sale...............
6,000 Unrealized Gain Equity.......................................... 6,000 C. Unrealized Gain Equity..........................................
1,000 Market Adjustment Available-for-Sale............... 1,000 D. Unrealized Gain (Loss) Equity..........................................
6,000 Market Adjustment Available-for-Sale............... 6,000 E. Unrealized Gain (Loss) Equity..................................
4,000 Market Adjustment Available-for-Sale............... 4,000
Q:
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? Market Adjustment Available-for-Sale Unrealized Gain Equity 3,000 3,000 A. Market Adjustment Available-for-Sale...............
2,000 Unrealized Gain Equity.......................................... 2,000 B. Market Adjustment Available-for-Sale...............
1,000 Unrealized Gain Equity.......................................... 1,000 C. Unrealized Gain Equity..........................................
1,000 Market Adjustment Available-for-Sale............... 1,000 D. Unrealized Gain Equity..........................................
2,000 Market Adjustment Available-for-Sale............... 2,000 E. Unrealized Gain Equity..........................................
3,000 Market Adjustment Available-for-Sale............... 3,000
Q:
Acme owns 4,000 shares of XYZ. XYZ has 50,000 total shares of stock outstanding. XYZ paid $0.82 per share in cash dividends to its stockholders. Acme should record a:
A. Debit to Dividends for $41,000.
B. Debit to Dividends for $3,280.
C. Debit to Cash for $3,280.
D. Debit to Long-Term Investments for $3,280.
E. Credit to Long-Term Investments for $3,280.
Q:
Micron owns 3,000 shares of JVT. JVT has 25,000 total shares of stock outstanding. JVT paid $3 per share in cash dividends to its stockholders. Micron should record a:
A. Debit to Dividends for $75,000.
B. Debit to Dividends for $9,000.
C. Debit to Cash for $9,000.
D. Debit to Long-Term Investments for $9,000.
E. Credit to Long-Term Investments for $9,000.
Q:
Morgan Company purchased 2,000 shares of Asta's common stock for $143,000 as a long-term investment and 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.
Q:
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.
Q:
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.
Q:
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.
Q:
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
Q:
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.
Q:
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
Q:
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
Q:
A company had net income of $82,000, net sales of $781,000, and average total assets of $300,000. Its profit margin and total asset turnover were respectively:
A. 10.5%; 0.38
B. 10.5%; 2.6
C. 9.52%; 2.6
D. 27.3%; 1
E. 27.3%; 9.52
Q:
A company had net income of $40,000, net sales of $300,000, and average total assets of $200,000. Its profit margin and total asset turnover were respectively:
A. 13.3%; 0.2
B. 13.3%; 1.5
C. 2.0%; 1.5
D. 1.5%; 0.2
E. 1.5%; 13.3
Q:
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. 1.7%; 11.3
E. 19.5%; 11.3
Q:
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%
Q:
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 is equal to:
A. 3.01%
B. 10.64%
C. 32.00%
D. 33.25%
E. 300.75%
Q:
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 is equal to:
A. 12.5%
B. 13.3%
C. 16.7%
D. 75.0%
E. 600.0%
Q:
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 equal to:
A. 3%
B. 200%
C. 6%
D. 17%
E. 1.5%
Q:
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.
Q:
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
Q:
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
Q:
Long-term investments in held-to-maturity debt securities are accounted for using the:
A. Market value method with market adjustment to income.
B. Market value method with market adjustment to equity.
C. Cost method with amortization.
D. Cost method without amortization.
E. Equity method.
Q:
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.
Q:
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%
Q:
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.
Q:
In accounting for noninfluential securities:
A. The GAAP concept of trading securities is commonly referred to as financial
assets at fair value through profit and loss under IFRS.
B. The IFRS concept of trading securities is commonly referred to as financial
assets at fair value through profit and loss under GAAP.
C. The GAAP concept of available-for-sale securities is commonly referred to as available-for-sale financial assets under IFRS.
D. The IRFS concept of available-for-sale securities translates as available-for-sale financial assets under GAAP.
E. Both A and C above are true statements.
Q:
The controlling investor is referred to as the:
A. Owner
B. Subsidiary
C. Parent
D. Investee
E. Senior entity
Q:
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.
Q:
A company paid $47,500 plus a broker's fee of $400 to acquire 8% bonds with a $60,000 maturity value. The company intends to hold the bonds to maturity. The cash proceeds the company will receive upon maturity of the bonds is:
A. $60,000
B. $60,400
C. $47,900
D. $64,800
E. $52,300
Q:
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 upon the maturity of the bond is:
A. $37,800
B. $38,325
C. $40,000
D. $40,525
E. $43,200
Q:
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
Q:
A company owns $400,000 of 7% bonds that pay interest on October 1 and April 1. The amount of interest accrued on December 31 (the company's year-end) would be:
A. $4,667
B. $7,000
C. $28,000
D. $14,000
E. $9,333
Q:
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
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
Long-term investments are reported in the:
A. Current asset section of the balance sheet.
B. Intangible asset section of the balance sheet.
C. Noncurrent asset section of the balance sheet.
D. Liability section of the balance sheet.
E. Equity section of the balance sheet.
Q:
Short-term investments:
A. Are securities that management intends to convert to cash within one year or an operating cycle, whichever is longer.
B. Include funds earmarked for a special purpose such as bond sinking funds.
C. Include stocks not intended to be converted into cash.
D. Include bonds not intended to be converted into cash.
E. Include sinking funds not intended to be converted into cash.
Q:
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
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
An increase in the price of the U.S. dollar against other currencies puts U.S. companies in a stronger competitive position internationally.
Q:
When using the equity method, receipt of cash dividends increases the carrying value of an investment in equity securities.
Q:
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 would include a debit to Cash for $6,500 and a credit to Long-Term Investments for $6,500.
Q:
When using the equity method of accounting for investments in equity securities, the receipt of cash dividends is recorded as revenue.
Q:
The cost method of accounting is used for long-term investments in equity securities with significant influence.
Q:
An investor with significant influence owns as least 20%, but not more than 50%, of another company's voting stock.
Q:
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.
Q:
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.
Q:
Any unrealized gain or loss on available-for-sale securities is reported on the income statement in the other gain or loss section.
Q:
Long-term investments in available-for-sale securities are reported at market value on the balance sheet.
Q:
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.
Q:
Long-term investments in debt securities not classified as held-to-maturity securities are classified as available-for-sale securities.
Q:
Accounting for long-term investments in held-to-maturity securities requires companies to record interest revenue as it accrues.
Q:
Held-to-maturity securities are equity securities a company intends and is able to hold until maturity.