Chapter 15

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Accounting Test 1

Company A purchased 1,000 shares of Company B common stock for \$149,600. The par value of the stock was \$1 per share. Company A paid \$400 in commissions on the transaction. Prepare the journal entry to record the purchase.

Investment in Company B Stock 150,000
Cash 150,000

Company A purchased 50,000 shares of Company B common stock. This represents 40% of the outstanding stock. The purchase price was \$250,000. Prepare the journal entry to record the purchase.

Investment in Company B Stock 250,000
Cash 250,000

A corporation has net income of \$300,000, net sales of \$1,500,000, and total assets of \$1,200,000. What is the total return on assets?

= Net income / Totals assets
= \$300,000 / \$1,200,000
= 25%

When a credit sale is denominated in a foreign currency, what is the foreign exchange rate used to record the sale?

The current exchange rate on the date of the sale.

When a payment on account is denominated in a foreign currency, what is the foreign exchange rate used to record the payment?

The current exchange rate on the date payment is made.

On February 18, USA Company sold merchandise to Denmark Company for 60,000 kroner, with payment due in 30 days. The exchange rate was \$0.60 on the date of the sale and \$0.70 on the date of collection. A. Will USA Company have a gain or loss and what is the amount of the gain or loss? B. Make the journal entries for both the sale and the collection.

A. The sale in dollars was \$36,000 (60,000 kroner \$0.60), and the collection in dollars was \$42,000 (60,000 \$0.70). Since USA Company is receiving \$6,000 more in cash than the amount of the sale, it has a gain of \$6,000. (See journal entries below.)

B.
Accounts Receivable 36,000
Sales 36,000
Cash 42,000
Accounts Receivable 36,000
Gain 6,000

On April 20, USA Company purchased merchandise from Mexico Company for 600,000 pesos, with payment due in 60 days. The exchange rate was \$0.05 on the date of purchase and \$0.06 on the date of payment. A. Will USA Company have a gain or loss and what is the amount of the gain or loss? B. Make the journal entries for both the purchase and the payment.

A. The purchase in dollars was \$30,000 (600,000 pesos \$0.05), and the payment in dollars was \$42,000 (600,000 \$0.06). Since USA Company is paying \$6,000 more in cash than the amount of the purchase, it has a loss of \$6,000. (See journal entries below.)

B.
Merchandise Inventory or Purchases 30,000
Accounts Payable 30,000
Accounts Payable 30,000
Loss 6,000
Cash 36,000

What is the definition of "long-term investments"?

They are investments in debt and equity securities that are not readily convertible into cash and which management does not intend to convert into cash in the short term. In addition, they can be investments in land or other assets not used in the company's operations; and they can also be funds earmarked for a special purpose, such as bond sinking funds.

On what financial statement and in which section of that statement are long-term investments reported?

Long-term investments are reported on the balance sheet in a noncurrent asset section. Not surprisingly, this section is called Long-Term Investments.

What are four classes of long-term investments?

• Debt or equity securities available-for-sale
• Debt securities held-to-maturity
• Equity securities with a significant influence over an investee
• Equity securities with control over an investee

Equity method

What do consolidated financial statements show?

Consolidated financial statements show the results of operations (income statements), cash flows, and the financial position (balance sheets) of all entities under a parent's control.

More than 50%

What four changes cause foreign exchange rates to fluctuate?

• Economic conditions
• Expectations of future events
• Political conditions
• Supply and demand for currencies

What is the ratio for "profit margin"?

Net income / Net sales

What does the ratio "profit margin" measure?

Profit margin measures how much profit the company is generating from its sales.

What is the ratio for "return on total assets"?

Net income / Average total assets

What does the ratio "return on total assets" measure?

The return on total assets measures a company's ability to produce net income from net sales

If a company had net income of \$40,000, net sales of \$400,000, and total assets of \$200,000, what is the company's (1) profit margin and (2) total asset turnover?

Profit margin = Net income /Net sales = \$40,000 / \$400,000 = 10.0%
Rate of return on assets = Net income / Average total assets = \$40,000 / \$200,000 = 20.0%

yes

cost

yes

no

no

If a company owns \$300,000 of 8% bonds that pay interest on September 1 and March 1, what is the amount of interest accrued as of December 31 (the company's year-end)?

= Principal x Rate x Months since interest paid / 12
= \$300,000 x 8% x 4/12
= \$8,000

yes

no

no

no

yes

yes

yes

yes

Equity method

Cost method

Company A (investor) purchased 30% of Company B's (investee's) stock for \$500,000 cash on January 1. On July 1 of the same year, Company B declared total cash dividends of \$10,000. At year-end, Company B reported net income of \$100,000. What method should Company A use to account for this investment?

Equity method since Company A owns more than 20% of the Company B's stock

Company A (investor) purchased 30% of Company B's (investee's) stock for \$500,000 cash on January 1. On July 1 of the same year, Company B declared total cash dividends of \$10,000. At year-end, Company B reported net income of \$100,000. What journal entry is made Company A to record the purchase?

Debit Investment in Stock and credit Cash for \$500,000

Company A (investor) purchased 30% of Company B's (investee's) stock for \$500,000 cash on January 1. On July 1 of the same year, Company B declared total cash dividends of \$10,000. At year-end, Company B reported net income of \$100,000. What journal entry is made by Company A to record its share of the cash dividends?

Debit Cash and credit Investment in Stock for \$3,000 (\$10,000 x 30%)

Company A (investor) purchased 30% of Company B's (investee's) stock for \$500,000 cash on January 1. On July 1 of the same year, Company B declared total cash dividends of \$10,000. At year-end, Company B reported net income of \$100,000. What journal entry is made by Company A to record its share of net income?

Debit Investment in Stock and credit Investment Income for \$30,000 (\$100,000 x 30%)

What is the price of one currency stated in terms of another currency called?

Foreign exchange rate

A company sold merchandise on January 1 for 100,000 pesos, with payment due in 30 days. The exchange rate was \$0.12 on the date of sale and \$0.11 on the date of payment. Record the journal entries for the (1) sale and (2) receipt from customer.

(1) sale:
Debit Accounts Receivable \$12,000
Credit Sales \$12,000
(2) receipt from customer
Debit Cash \$11,000
Debit Loss from Monetary Exchange \$1,000
Credit Accounts Receivable \$12,000

When does percentage of stock ownership require using (A) the cost method and (B) the equity method?

cost method: when the company owns less than 20% of the investee's voting stock.

equity method: when the company owns 20% or more of the investee's voting stock.

When are consolidated financial statements prepared?

If an investor owns more than 50% of another company's voting stock and controls the investee, the investor's financial reports are prepared on a consolidated basis.

Example: