Deck 10: Long-Term Investments International Operations

Question 1

High Times Corporation owns 300 shares of Low Tide Company's common stock. Low Tide has 1,000,000 shares of common stock outstanding. High Times Corporation is the:

A)investor.
B)investee.
C)parent company.
D)controlling company.

Answer 1

A

Question 2

All investments not classified as held-to maturity or trading securities are:

A)available-for-sale investments.
B)equity investments.
C)debt investments.
D)short-term investments.

Answer 2

A

Question 3

If an investment is liquid and the investor intends to convert the investment to cash within one year, the investment will be classified as:

A)long-term.
B)equity.
C)short-term.
D)either long-term or short term.

Answer 3

C

Question 4

Realized gains on the sale of available-for-sale securities are used to compute net income.

Question 5

The following is the proper order for assets on a balance sheet:

A)Cash, intangibles, long-term investments, property, plant and equipment
B)Cash, long-term investments, intangibles, property, plant and equipment
C)Cash, long-term investments, property, plant and equipment, and intangibles
D)Cash, property, plant and equipment, long-term investments, intangibles

Question 6

High Times Corporation owns 300 shares of Low Tide Company's common stock. Low Tide has 1,000,000 shares of common stock outstanding. High Times Corporation will show the investment on their books as:

A)a liability.
B)an equity.
C)an asset.
D)other comprehensive income.

Question 7

Available-for-sale investments in stock are reported on the balance sheet at:

A)their amortized cost.
B)their historical cost or current market value on the balance sheet date.
C)the lower-of-cost-or-market value on the balance sheet date.
D)their current market value.

Question 8

The Allowance to Adjust Investment to Market has a credit balance. Therefore:

A)the Allowance account is subtracted from the carrying amount.
B)the Allowance account is added to the carrying amount.
C)the Allowance account is neither added nor subtracted from the carrying amount.
D)none of the above are true.

Question 9

An investment in common stock acquired during the year at a cost of $45,000 has a market value at year end of $45,771. The adjusting entry requires a debit to Allowance to Adjust Investment to Market for $771.

Question 10

Unrealized gains and losses result from sales of the investments.

Question 11

The market value of an available-for-sale security has declined from the last carrying value. The journal entry to record this decline will include:

A)a credit to the Allowance to Adjust Investment to Market.
B)a credit to the Unrealized Gain on Investment.
C)a debit to the Unrealized Loss on Investment.
D)both A and C.

Question 12

High Times Corporation owns 300 shares of Low Tide Company's common stock. Low Tide has 1,000,000 shares of common stock outstanding. Low Tide Company is the:

A)investor.
B)investee.
C)parent company.
D)controlling company.

Question 13

The market value of an available-for-sale security has increased from the last carrying value. The journal entry to record this increase will include:

A)a debit to the Allowance to Adjust Investment to Market.
B)a credit to the Allowance to Adjust Investment to Market.
C)a debit to the Unrealized Gain on Investment.
D)none of the above.

Question 14

An investee should report available-for-sale securities that might be sold in the next 12 months as a long-term investment.

Question 15

The Allowance to Adjust Investment to Market is a companion account to Long-Term Investments.

Question 16

Unrealized gains and losses from available-for-sale investments arise from:

A)the sale of the investment.
B)changes in the market value of the investment.
C)both the sale of the investment and changes in the market value of the investment.
D)none of the above.

Question 17

The Allowance to Adjust Investment to Market is reported in the Long-Term Assets section of the balance sheet.

Question 18

Unrealized gains and losses on available-for-sale securities are used to compute net income.

Question 19

The market value of an available-for-sale security has increased from the last carrying value. The journal entry to record this increase will include:

A)a credit to the Allowance to Adjust Investment to Market.
B)a credit to the Unrealized Gain on Investment.
C)a debit to the Unrealized Gain on Investment.
D)none of the above.

Question 20

Available-for-sale investments in stock are initially recorded at:

A)their amortized cost.
B)their cost.
C)the lower-of-cost-or-market.
D)none of the above.

Question 21

The journal entry to record the sale of an available-for-sale investment includes a loss on sale of investment for $700. The income statement will reflect:

A)an other expense of $700.
B)a decrease in net sales of $700.
C)nothing, since the entry impacts only asset accounts.
D)an extraordinary loss of $700.

Question 22

ABC receives a stock dividend of 50 shares from XYZ Company. ABC previously owned 500 shares of XYZ stock that had a cost basis of $3,135. The cost basis per share of XYZ stock is:

A)$60.
B)$6.96.
C)$6.00.
D)$5.70.

Question 23

The receipt of a stock dividend:

A)has no effect on assets or total equity.
B)increases assets and increases paid-in-capital.
C)increases assets and decreases stockholders' equity.
D)increases assets and increases retained earnings.

Question 24

Abba Company purchased 1,000 shares of Dabber Company at $20 per share. Abba received an additional 250 shares from Dabber Company as a stock dividend. After receiving the stock dividend, the total value of the investment in Dabber and cost per share of Dabber, respectively is:

A)$25,000 and $20.
B)$20,000 and $16.
C)$25,000 and $16.
D)$20,000 and $20.

Question 25

The journal entry to record the receipt of a stock dividend arising from an available-for-sale investment held by a company includes:

A)a debit to Unrealized Gain on Investment and a credit to Dividend Revenue.
B)a debit to Cash and a credit to Dividend Revenue.
C)a debit to Cash and a credit to Unrealized Gain on Investments.
D)no journal entry. Only a memorandum entry is required.

Question 26

The Unrealized Gain or the Unrealized Loss Account appears:

A)in Other comprehensive income.
B)in Accumulated other comprehensive income.
C)in Other comprehensive income and Accumulated other comprehensive income.
D)in none of the above.

Question 27

1.adjusting entry requires a:

A)debit to Allowance to Adjust Investments to Market for $1,250.
B)debit to Long-Term Investments for $1,250.
C)debit to Unrealized Gain on Investment for $1,250.
D)credit to Allowance to Adjust investment to Market for $1,250.

Question 28

The gain or loss on the sale of an investment classified as "available-for-sale" is measured by comparing the amount received from the sale of investment with the:

A)market value of the investment.
B)lower-of-cost-or-market value of the investment.
C)cost of the investment.
D)amortized cost of the investment.

Question 29

Other comprehensive income:

A)appears on the income statement in a separate section below net income.
B)is a separate section of stockholders' equity.
C)appears below retained earnings on the balance sheet.
D)does both B and C.

Question 30

The journal entry to record the receipt of a cash dividend arising from an available-for-sale investment held by a company includes:

A)a debit to Unrealized Gain on Investment and a credit to Dividend Revenue.
B)a debit to Cash and a credit to Dividend Revenue.
C)a debit to Cash and a credit to Unrealized Gain on Investments.
D)no journal entry. Only a memorandum entry is required.

Question 31

Accumulated other comprehensive income:

A)appears on the income statement in a separate section below net income.
B)is a separate section of stockholders' equity.
C)appears below retained earnings on the balance sheet.
D)does both B and C.

Question 32

The receipt of a cash dividend:

A)has no effect on assets or total equity.
B)increases assets and increases paid-in-capital.
C)increases assets and decreases stockholders' equity.
D)increases assets and increases retained earnings.

Question 33

The Unrealized Gains and Losses on Available-for-sale Securities account appear in which financial statement?

A)The balance sheet in the assets section
B)The balance sheet as part of stockholders' equity
C)The income statement as an operating expense
D)The balance sheet in the liabilities section

Question 34

As a result of a stock dividend:

A)the investor's total cost in the investment does not change.
B)the investor's cost per share decreases.
C)no journal entry is needed to record the receipt of the stock dividend.
D)all of the above occur.

Question 35

Realized gains and losses from available-for-sale investments arise from:

A)the sale of the investment.
B)changes in the market value of the investment.
C)both the sale of the investment and changes in the market value of the investment.
D)none of the above.

Question 36

1.investments with a cost of $19,000 have a current market value of $20,250. The adjusting entry will require a:

A)credit to Allowance to Adjust Investment to Market for $271.
B)debit to Allowance to Adjust Investment to Market for $271.
C)credit to Allowance to Adjust Investment to Market for $2,229.
D)debit to Allowance to Adjust Investment to Market for $2,229.

Question 37

1.investments have a current market value of $15,000. The carrying value of the investments is:

A)$15,950.
B)$15,000.
C)$14,050.
D)unknown. The carrying value cannot be computed without knowing the cost of the investment.

Question 38

How are available-for-sale investments in stock reported on the balance sheet?

A)As long-term assets
B)As current assets
C)As either current assets or long-term assets, depending on when the investment is expected to be sold
D)As both long-term assets and stockholders' equity

Question 39

1.investments with a cost a $5,000 have a current market value of $6,350. The adjusting entry will require a:

A)credit to Allowance to Adjust Investments to Market for $450.
B)debit to Allowance to Adjust Investments to Market for $450.
C)credit to Allowance to Adjust Investments to Market for $1,350.
D)debit to Allowance to Adjust Investments to Market for $1,350.

Question 40

With regard to available-for-sale securities, which of the following is used to compute net income?

A)Realized gains
B)Unrealized gains
C)Both unrealized gains and realized gains
D)Neither realized gains nor unrealized gains

Question 41

If the equity method is used to account for stock investments, the investor company recognizes revenue when it receives a cash dividend from the investee company.

Question 42

Investments accounted for by the equity method are initially recorded at cost.

Question 43

Under the equity method, the investor applies its percentage of ownership in recording its share of the investee's net income and dividends.

Question 44

The equity method of accounting for a stock investment should generally be used when the investor owns a level of stock ownership that:

A)is the controlling interest in the investee company.
B)gives the investor significant influence over the investee company.
C)usually indicates a plan to acquire a controlling interest in the investee company.
D)requires the investor to notify the government of any plans to acquire a controlling interest in the investee company.

Question 45

The investor should generally use the equity method of accounting for the investee if the investor owns what percentage of the outstanding stock of the investee?

A)0% - 15%
B)20% - 50%
C)50% - 100%
D)More than 50%

Question 46

Abler Company owns 40% of Saparo Company. Saparo Company paid $40,000 cash dividends for the year. Abler Company's journal entry to record the dividends includes a:

A)credit to Dividend Revenue for $16,000.
B)credit to Dividend Revenue for $40,000.
C)credit to Long-Term Investments for $16,000.
D)credit to Long-Term Investments for $40,000.

Question 47

If an investor company owns between 20% and 50% of the common stock of another business, cash dividends received from the investee company are generally recorded by the investor company by:

A)decreasing the investor company's Common Stock account.
B)increasing the value of the investor's Investment account.
C)increasing the Dividend Revenue account.
D)decreasing the value of the investor's Investment account.

Question 48

Blueberry Jam Company owns 37% of Georgia Peach Company. Net income for Georgia Peach Company for the year is $317,000. The journal entry prepared by Blueberry Jam Company includes a:

A)debit to Long-Term Investments for $117,290.
B)credit to Long-Term Investments for $117,290.
C)debit to Long-Term Investments for $199,710.
D)credit to Long-Term Investments for $199,710.

Question 49

Under the equity method of accounting for stock investments, cash dividends received from the investee are recorded by the investor as:

A)a debit to the Investment account of the investor company.
B)a credit to Dividend Revenue of the investor company.
C)a credit to the Investment account of the investor company.
D)no entry. There is no entry made to record dividends in this accounting situation.

Question 50

Under the equity method of accounting for stock investments, the Investment account is decreased for the receipt of a dividend because:

A)no cash is received.
B)the dividend decreases the investee's owners' equity, and thus the investor's investment.
C)the dividend decreases the investee's owners' equity, and thus increases the investor's investment.
D)none of the above occur.

Question 51

Which of the following is the method used when one company owns less than 20% of the shares of another company?

A)Market value method
B)Consolidation method
C)Equity method
D)Amortized method

Question 52

A gain or loss on the sale of a long-term investment using the equity method is determined by comparing the cash received with the:

A)lower-of-cost-or-market value of the long-term investment.
B)cost of the long-term investment.
C)market value of the long-term investment.
D)cost of the long-term investment, adjusted for the investor's share of the investee's net income and cash dividends, while the investment was held by the investor company.

Question 53

A company using the equity method to account for long-term investments should report an unrealized gain on the investment:

A)if the investee stock has fallen below or risen above its cost to the investor.
B)only if market exceeds cost.
C)only if market is below cost.
D)in no instance. No adjusting entry is made.

Question 54

Which of the following is the method used when one company owns more than 50% of the shares of another company?

A)Market value method
B)Consolidation method
C)Equity method
D)Amortized method

Question 55

The method used to account for investments in which the investor has 20-50% of the investee's voting stock and can significantly influence the decisions of the investee is the:

A)market value method.
B)equity method.
C)consolidated method.
D)historical cost.

Question 56

Which of the following is the method used when one company owns 20% to 50% of the shares of another company?

A)Market value method
B)Consolidation method
C)Equity method
D)Amortized method

Question 57

Under the equity method, investee companies are referred to as:

A)the parent company.
B)the subsidiary company.
C)affiliates.
D)the consolidated company.

Question 58

A company that owns between 20% and 50% of the common stock of another business recognizes revenue from the investment when:

A)the company receives a cash dividend from the investee company.
B)the company sells the shares in the investee company.
C)the investee company recognizes net income.
D)any of the above occur.

Question 59

Under the equity method, when the equity of the investee increases, the investment account on the investor's books decreases

Question 60

An investor who owns 35% of the outstanding stock of another company should report the investment using the:

A)market value method.
B)equity method.
C)consolidated method.
D)historical cost.

Question 61

An investee company in which a parent company owns more than 50% of the voting stock is the:

A)parent company.
B)subsidiary company.
C)consolidated company.
D)minority interest.

Question 62

When a parent-subsidiary relationship exists, the consolidated statements include:

A)the balance sheet.
B)the income statement.
C)the statement of cash flows.
D)all of the above.

Question 63

A noncontrolling (minority)interest is defined as:

A)a subsidiary company that represents less than 20% of the value of the consolidated company.
B)all of the stock of a subsidiary company relative to the parent company.
C)a subsidiary company's equity held by stockholders other than the parent company.
D)a parent company that owns less than 50% of the shares in the subsidiary company.

Question 64

An investor company that owns more than 50% of the voting stock of a subsidiary company is the:

A)parent company.
B)subsidiary company.
C)consolidated company.
D)minority interest.

Question 65

The English Tea Company owns 19,000 of the 40,000 shares of outstanding common stock of the Express Beverage Company. The English Tea Company should account for this investment using the:

A)equity method.
B)market method.
C)consolidation method.
D)lower-of-cost-or-market method.

Question 66

Under the equity method, if the investee company has a net loss, then the investor company will:

A)debit the Investment account for their share of the net loss.
B)credit the Investment account for their share of the net loss.
C)make no entry to the Investment account.
D)do none of the above.

Question 67

An investor company with a 40% interest in an investee debited the Investment account for $70,000 and credited the account for $55,000. Based on this information, the investee must have paid dividends of:

A)$6,000.
B)$22,000.
C)$28,000.
D)$137,500.

Question 68

1.investment will appear on Centurian Corporation's December 31, 2011 balance sheet in the amount of:

A)$750,000.
B)$768,000.
C)$795,000.
D)$860,000.

Question 69

1.Investment account will be:

A)$675,000.
B)$680,000.
C)$696,600.
D)$729,000.

Question 70

On January 1, 2011, the Hammer Company paid $1,300,000 to purchase 35% of the outstanding stock of the Anvil Corporation. Anvil Corporation reports $425,000 of net income for the year ending December 31, 2011 and pays a cash dividend of $115,000 during 2011. On January 1, 2012, the Hammer Company sells its entire investment in the Anvil Corporation for $1,500,000. The Hammer Company will report a(n):

A)realized gain on the sale of $200,000
B)unrealized gain on the sale of $200,000.
C)realized gain on the sale of $91,500.
D)unrealized gain on the sale of $91,500.

Question 71

On January 1, 2011, Rider Corporation purchased 30% of the outstanding stock of Arapahoe Corporation for $770,000. Net income reported by Arapahaoe Corporation for 2011 was $120,000. Dividends paid by Arapahoe Corporation during 2011 were $70,000. The amount of investment revenue that Rider should recognize for 2011 is:

A)$15,000.
B)$21,000.
C)$36,000.
D)$50,000.

Question 72

When a parent-subsidiary relationship exists between two companies:

A)the subsidiary company will keep one set of accounting records covering both companies.
B)the parent company will keep one set of accounting records covering both companies.
C)both the parent and the subsidiary will continue to keep their own separate accounting records as if the parent-subsidiary relationship does not exist.
D)the parent company must use the cost method to account for the subsidiary.

Question 73

Financial statements of the parent company plus those of the majority-owned subsidiaries-as if the combination were a single legal entity-are:

A)foreign-currency statements.
B)consolidated statements.
C)minority interest statements.
D)supplemental statements.

Question 74

Goodwill arises when a parent company:

A)pays more to acquire a subsidiary company than the market value of the subsidiary's net assets.
B)pays less to acquire a subsidiary company than the market value of the subsidiary's net assets.
C)pays more to acquire a subsidiary company than the book value of the subsidiary's net assets.
D)pays less to acquire a subsidiary company than the book value of the subsidiary's net assets.

Question 75

Which of the following terms represents a subsidiary company's equity that is held by stockholders other than the parent company?

A)Directing interest
B)Equity interest
C)Minority interest
D)Controlling interest

Question 76

The Hammer Company paid $1,300,000 to purchase 35% of the outstanding stock of the Anvil Corporation. Anvil Corporation reports $425,000 of net income and pays a cash dividend of $115,000. These three events will increase Hammer Company's Investment account from $0 to:

A)$ 40,250.
B)$1,610,000.
C)$1,408,500.
D)$1,725,000.

Question 77

A controlling interest exists when the investor:

A)uses the equity method to account for the investment.
B)uses the market value method of accounting for the investment.
C)owns more than 20% of the investee's voting stock.
D)owns more than 50% of the investee's voting stock.

Question 78

Under the equity method, the revenue from the investment appears on:

A)the balance sheet as a long-term asset.
B)the income statement as Other Revenue.
C)the balance sheet as Other comprehensive income.
D)none of the above.

Question 79

Tupelo Corporation used the equity method to account for a 25% ownership interest in Jordan Corporation. If Jordan Corporation reports $300,000 of income and pays $60,000 of dividends, the net effect of the entries made by Tupelo Corporation will be to:

A)increase the Investment account by $240,000.
B)reduce the Investment account by $240,000.
C)increase the Investment account by $60,000.
D)reduce the Investment account by $60,000.

Question 80

Which of the following terms represents more than 50% interest in a subsidiary company?

A)Directing interest
B)Equity interest
C)Minority interest
D)Controlling interest