Deck 25: Investments and International Operations

Question 1

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.

Answer 1

True

Question 2

Debt securities are recorded at cost when purchased and interest revenue for investments in debt securities is recorded when earned.

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

Equity securities reflect a creditor relationship such as investments in notes, bonds and certificates of deposit.

Question 5

Cash equivalents are investments that are readily converted to known amounts of cash that mature within three months.

Question 6

Long-term investments are usually held as an investment of cash for the use of current operations.

Question 7

Short-term investments are readily convertible to cash that are intended to be converted into cash within one year or the operating cycle, whichever is longer.

Question 8

Bond sinking funds are examples of short-term investments.

Question 9

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.

Question 10

An investor purchased $50,000 of bonds that were held to maturity. The 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.

Question 11

The equity method with consolidation is used in accounting for long-term investments in equity securities with controlling influence.

Question 12

Long-term investments can include funds set aside for special purposes such as bond sinking funds.

Question 13

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

Question 14

When an investor company owns more than 25% of the voting stock of an investee company, it has a controlling influence.

Question 15

Management's intent determines whether an available-for-sale security is classified as long-term or short-term.

Question 16

IFRS requires uniform accounting policies to be used throughout the group of consolidated subsidiaries.

Question 17

A controlling investor is referred to as the parent and the investee company is referred to as the subsidiary.

Question 18

A company holds $40,000 of 7% bonds as a held-to-maturity security. The 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.

Question 19

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

Question 20

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

Question 21

Consolidated statements are prepared as if a company is organized as one entity, with the amounts allocated for subsidiaries reported in the investment accounts.

Question 22

A company should report its portfolio of trading securities at its market value.

Question 23

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

Question 24

Trading securities are securities that are purchased by trading other securities rather than by paying cash.

Question 25

Consolidated financial statements show the financial position, results of operations and cash flows of all entities under the parent's control.

Question 26

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

Question 27

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

Question 28

Investments in trading securities are always short-term investments.

Question 29

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

Question 30

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.

Question 31

Profit margin is calculated by sales divided by net income.

Question 32

All companies desire a low return on total assets.

Question 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%.

Question 34

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

Question 35

A company has net income of $130,500. Its net sales were $1,740,000 and its total assets were $2,750,000. Its total asset turnover is equal to 4.7%.

Question 36

Comprehensive income refers to all changes in equity during a period except those due to investments and distributions to income.

Question 37

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

Question 38

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

Question 39

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

Question 40

Trading securities, held-to-maturity debt securities and equity securities giving an investor significant influence over an investee are always considered short-term investments.

Question 41

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

Question 42

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.

Question 43

Accounting for long-term investments in held-to-maturity securities requires companies to record interest revenue as it accrues.

Question 44

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.

Question 45

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

Question 46

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.

Question 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.

Question 48

When using the equity method, receipt of cash dividends increases the carrying value of an investment in equity securities.

Question 49

When using the equity method of accounting for investments in equity securities, the receipt of cash dividends is recorded as revenue.

Question 50

An increase in the price of the U.S. dollar against other currencies puts U.S. companies in a stronger competitive position internationally.

Question 51

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.

Question 52

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

Question 53

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.

Question 54

Long-term investments in debt securities not classified as held-to-maturity securities are classified as available-for-sale securities.

Question 55

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.

Question 56

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.

Question 57

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

Question 58

Any unrealized gain or loss on available-for-sale securities is reported on the income statement in the other gain or loss section.

Question 59

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.

Question 60

An investor with significant influence owns as least 20%, but not more than 50% of another company's voting stock.

Question 61

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

Question 62

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

Question 63

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

Question 64

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.

Question 65

The controlling investor is referred to as the:

A) Owner
B) Subsidiary
C) Parent
D) Investee
E) Senior entity

Question 66

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

Question 67

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

Question 68

In accounting for non-influential 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" is commonly referred to as "available-for-sale financial assets" under GAAP
E) Both A and C above are true statements

Question 69

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

Question 70

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

Question 71

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

Question 72

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

Question 73

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

Question 74

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

Question 75

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

Question 76

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

Question 77

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

Question 78

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%

Question 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

Question 80

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