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Exam 15: Investments

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Question 1

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

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B) False

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Question 2

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On January 3, Kostansas Corporation purchased 5,000 shares of Morton, Inc. for $40 per share plus $700 in broker commissions. These shares represent a 40% ownership in Morton, Inc. Prepare the journal entry Kostansas Corporation should record for the receipt of cash dividends of $2 per share from Morton on July 10.

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Jul. 10 Cash (5000 s...

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Question 3

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When one company owns more than 50% of another company's voting stock and has control over the investee company, the investee is called the ________.

Washington Corp. held 1,500 of Vashon Company common stock with a cost of $74,387. These shares were classified as a Long-Term available-for-sale investment. It sold the shares on December 13 for $55,275. Prepare the journal entry to record Washington's sale.

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

A company had net income of $2,660,000, net sales of $25,000,000, and average total assets of $8,000,000. Its return on total assets equals:

Kreighton Manufacturing purchased on credit £50,000 worth of production materials from a British company when the exchange rate was $1.97 per British pound. At the year-end balance sheet date, the exchange rate increased to $2.76. If the liability is still unpaid at that time, Kreighton must record a:

Kendall Corp. purchased at par value $160,000 of Barker Company's 7% bonds that mature in 10 months. The bonds pay interest semiannually on June 1 and December 1. Kendall plans to hold the bonds until they mature. The journal entry to record Kendall's purchase of the bonds is:

MotorCity, Inc. purchased 40,000 shares of Shaw common stock for $232,000. This represents 40% of the outstanding stock. The entry to record the transaction includes a:

________securities reflect a creditor relationship while securities reflect an owner relationship.

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

Cosmos Corporation had the following long-term investment transactions. Jan 2 Purchased 5,000 shares of Visual, Inc. for $42 per share plus $7,000 in fees and commission. These shares represent a 35% ownership of Visual. Oct 15 Received Visual, Inc. cash dividend of $2 per share. Dec 31 Visual reported a net loss of $66,000 for the year. Prepare the journal entries Cosmos Corporation should record for these transactions and events.

________ are investments in securities that management intends to convert to cash within the longer of one year or the operating cycle, and are readily convertible to cash.

Element Company had the following long-term available-for-sale securities in its portfolio at December 31 for each of the years listed. The year-end cost and fair values for its portfolio follow. Beginning with Year 1, prepare the appropriate journal entry to record each year-end market adjustment for these securities. $\begin{array} { l | l | l } \text { Available-for-Sale Securities } & \text { Cost } & \begin{array} { l } \text { Fair } \\\text { Value }\end{array} \\\hline \text { Year 1 } &\$ 4 0 4 , 5 0 0 & \$ 389,900 \\\hline \text { Year } 2 & 406,400 & 412,600 \\\hline \text { Year 3 } & 454,800 & 472,000 \\\hline\end{array}$

Draft Co. purchased 14,000 shares of Hamburg Corporation's 40,000 shares of common stock on January 1. This represented 35% of Hamburg's outstanding shares and gave Draft Co. significant influence over Hamburg's management and operations. On October 11, Hamburg declared and paid cash dividends of $30,000. On December 31, Hamburg reported net income of $125,000 for the year. Prepare the journal entries Draft Co. should record to account for the dividends received and the earnings reported by Hamburg Corporation.

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 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 January 12, Higgins should prepare the following journal entry:

McVeigh Corp. owns 40% of Gondor Company's common stock. McVeigh received $41,200 in cash dividends from Gondor. The entry to record this transaction should include a:

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

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

The currency in which a company presents its financial statements is known as the: