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Exam 15: Investments and International Operations

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Question 81

True/False

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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.

A) True
B) False

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Question 82

Multiple Choice

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At acquisition, debt securities are:

A) Recorded at cost.
B) Recorded at the amount of interest that will be received over the life of the security.
C) Not recorded, because no interest is due yet.
D) Recorded at cost plus the amount of dividend income to be received.
E) Recorded at their cost, plus total interest that will be received over the life of the security.

F) D) and E)
G) A) and C)

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Question 83

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Lessington Corporation purchases 4,000 shares of Gonzalez Company common stock for $150,000 as a long-term investment. The investment is classified as available-for-sale securities. Gonzalez has 500,000 shares of stock currently outstanding and the par value of the stock is $1 per share. Lessington's entry to record the purchase transaction would include a:

When consolidated financial statements are prepared, the parent company uses the equity method and reports the investment accounts for the subsidiaries on the balance sheet.

Investments can be classified as all but which of the following:

Investments in trading securities:

An investor purchased $50,000 of 10-year bonds it intends to hold to maturity. The investor's journal entry to record the purchase is a debit to Long-Term Investments for $50,000 and a credit to Cash for $50,000.

Profit margin is net sales divided by net income.

Madison Corporation purchased 40% of Jay Corporation for $125,000 on January 1. On June 20 of the same year, Jay Corporation declared total cash dividends of $30,000. At year-end, Jay Corporation reported net income of $150,000. The balance in Madison Corporation's Long-Term Investment-Jay Corporation account as of December 31 should be:

The price of one currency stated in terms of another currency is called a(n) :

If the exchange rate for Canadian and U.S. dollars is 0.7382 to 1, this implies that 2 Canadian dollars can be purchased for $1.48 U.S. dollars.

Held-to-maturity securities are:

On November 12, Higgins, Inc., a U.S. Company, sold merchandise on credit to Kagome 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 Higgins prepared its financial statements, the exchange rate was $0.00843. Kagome paid in full on January 12, when the exchange rate was $0.00861. On December 31, Higgins should prepare the following journal entry:

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.

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

Carpark Services began operations in 20X1 and maintains long-term investments in available-for-sale securities. The year-end cost and fair values for its portfolio of these investments follow. The year-end adjusting entry to record the unrealized gain/loss at December 31, 20X2 is: $\begin{array}{|l|l|l|}\hline \text { Available-for-Sale Securities }&\text { Cost }&\text { Fair value}\\\hline \text { December } 31,20 \mathrm{X} 1 & \$ 250,000 & \$ 241,000 \\\hline \text { December } 31,20 \mathrm{X} 2 & \$ 340,000 & \$ 350,000 \\\hline \text { December } 31,20 \mathrm{X} 3 & \$ 410,000 & \$ 415,000\\\hline\end{array}$

Consolidated financial statements:

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?

Segmental Manufacturing owns 35% of Glesson Corp. stock. Glesson pays a total of $47,000 in cash dividends for the period. Segmental's entry to record the dividend transaction would include a:

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