Deck 10: Long-Term Investments and International Operations

Question 1

A foreign- currency transaction gain or loss on a credit purchase is calculated as the difference between the exchange rates on the date:

A)of the purchase and the date of cash payment for the purchase.
B)the merchandise is ordered and the date it arrives.
C)the merchandise is ordered and the date payment is made for the merchandise.
D)the merchandise is purchased and the date it is sold.

Answer 1

A

Question 2

Amortizing a premium on a held- to- maturity investment will cause the Investment account and interest revenue respectively to:

A)increase and decrease.
B)decrease and increase.
C)decrease and decrease.
D)increase and increase.

Answer 2

C

Question 3

An investment in common stock acquired during the year at a cost of $20,000 has a year- end market value of $21,250. The year- end adjusting entry requires a:

A)debit to Long- Term Investments for $1,250.
B)credit to Allowance to Adjust investment to Market for $1,250.
C)debit to Allowance to Adjust Investments to Market for $1,250.
D)debit to Unrealized Gain on Investment for $1,250.

Answer 3

C

Question 4

NewLook Company owns all of the stock of Harlow Corporation and 80% of the stock of Tamblyn Corporation. NewLook earned net income of $500,000; Harlow earned $130,000; and Tamblyn earned $115,000. NewLook's consolidated income statement would report net income of:

A)$722,000.
B)$745,000.
C)$805,000.
D)$630,000.

Question 5

Which of the following terms represents a subsidiary company's equity that is held by stockholders other than the parent company?

A)Minority interest
B)Directing interest
C)Equity interest
D)Controlling interest

Question 6

The three methods of accounting for stock investments are the market value method, the consolidation method, and the equity method. The appropriate method to use depends on the percentage of ownership. Which of the following statements is true?

A)When the percentages of ownership are less than 20%, 20%- 50%, and greater than 50%, the market value method, consolidation method, and equity method should be used, respectively.
B)When the percentages of ownership are less than 20%, 20%- 50%, and greater than 50%, the consolidation method, equity method, and market value method should be used, respectively.
C)When the percentages of ownership are less than 20%, 20%- 50%, and greater than 50%, the market value method, equity method, and consolidation method should be used, respectively.
D)When the percentages of ownership are less than 20%, 20%- 50%, and greater than 50%, the equity method, market value method, and consolidation method should be used, respectively.

Question 7

If a parent company and its subsidiary have accounts receivable from mutually exclusive external sources in the amounts of $155,000 and $145,000, respectively, the consolidated balance sheet for the parent and its subsidiary will show:

A)net accounts receivable of $10,000.
B)only the parent's accounts receivable balance.
C)one accounts receivable balance of $300,000.
D)both amounts, but it will list them in two separate accounts.

Question 8

The receipt of a stock dividend:

A)increases assets and increases retained earnings.
B)increases assets and decreases stockholders' equity.
C)increases assets and increases paid- in- capital.
D)has no effect on assets or total equity.

Question 9

Tupelo Corporation used the equity method to account for a 25% ownership interest in Jordan Corporation. If Jordan Corporation reports $300,000 of income and pays $60,000 of dividends, the net effect of the entries made by Tupelo Corporation will be to:

A)increase the Investment account by $60,000.
B)increase the Investment account by $240,000.
C)reduce the Investment account by $240,000.
D)reduce the Investment account by $60,000.

Question 10

When a premium on a held- to- maturity bond investment is amortized by the company holding the investment,:

A)the amount of interest revenue recognized will increase.
B)the amount of cash received as an interest payment will be reduced.
C)the amount of cash received as an interest payment will be increased.
D)the amount of interest revenue recognized will decrease.

Question 11

On a worksheet for a consolidated entity balance sheet, the elimination entry requires:

A)debits to the stockholders' equity accounts of the parent.
B)a debit to Investment in Subsidiary.
C)a credit to Investment in Subsidiary.
D)credits to the stockholders' equity accounts of the subsidiary.

Question 12

How are available- for- sale investments in stock reported on the balance sheet?

A)As both long- term assets and stockholders' equity
B)As current assets
C)As either current assets or long- term assets, depending on when the investment is expected to be sold
D)As long- term assets

Question 13

Amortizing a discount on a held- to- maturity investment will cause the Investment account and interest revenue respectively to:

A)increase and decrease.
B)decrease and increase.
C)increase and increase.
D)decrease and decrease.

Question 14

A foreign- currency transaction gain/loss is:

A)not reported on the income statement, but is adjusted by debiting or crediting Retained Earnings.
B)reported on the income statement as an extraordinary item.
C)reported on the balance sheet as an equity account.
D)reported on the income statement as other income/expense.

Question 15

The investor should generally use the equity method of accounting for the investee if the investor owns what percentage of the outstanding stock of the investee?

A)50% - 100%
B)0% - 15%
C)20% - 50%
D)More than 50%

Question 16

The gain or loss on the sale of an investment classified as "available- for- sale" is measured by comparing the amount received from the sale of investment with the:

A)cost of the investment.
B)amortized cost of the investment.
C)market value of the investment.
D)lower- of- cost- or- market value of the investment.

Question 17

Subsidiary Company borrowed $75,000 from Parent Company on a note payable during the year. Before the consolidation entries were made on the worksheet, the balances in Parent Company's Notes Receivable and Notes Payable accounts were $175,000 and $255,000, respectively. A consolidated balance sheet shows:

A)Notes Receivable of $100,000 and Notes Payable of $255,000.
B)Notes Receivable of $175,000 and Notes Payable of $180,000.
C)Notes Receivable of $175,000 and Notes Payable of $330,000.
D)Notes Receivable of $250,000 and Notes Payable of $255,000.

Question 18

On the statement of cash flows, the cash paid to acquire another company is reported as an):

A)investing inflow.
B)financing outflow.
C)financing inflow.
D)investing outflow.

Question 19

On April 1, Allen Company purchased $25,000 of Stevens Corporation's 8% bonds at a purchase price of 96. Allen Company, whose year end is December 31, expects to hold the bonds until their maturity date 5 years from the date of purchase. Interest on the bonds will be paid every April 1 and October 1 until maturity. Allen Company uses the straight- line method to amortize premium or discount on held- to- maturity investments. What is the carrying value of the investment at December 31?

A)$23,850
B)$25,000
C)$24,150
D)$24,000

Question 20

Which of the following is the method used when one company owns 20% to 50% of the shares of another parent company?

A)Consolidation method
B)Equity method
C)Amortized method
D)Market value method

Question 21

Which of the following terms represents a decrease in foreign currency value relative to the U.S. dollar between the dates of purchase and payment?

A)Exchange gain
B)Exchange translation
C)Exchange decrease
D)Exchange loss

Question 22

On January 1, 2008, Centurian Corporation purchased 40% of the outstanding stock of Street Kings Corporation for $750,000. Net income reported by Street Kings Corporation for 2007 was $110,000. Dividends paid by Street Kings Corporation during 2007 were $65,000. The long- term investment will appear on Centurian Corporation's December 31, 2008 balance sheet at:

A)$750,000.
B)$860,000.
C)$768,000.
D)$795,000.

Question 23

An investor who owns 35% of the outstanding stock of another company should report the investment using the:

A)historical cost.
B)equity method.
C)consolidated method.
D)market value method.

Question 24

Held- to- maturity investments are reported on the balance sheet at their:

A)amortized cost.
B)historical cost.
C)par value or stated value.
D)current market value.

Question 25

Blueberry Jam Company owns 37% of Georgia Peach Company. Net income for Georgia Peach Company for the year is $317,000. The journal entry prepared by Blueberry Jam Company includes a:

A)credit to Long- Term Investments for $199,710.
B)debit to Long- Term Investments for $117,290.
C)credit to Long- Term Investments for $117,290.
D)debit to Long- Term Investments for $199,710.

Question 26

The foreign- currency translation adjustment appears on the:

A)balance sheet as a contra- asset account.
B)income statement as other income/expense.
C)balance sheet as part of stockholders' equity.
D)income statement as separate revenue account.

Question 27

Which of the following terms represents an increase in foreign currency value relative to the U.S. dollar between the dates of purchase and payment?

A)Exchange decrease
B)Exchange translation
C)Exchange loss
D)Exchange gain

Question 28

The journal entry to record the sale of an available- for- sale investment includes a loss on sale of investment for $700. The income statement will reflect:

A)an other expense of $700.
B)nothing, since the entry impacts only asset accounts.
C)an extraordinary loss of $700.
D)a decrease in net sales of $700.

Question 29

A gain or loss on the sale of a long- term investment using the equity method is determined by comparing the cash received with the:

A)lower- of- cost- or- market value of the long- term investment.
B)market value of the long- term investment.
C)cost of the long- term investment.
D)cost of the long- term investment adjusted for the investor's share of the investee's net income and cash dividends, while the investment was held by the investor company.

Question 30

Which of the following would NOT be presented on a consolidated balance sheet after the accounts of the parent and subsidiary have been combined?

A)Stockholders' equity accounts for the parent
B)Liabilities of the subsidiary
C)Assets of the subsidiary
D)Stockholders' equity accounts for the subsidiary

Question 31

Douglas Company purchased 40% of the outstanding shares of Outrigger Corporation on January 1 at a cost of $675,000. Outrigger Corporation reported net income of $87,000 and paid total dividends of $33,000 for the year. At the end of the year, the Outrigger shares had a current market value of $680,000. After all necessary adjusting entries are made for the year, the balance in Douglas Company's Long- Term Investment account will be:

A)$729,000.
B)$680,000.
C)$696,600.
D)$675,000.

Question 32

A controlling interest exists when the investor:

A)owns more than 50% of the investee's voting stock.
B)uses the market value method of accounting for the investment.
C)uses the equity method to account for the investment.
D)owns more than 20% of the investee's voting stock.

Question 33

Consolidated net income for a parent and its partially owned subsidiary would always be equal to the total of the parent company's net income:

A)plus the subsidiary's net income and the net income of the minority interest.
B)plus the minority percentage of the subsidiary's net income.
C)plus the subsidiary's net income.
D)plus the parent's share of the subsidiary's net income.

Question 34

The journal entry to record amortization of a bond discount on a held- to- maturity investment includes a:

A)debit to Investment in Bonds and a credit to Interest Revenue.
B)debit to Cash and a credit to Investment in Bonds.
C)debit to Cash and a credit to Interest Revenue.
D)debit to Interest Revenue and a credit to Investment in Bonds.

Question 35

Which of the following brings the dollar amount of the total liabilities and stockholders' equity of a foreign subsidiary into agreement with the dollar amount of its total assets?

A)The foreign- currency hedging adjustment
B)The foreign- currency rate of return adjustment
C)The foreign- currency translation adjustment
D)The foreign- currency amortization adjustment

Question 36

When a parent- subsidiary relationship exists between two companies,:

A)the parent company must use the cost method to account for the subsidiary.
B)the parent company will keep one set of accounting records covering both companies.
C)both the parent and the subsidiary will continue to keep their own separate accounting records as if the parent- subsidiary relationship does not exist.
D)the subsidiary company will keep one set of accounting records covering both companies.

Question 37

The Hammer Company paid $1,300,000 to purchase 35% of the outstanding stock of the Anvil Corporation. Anvil Corporation reports $425,000 of net income and paid a cash dividend of $115,000. These three events will increase Hammer Company's Investment account from $0 to:

A)$1,725,000.
B)1,408,500.
C)$1,610,000.
D)$40,250.

Question 38

On April 1, Everjoy Company purchased $30,000 of Miller Corporation's 8% bonds at a purchase price of 95. Everjoy Company, whose year end is December 31, expects to hold the bonds until their maturity date 5 years from the date of purchase. Interest on the bonds will be paid every April 1 and October 1 until maturity. Assuming the premium or discount is amortized every interest payment date using straight- line amortization, how much cash will Everjoy receive and how much total interest revenue will Everjoy Company report relative to the October 1 interest payment?

A)Cash 1,350; Interest Revenue 1,350
B)Cash 1,350; Interest Revenue 1,200
C)Cash 900; Interest Revenue 1,200
D)Cash 1,200; Interest Revenue 1,350

Question 39

A U.S. company sold merchandise on account to a Greek company, for 500,000 euros. The relevant exchange rates for the Euro were as follows: The exchange rate gain or loss for the U.S. company on this transaction was a:

A)$10,000 gain.
B)$10,000 loss.
C)$20,000 loss.
D)$20,000 gain.

Question 40

How do consolidation entries in a worksheet affect the stockholders' equity of parent and subsidiary corporations?

A)The stockholders' equity of the parent will be eliminated, but investment in subsidiary will be presented.
B)Neither investment in subsidiary nor the subsidiary's stockholders' equity will be presented.
C)Both investment in subsidiary and the stockholders' equity of the parent will be eliminated.
D)Investment in subsidiary will be presented, but the stockholders' equity of the subsidiary will be eliminated.

Question 41

A US company purchased merchandise on account from a Canadian firm for $900,000 Canadian. Assume the exchange rates for the Canadian dollar were as follows: The purchase cost of the merchandise was:

A)$900,000.
B)$675,000.
C)$630,000.
D)$720,000.

Question 42

The journal entry to record amortization of a bond premium on a held- to- maturity investment includes a:

A)debit to Investment in Bonds and a credit to Interest Revenue.
B)debit to Cash and a credit to Investment in Bonds.
C)debit to Interest Revenue and a credit to Investment in Bonds.
D)debit to Cash and a credit to Interest Revenue.

Question 43

Abba Company purchased 1,000 shares of Dabber Company at $20 per share. Abba received an additional 250 shares from Dabber Company as a stock dividend. After receiving the stock dividend, the total value of the investment in Dabber and cost per share of Dabber, respectively is:

A)$25,000 and $20.
B)$20,000 and $20.
C)$20,000 and $16.
D)$25,000 and $16.

Question 44

Issuing bonds are shown on the statement of cash flows as:

A)investing activities.
B)operating activities.
C)financing activities.
D)none of the above. It is not shown on the statement of cash flows.

Question 45

If an investor company owns between 20% and 50% of the common stock of another business, cash dividends received from the investee company are generally recorded by the investor company by:

A)decreasing the value of the investor's Investment account.
B)decreasing the investor company's Common Stock account.
C)increasing the Dividend Revenue account.
D)increasing the value of the investor's Investment account.

Question 46

Which of the following terms represents converting the cost of an item given in one currency to its cost in a different currency?

A)Foreign currency exchange rate
B)Foreign currency translation
C)Foreign market value
D)Dollar value exchange rate

Question 47

The journal entry to record the receipt of a cash dividend arising from an available- for- sale investment held by a company includes:

A)a debit to Cash and a credit to Dividend Revenue.
B)a debit to Unrealized Gain on Investment and a credit to Dividend Revenue.
C)a debit to Cash and a credit to Unrealized Gain on Investments.
D)no journal entry. Only a memorandum entry is required.

Question 48

When referring to foreign- currency transactions, hedging is a process in which:

A)a company protects itself from losing money in one transaction by engaging in a counterbalancing transaction.
B)companies sell the same product in various countries at similar prices to minimize the currency risks associated with any one particular country.
C)companies wager that the currency of one country will rise relative to their own.
D)a company wagers that the currency of one country will fall relative to its own.

Question 49

A US company purchased merchandise on account from a Spanish firm for 200,000 euros. Assume the exchange rates for the Euro were as follows: The exchange rate gain/loss for the U.S. company on this transaction was a:

A)$1,500 gain.
B)$4,000 loss.
C)$4,500 gain.
D)$4,500 loss.

Question 50

The Allowance to Adjust Investment to Market account has a current debit balance of $900. Available- for- sale investments with a cost a $5,000 have a current market value of $6,350. The adjusting entry will require a:

A)credit to Allowance to Adjust Investments to Market for $450.
B)debit to Allowance to Adjust Investments to Market for $1,350.
C)debit to Allowance to Adjust Investments to Market for $450.
D)credit to Allowance to Adjust Investments to Market for $1,350.

Question 51

Which of the following is the method used when one company owns more than 50% of the shares of another company?

A)Market value method
B)Equity method
C)Amortized method
D)Consolidation method

Question 52

On the statement of cash flows, the cash paid to purchase available- for- sale investments is shown as an):

A)decrease in investing activities.
B)increase in investing activities.
C)decrease in financing activities.
D)increase in financing activities.

Question 53

The amortized cost of a held- to- maturity investment is the:

A)par value plus issue cost.
B)purchase price minus annual bond expense.
C)purchase price adjusted for any change in market value.
D)purchase price plus any unamortized premium.

Question 54

The Unrealized Gains and Losses on Available- for- sale Securities account appear in which financial statement?

A)The balance sheet in the assets section
B)The balance sheet in the liabilities section
C)The income statement as an operating expense
D)The balance sheet as part of stockholders' equity

Question 55

The purchase of held- to- maturity investments would appear on a statement of cash flows in:

A)the operating activities section.
B)the financing activities section.
C)the investing activities section.
D)none of the above. The purchase would not appear on a statement of cash flows.

Question 56

On the statement of cash flows, the cash paid for 30% of a corporation to be accounted for under the equity method is shown as an):

A)increase in financing activities.
B)decrease in financing activities.
C)increase in investing activities.
D)decrease in investing activities.

Question 57

On January 1, 2008, Rider Corporation purchased 30% of the outstanding stock of Arapahoe Corporation for $770,000. Net income reported by Arapahoe Corporation for 2008 was $120,000. Dividends paid by Arapahoe Corporation during 2008 were $70,000. The amount of investment revenue that Rider should recognize for 2008 is:

A)$21,000.
B)$15,000.
C)$36,000.
D)$50,000.

Question 58

Assets and liabilities of a foreign subsidiary are translated into dollars on a consolidated balance sheet at the:

A)older, historical exchange rates on the date of the purchase of the subsidiary's stock.
B)anticipated exchange rate in effect over the next 5 years.
C)exchange rate in effect on the date of the financial statements.
D)average exchange rate in effect over the past 5 years.

Question 59

The equity method of accounting for a stock investment should generally be used when the investor owns a level of stock ownership that:

A)requires the investor to notify the government of any plans to acquire a controlling interest in the investee company.
B)gives the investor significant influence over the investee company.
C)usually indicates a plan to acquire a controlling interest in the investee company.
D)is the controlling interest in the investee company.

Question 60

A consolidated balance sheet shows:

A)combined assets and liabilities for the parent and the subsidiary, but stockholders' equity for solely the parent.
B)combined assets and stockholders' equity for the parent and the subsidiary, but liabilities for solely the subsidiary.
C)combined assets and liabilities for the parent and the subsidiary, but stockholders' equity for solely the subsidiary.
D)combined liabilities and stockholders' equity for the parent and subsidiary, but assets for solely the parent.

Question 61

The exchange rate for the Euro was $1.30 on April 3 and $1.35 on April 12. These facts indicate that the U.S. dollar is:

A)rising and getting weaker.
B)falling and getting weaker.
C)falling and getting stronger.
D)rising and getting stronger.

Question 62

The journal entry to record the receipt of a stock dividend arising from an available- for- sale investment held by a company includes:

A)a debit to Cash and a credit to Dividend Revenue.
B)a debit to Cash and a credit to Unrealized Gain on Investments.
C)no journal entry. Only a memorandum entry is required.
D)a debit to Unrealized Gain on Investment and a credit to Dividend Revenue.

Question 63

The Allowance to Adjust Investments to Market account has a current credit balance of $950 after adjustment. Available- for- sale investments have a current market value of $15,000. The carrying value of the investments is:

A)$15,000.
B)$14,050.
C)$15,950.
D)unknown. The carrying value cannot be computed without knowing the cost of the investment.

Question 64

A foreign- currency translation adjustment is most closely associated with:

A)consolidations.
B)sales on account.
C)purchases on account.
D)all of the above.

Question 65

Which of the following is the method used when one company owns less than 20% of the shares of another company?

A)Amortized method
B)Equity method
C)Consolidation method
D)Market value method

Question 66

The Allowance to Adjust Investment to Market account has a current credit balance of $979. Available- for- sale investments with a cost of $19,000 have a current market value of $20,250. The adjusting entry will require a:

A)credit to Allowance to Adjust Investment to Market for $2,229.
B)debit to Allowance to Adjust Investment to Market for $2,229.
C)debit to Allowance to Adjust Investment to Market for $271.
D)credit to Allowance to Adjust Investment to Market for $271.

Question 67

A minority interest is defined as:

A)a subsidiary company that represents less than 20% of the value of the consolidated company.
B)a parent company that owns less than 50% of the shares in the subsidiary company.
C)all of the stock of a subsidiary company relative to the parent company.
D)a subsidiary company's equity held by stockholders other than the parent company.

Question 68

Available- for- sale investments in stock are reported on the balance sheet at:

A)their historical cost or current market value on the balance sheet date.
B)their current market value.
C)the lower- of- cost- or- market value on the balance sheet date.
D)their amortized cost.

Question 69

In international trade, companies use hedging to protect themselves from the effects of fluctuations in:

A)interest rates.
B)foreign- currency exchange rates.
C)demand for the company's products.
D)invoice prices.

Question 70

A company that owns between 20% and 50% of the common stock of another business recognizes revenue from the investment when:

A)the company sells the shares in the investee company.
B)the investee company recognizes net income.
C)the company receives a cash dividend from the investee company.
D)any of the above occur.

Question 71

The sale of a held- to- maturity investment would appear on a statement of cash flows as a:

A)cash outflow in the investing activities section.
B)cash inflow in the financing activities section.
C)cash inflow in the investing activities section.
D)cash inflow in the operating activities section.

Question 72

On April 1, 2008, Country Pride Company purchased $8,000 of 7% bonds as a long- term investment to be held to maturity. Country Pride's year end is December 31. Interest dates are April 1 and October 1. The bonds mature 36 months from the purchase date. The purchase price of the bonds was $8,570, and the premium is amortized on the straight- line basis. Assume the proper adjusting entry was made on December 31, 2008 to record accrued interest receivable and amortization of the premium. The total interest revenue recorded by Country Pride Company on April 1, 2009 will be:

A)$92.50.
B)$46.67.
C)$123.33.
D)$15.83.

Question 73

A company using the equity method to account for long- term investments should report an unrealized gain on the investment:

A)only if market exceeds cost.
B)only if market is below cost.
C)if the investee stock has fallen below or risen above its cost to the investor.
D)in no instance. No adjusting entry is made.

Question 74

The entry to eliminate the Investment in Subsidiary account affects:

A)total assets and total stockholders' equity reported by the consolidated company.
B)total assets reported by the parent company and total liabilities reported by the subsidiary company.
C)total equity reported by the parent company and total equity reported by the subsidiary company.
D)total assets and total liabilities reported by the consolidated company.

Question 75

Which of the following terms represents more than 50% interest in a subsidiary company?

A)Equity interest
B)Minority interest
C)Controlling interest
D)Directing interest

Question 76

Which of the following is the method used when one company owns 20% to 50% of the shares of another company?

A)Equity method
B)Consolidation method
C)Market value method
D)Amortized method

Question 77

Purchases and sales of held- to- maturity investments are shown on the statement of cash flows as:

A)financing activities.
B)operating activities.
C)investing activities.
D)none of the above. They are not shown on the statement of cash flows.

Question 78

Under the equity method of accounting for stock investments, cash dividends received from the investee are recorded by the investor as:

A)a debit to the Investment account of the investor company.
B)a credit to the Investment account of the investor company.
C)a credit to Dividend Revenue of the investor company.
D)no entry. There is no entry made to record dividends in this accounting situation.

Question 79

Goodwill arises when a parent company:

A)pays less to acquire a subsidiary company than the market value of the subsidiary's net assets.
B)pays more to acquire a subsidiary company than the book value of the subsidiary's net assets.
C)pays less to acquire a subsidiary company than the book value of the subsidiary's net assets.
D)pays more to acquire a subsidiary company than the market value of the subsidiary's net assets.

Question 80

The receipt of a cash dividend:

A)increases assets and increases retained earnings.
B)has no effect on assets or total equity.
C)increases assets and decreases stockholders' equity.
D)increases assets and increases paid- in- capital.