Question 1

To prepare consolidated financial statements when a U.S. parent company has an international subsidiary, the international subsidiary's financial statements must be translated into U.S. dollars.

Accepted Answer

This is true. To create consolidated financial statements, the financial statements of all subsidiaries, including international subsidiaries, must be translated into the parent company's currency, which is typically U.S. dollars for U.S. parent companies. This process is called currency translation or foreign currency translation.

Question 2

If a U.S. company's credit sale to an international customer allows payment to be made in a foreign currency, the sale transaction is recorded using the exchange rate on the date of sale.

Accepted Answer

When a U.S. company records a credit sale to an international customer with payment in a foreign currency, the company must use the exchange rate on the date of sale to record the transaction. This is done to accurately reflect the value of the sale in the company's financial records.

Question 3

When using the equity method for investments in equity securities, the investor records the receipt of cash dividends as revenue.

Accepted Answer

Under the equity method, dividends received are not recorded as revenue but rather as a reduction in the carrying amount of the investment.

Question 4

Both U.S. GAAP and IFRS permit companies to use fair value in reporting available-for-sale and held-to-maturity securities.

Accepted Answer

Both U.S. GAAP and IFRS allow companies to use fair value in reporting available-for-sale and held-to-maturity securities, subject to certain accounting and disclosure requirements.

Question 5

Unrealized Loss-Equity and Unrealized Gain-Equity are permanent equity accounts.

Accepted Answer

Both Unrealized Loss-Equity and Unrealized Gain-Equity are permanent equity accounts as they are used to record the changes in the fair value of certain assets and liabilities. The balances in these accounts are carried forward until the related assets or liabilities are realized or settled.

Question 6

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

Accepted Answer

Long-term investments in debt securities that are not classified as trading or held-to-maturity securities are recorded as available-for-sale securities. These securities are reported at fair value on the balance sheet, and any unrealized gains or losses are reported in other comprehensive income until the securities are sold.

Question 7

On May 15, Tumbleweed, Inc. purchased 10,000 shares of Dansell Corp. for $80,000. The securities are considered available-for-sale securities. This is the company's first and only investment in available-for-sale securities. On September 30, the stock had a market value of
$85,000. The $5,000 difference must be reported on Tumbleweed's income statement as a $5,000 gain.

Accepted Answer

The $5,000 unrealized gain on the available-for-sale securities held by Tumbleweed, Inc. is reported in other comprehensive income (OCI) as a component of stockholders' equity, not on the income statement. It will only be recognized on the income statement if the securities are sold.

Question 8

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

Accepted Answer

Management's intent is a key factor in determining the classification of available-for-sale securities as either long-term or short-term. If management intends to hold the security for more than a year, it will be classified as long-term. If management intends to sell the security within a year, it will be classified as short-term.

Question 9

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

Accepted Answer

The equity method, not the cost method, is used for accounting long-term investments in equity securities when the investor has significant influence over the investee.

Question 10

Available-for-sale securities are actively managed like trading securities because the company intends to trade them for profit in the short term.

Accepted Answer

Available-for-sale securities are not actively managed like trading securities. They are classified as long-term investments where the company does not have the intention to sell them in the short term. Companies hold available-for-sale securities to earn interest or dividend income, or to benefit from potential price appreciation over a longer period of time.

Question 11

Security prices are sometimes listed in fractions. For example, a debt security with a price of 22¾ is the same as $22.25.

Accepted Answer

A price of 22¾ is equivalent to $22.75, not $22.25. The fraction ¾ represents 0.75, not 0.25.

Question 12

Hamasaki Company owns 30% of CDW Corp. stock. Hamasaki received $6,500 in cash dividends from its investment in CDW. 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.

Accepted Answer

The entry to record receipt of cash dividends from an investment in another company typically involves a debit to Cash and a credit to the Long-Term Investments account. As Hamasaki Company owns 30% of CDW Corp. stock, it would be considered a long-term investment. Therefore, the entry to record the receipt of $6,500 in cash dividends would include a debit to Cash for $6,500 and a credit to the Long-Term Investments account for $6,500.

Question 13

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.

Accepted Answer

If a long-term investment in an equity security gives the investor significant influence over the investee, the investment is classified as an equity method investment, not available-for-sale. Available-for-sale investments are those for which the investor has no significant influence over the investee.

Question 14

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

Accepted Answer

Unrealized gains or losses for available-for-sale securities are reported in other comprehensive income, not on the income statement.

Question 15

An investor presumed to have significant influence owns at least 20% but not more than 50% of another company's voting stock.

Accepted Answer

According to accounting standards, an investor who holds between 20% and 50% of another company's voting stock is presumed to have significant influence over that company. This means they have the ability to participate in the financial and operating policy decisions of the investee, but they do not necessarily have control over those decisions.

Question 16

If a U.S. Company's credit sale to an international customer allows payment to be made in a foreign currency, the same exchange rate must be used for the date of sale and the cash payment date.

Accepted Answer

The exchange rate may fluctuate between the date of sale and the cash payment date, and therefore, the exchange rate used for the cash payment should reflect the current rate on the payment date.

Question 17

Kim Manufacturing 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. Kim must record a gain of $600.

Accepted Answer

Kim Manufacturing would record a loss, not a gain, because the cost in dollars increased due to the exchange rate change from $1.66 to $1.69 per British pound.

Question 18

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

Accepted Answer

When using the equity method, receipt of cash dividends does not increase the carrying (book) value of an investment in equity securities. Instead, it reduces the carrying value, as the investor's share of the investee company's earnings decreases.

Question 19

On May 1, Jorge Co. purchases 2,000 shares of Radiotech stock for $25,000. This investment is considered to be an available-for-sale investment. This is the company's first and only investment in available-for-sale securities. On July 31 (Jorge's year-end), the stock had a market value of
$28,000. Jorge should record a credit to Unrealized Gain-Equity for $3,000.

Accepted Answer

When an available-for-sale investment increases in value, the unrealized gain is recorded as a credit to Unrealized Gain-Equity. In this case, the increase in value is $3,000 ($28,000 - $25,000), so Jorge should record a credit to Unrealized Gain-Equity for $3,000.

Question 20

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

Accepted Answer

Long-term investments in available-for-sale securities are reported at fair value on the balance sheet, with any unrealized gains or losses included in stockholders' equity as part of comprehensive income.

Quiz 15: Investments