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Exam 15: Investments and International Operations

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Question 1

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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:

A) Debit to Dividends for $103,000.
B) Credit to Long-Term Investments for $41,200.
C) Debit to Dividend Revenue for $41,200.
D) Credit to Long-Term Investments for $103,000.
E) Credit to Cash for $41,200.

F) A) and E)
G) A) and B)

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Question 2

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A company has net income of $130,500. Its net sales are $1,740,000 and its average total assets are $2,750,000. Its profit margin equals 7.5%. Profit margin = $130,500/$1,740,000 = 7.5%

A) True
B) False

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Question 3

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Explain how transactions (both sales and purchases) in a foreign currency are recorded and reported.

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

Profit margin is net sales divided by net income.

Hubbard Company had the following trading securities in its portfolio at December 31. The Fair Value Adjustment-Trading account had a balance of zero prior to year-end adjustment. Prepare the appropriate adjusting journal entry.

Explain how investors report investments in equity securities when the investor has a controlling influence over an investee.

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.

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

A company paid $37,800 plus a broker's fee of $525 to acquire 8% bonds with a $40,000 maturity value as a long-term investment. The company intends to hold the bonds to maturity. The correct entry to record the purchase of the bond investment is:

Profit margin reflects the percent of net income in each dollar of net sales.

What are the accounting basics for debt securities, including recording their acquisition, interest earned, and their disposal?

Long-term investments include investments in land or other assets not used in a company's operations.

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

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

__________________________ are investments in securities that are not readily convertible to cash, or are not intended to be converted to cash in the short-term.

Investments in debt and equity securities that the company actively manages and trades for profit are referred to as short-term investments in:

Landmark Corp. buys $300,000 of Schroeter Company's 8% five-year bonds at par value on September 1. Interest payments are made semiannually. All of the following regarding accounting for the securities are true except:

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.

Foreign exchange rates fluctuate due to changing _______________ and ___________ conditions.