Question 1

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.

Accepted Answer

The foreign exchange rate used to record the sale should be based on the date of the sale, as this reflects the current market rate at the time of the transaction. Waiting 30 days, until the end of the seller or buyer's fiscal year, or until final payment is made could result in using an outdated exchange rate that does not accurately reflect the value of the sale.

Question 2

On September 1,2014,Rode Corp.paid $100,000 plus a brokerage fee in the amount of $500 to buy Liston's 6%,two-year bonds payable with a $100,000 par value.The bonds pay interest semiannually on June 30 and December 31.Rode intends to hold the bonds until they mature on December 31,2016.How would Rode record the adjusting entry relating to these bonds on December 31,2014?
A)Debit Interest Receivable for $2,000 and credit Interest Revenue for $2,000.
B)Debit Interest Receivable for $2,010 and credit Interest Revenue for $2,010.
C)Debit Interest Receivable for $3,000 and credit Interest Revenue for $3,000.
D)Debit Interest Receivable for $3,015 and credit Interest Revenue for $3,015.
E)Debit Interest Receivable for $6,000 and credit Interest Revenue for $6,000.

Accepted Answer

The bonds pay 6% annual interest on a $100,000 par value, which is $6,000 annually or $3,000 semiannually. Since the bonds were purchased on September 1, 2014, the interest for the period from September 1 to December 31 (4 months) would be $2,000.

Question 3

On June 15,2014,Bellows Corp.acquired 100 shares of Sonny,Inc.for $75 per share as a trading security.On December 17,2014,Bellows sold the stock for $115 per share.How would the company record this transaction?
A)Debit Cash for $11,500,credit Short-Term Investments-Trading for $7,500,and credit Gain on Sale of Short-Term Investments for $4,000.
B)Debit Cash for $11,500,credit Long-Term Investments-Trading for $7,500,and credit Gain on Sale of Long-Term Investments for $4,000.
C)Debit Cash for $11,500,credit Short-Term Investments-Trading for $7,500,and credit Fair Value Adjustment-Trading for $4,000.
D)Debit Cash for $11,500,credit Long-Term Investments-Trading for $7,500,and credit Fair Value Adjustment-Trading for $4,000.
E)Debit Fair Value Adjustment-Trading for $4,000 and credit Gain on Sale of Short-Term Investments for $4,000.

Accepted Answer

The acquisition of the trading security is recorded as a debit to Short-Term Investments-Trading and a credit to Cash. 
When the security is sold, it is recorded as a debit to Cash for the sales price, a credit to Short-Term Investments-Trading for the original cost, and a credit to Gain on Sale of Short-Term Investments for the difference between the sales price and the original cost. Therefore, the correct option is A.

Question 4

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

Accepted Answer

The exchange rate increased from $1.14 to $1.35 per euro, meaning the euro strengthened against the dollar. Johnson Company will receive more dollars for the same amount of euros, resulting in a gain. The gain is calculated as (1.35 - 1.14) * 60,000 = $12,600.

Question 5

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) 
B) 
C) 
D) 
E)No journal entry is required until the amount is collected

Accepted Answer

The answer of On November 12,Kendra,Inc.,a U.S.Company,sold merchandise on credit...

Question 6

On January 1,2014,Brig Corp.paid $39,200 plus a brokerage fee in the amount of $800 to buy Sonny's 8%,two-year bonds payable with a $40,000 par value.The bonds pay interest semiannually on June 30 and December 31.Brig intends to hold the bonds until they mature on December 31,2016.How would the company record the purchase of the bonds?
A)Debit Long-Term Investments-HTM (Sonny) for $39,200 and credit Cash for $39,200.
B)Debit Short -Term Investments-HTM (Sonny) for $40,000 and credit Cash for $40,000.
C)Debit Long -Term Investments-HTM (Sonny) for $40,000 and credit Cash for $40,000.
D)Debit Long-Term Investments-HTM (Sonny) for $39,200,debit Brokerage Fee Expense for $800,and credit Cash for $40,000.
E)Debit Long-Term Investments-HTM (Sonny) for $39,200,debit Unrealized Loss-Income for $800,and credit Cash for $40,000.

Accepted Answer

The purchase of the bonds should be recorded at the total cost, which includes the par value and the brokerage fee. Therefore, the correct entry is to debit Long-Term Investments-HTM for the total amount paid ($40,000) and credit Cash for the same amount.

Question 7

On January 1,2014,Newark Corp.paid $60,000 plus a brokerage fee in the amount of $600 to buy Escalade's 8%,two-year bonds payable with a $60,000 par value.Newark intended to hold the bonds until their maturity date of December 31,2016.At maturity,Newark received the bond proceeds (not including the interest,which had already been paid).How would the company record the receipt of the proceeds at maturity?
A)Debit Cash for $60,000 and credit Short-Term Investments-HTM (Escalade) for $60,000.
B)Debit Cash for $60,600 and credit Short -Term Investments-HTM (Escalade) for $60,600.
C)Debit Cash for $60,000 and credit Long-Term Investments-HTM (Escalade) for $60,000
D)Debit Cash for $60,600 and credit Short -Term Investments-HTM (Escalade) for $60,600
E)Debit Cash for $60,000,debit Loss on Long-Term Investments-Income for $800,and credit Long-Term Investments-HTM (Escalade) for $60,000.

Accepted Answer

The bonds were held to maturity, so the company would debit Cash for the par value of $60,000 and credit Long-Term Investments-HTM for the same amount. The brokerage fee is not included in the maturity proceeds.

Question 8

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.

Accepted Answer

The purchase of 40% of the outstanding stock for $232,000 represents a significant long-term investment for Vans. Therefore, the entry to record the transaction should include a debit to Long-Term Investments for the entire amount of the investment, which is $232,000.

Question 9

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) 
B) 
C) 
D) 
E)

Accepted Answer

To record the sale of 3,000 shares of Warner Company stock for $39,000 cash, we need to calculate the cost of the shares sold using the cost method. The cost of the 5,000 shares purchased on January 4, 2011, was $59,500 plus a broker's fee of $1,000, which makes the total cost $60,500. The cost per share is $60,500 divided by 5,000 shares, which equals $12.10 per share. Therefore, the cost of the 3,000 shares sold is 3,000 shares times $12.10 per share, which equals $36,300. The entry to record the sale of the 3,000 shares should be:
Cash (proceeds from sale) $39,000
Cost of Warner shares sold $36,300
Gain on sale of Warner shares $2,700
To record the sale of 3,000 Warner Company shares at $39,000 cash.

Question 10

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

Accepted Answer

Parris Corporation's investment in Samitz Corporation should be adjusted for its share of Samitz's net income and dividends. The initial investment is $100,000. Parris's share of Samitz's net income is 40% of $60,000, which is $24,000. Parris's share of the dividends is 40% of $12,000, which is $4,800. The balance is calculated as $100,000 + $24,000 - $4,800 = $119,200.

Question 11

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

Accepted Answer

The equity method is used when a company owns between 20% to 50% of the stock of another company as a long-term investment. This method allows the investor to recognize their share of the investee's profits or losses on their income statement. The market value method is not used for long-term investments as it focuses on short-term fluctuations in stock prices. The historical cost method is used for fixed assets and inventory, but not for investments. The straight-line method is used for depreciation, not investments. The effective method is not a recognized accounting method.

Question 12

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.

Accepted Answer

The sale would be recorded using the current dollar value on the date of sale. This is because in accounting, transactions are recorded at their fair market value on the transaction date, which would be the current dollar value. Using a projected estimate or average value would not be accurate and would not reflect the true value of the transaction on the date of sale. The foreign currency value would also not be appropriate as the U.S. company would be converting the foreign currency to U.S. dollars at a later date when payment is received.

Question 13

A company had investments in long-term available-for-sale securities.At the end of the current year,the company's portfolio had a $731,000 cost and $730,000 market value. What is the current year's adjustment to market value given the following account balances at the end of the prior year?

A) 
B) 
C) 
D) 
E)

Accepted Answer

The answer of A company had investments in long-term available-for-sale...

Question 14

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.

Accepted Answer

The answer of Chung owns 40% of Lu's common stock.Lu...

Question 15

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

Accepted Answer

The correct term for the price of one currency in terms of another currency is foreign exchange rate. The other options do not accurately describe this concept.

Question 16

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.

Accepted Answer

The answer of Micron owns 35% of Martok.Martok pays a...

Question 17

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

Accepted Answer

Since Clark Corporation purchased 40% of IT corporation, it has significant influence over IT Corporation. Therefore, Clark Corporation must use the equity method to account for its investment in IT Corporation.

Under the equity method, Clark Corporation records its share of IT Corporation's net income and deducts its share of any dividends declared by IT Corporation.

Clark Corporation's initial investment of $125,000 represents 40% of IT Corporation's initial book value, which means that IT Corporation's initial book value is $312,500 ($125,000 ÷ 40%). We can set up the following table to track Clark Corporation's investment in IT Corporation:

At acquisition:
Investment in IT Corporation: $125,000
Plus: Share of IT Corporation's net assets: $187,500 ($312,500 × 60%)
Equals: Total cost of investment: $312,500

During the year, IT Corporation declared dividends of $30,000. Clark Corporation's share of those dividends is 40%, or $12,000. Thus, Clark Corporation's investment in IT Corporation would be:

Investment in IT Corporation (as of December 31) =
Investment in IT Corporation (at acquisition)
+ Share of IT Corporation's income
- Share of IT Corporation's dividends
= $312,500 + ($150,000 × 40%) - $12,000
= $173,000

Therefore, the answer is (C) $173,000.

Question 18

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) 
B) 
C) 
D) 
E)

Accepted Answer

The answer of On November 12,Kera,Inc.,a U.S.company,sold merchandise on credit...

Question 19

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)
 
B)
 
C)
 
D)
 
E)

Accepted Answer

The answer of On January 1,2011,Posten Company purchased 10,000 shares...

Question 20

Bawl Corp.acquired 100 shares of Darkness,Inc.for $75 per share for its trading portfolio.At December 31,2014,the value of the stock was $95 per share.How would Bawl record the adjustment to fair value?
A)Debit Fair Value Adjustment-Trading for $2,000 and credit Unrealized Gain-Equity for $2,000.
B)Debit Fair Value Adjustment-Trading for $2,000 and credit Unrealized Gain-Income for $2,000.
C)Debit Unrealized Gain-Equity for $2,000 and credit Fair Value Adjustment-Trading for $2,000.
D)Debit Unrealized Gain-Income for $2,000 and credit Fair Value Adjustment-Trading for $2,000.
E)Debit Short-Term Investments-Trading for $95,000 and credit Unrealized Gain-Equity for $95,000.

Accepted Answer

Under the fair value method for trading securities, unrealized gains and losses are recognized in income. Therefore, the fair value adjustment should be recorded as a debit to Fair Value Adjustment-Trading and a credit to Unrealized Gain-Income, reflecting the increase in value of the investment.

Quiz 15: Investments and International Operations

When a credit sale is denominated in a foreign currency,the foreign exchange rate used to record the sale is the current exchange rate:

On June 15,2014,Bellows Corp.acquired 100 shares of Sonny,Inc.for $75 per share as a trading security.On December 17,2014,Bellows sold the stock for $115 per share.How would the company record this transaction?

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:

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 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 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?

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:

The price of one currency stated in terms of another currency is referred to as the:

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:

Bawl Corp.acquired 100 shares of Darkness,Inc.for $75 per share for its trading portfolio.At December 31,2014,the value of the stock was $95 per share.How would Bawl record the adjustment to fair value?