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Exam 15: Investments

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Question 71

Multiple Choice

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On July 31, Potter Co. purchased 2,000 shares of GigaTech stock for $16,000. The investment is classified as available-for-sale securities. This is the company's first and only investment in available-for-sale securities. On October 31, which is Potter's year-end, the stock had a fair value of $20,000. Potter should record a:

A) Debit to Unrealized Loss-Equity for $4,000.
B) Credit to Investment Revenue for $4,000.
C) Credit to Market Adjustment-Available-for-Sale for $4,000.
D) Debit to Unrealized Gain-Equity for $4,000.
E) Credit to Unrealized Gain-Equity for $4,000.

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

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Question 72

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

A) True
B) False

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Question 73

Multiple Choice

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A U.S. company makes a sale to a foreign customer receivable in 30 days in the customer's currency. The sale would be recorded by the U.S. company on the date:

Discuss the reasons companies make investments.

In the current year, Logic Co. purchased bonds of Waterford Co. with a cost of $125,000 and a year-end fair value of $123,700. Logic also purchased 1,500 shares of Jasper Co. common stock with a cost of $25,000 and a year-end fair value of $26,100. These are classified as long-term available-for-sale securities. Prepare the journal entry to record the market value of the investments as of its December 31 year-end.

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

On May 1 of the current year, a company paid $200,000 cash to purchase 6%, 10-year bonds with a par value of $200,000; interest is paid semiannually each May 1 and November 1. The company intends to hold these bonds until they mature. Prepare the journal entry for the accrual of interest for the year-end December 31.

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 controlling influence over the investee is based on the investor owning voting stock exceeding:

Investments in trading securities are always classified as ________ and are reported as ________ on the balance sheet.

A company reported net sales of $850,000, net income of $200,000 and average total assets of $575,000. Calculate its return on total assets.

Long-term investments in held-to-maturity debt securities are accounted for using the ________.

All companies desire a low return on total assets.

Match the following definitions with the appropriate term

A company has an investment in 9% bonds with a par value of $100,000 that pay interest on October 1 and April 1. The amount of interest accrued on December 31 (the company's year-end) would be:

Long-term investments in held-to-maturity debt securities are accounted for using the:

Trading securities are always reported as current assets.

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:

Explain the difference between short-term and long-term investments. Cite examples of each.

Rainier Importers purchases automotive parts from Austria. Prepare journal entries for the following transactions of Rainier. Oct 1 Purchased inventory from Klossner Co. for 12,000 euros, terms n/30. The exchange rate was $1.15 per euro. Oct 30 Paid Klossner Co. for the October 1 purchase. The exchange rate was $1.13 per euro.