General Accounting Skills (Securities, Derivatives And Investments) MCQs

1. A derivative acquired to reduce risks involving fluctuations in a market value is called a ...... .

2. On January 1 of Year 1, XYZ Company leases a building and records the leasehold asset and the liability at $210,620, which is the present value of five end-of-year payments of $50,000, each discounted at 6 percent. The asset has a useful life of five years and a zero salvage value. Assuming straight-line amortization, what amount would XYZ Company report on its Balance Sheet as the book value of the leasehold asset as of December 31 of Year 1?

3. On January 1 of Year 1, XYZ Company leases equipment under a capital lease that calls for five payments of $25,000 at the end of each year. The first payment is due on December 31 of Year 1. Using 12 percent interest, the present value of the lease liability is $90,000 on January 1 of Year 1. What amount would XYZ Company report as the lease liability on its December 31 Year 1 Balance Sheet?

4. XYZ Company reports book income of $720,000 for Year 1, which includes a Warranty Expense of $80,000. For tax purposes, warranty costs are not deductible until incurred. Actual expenditures for warranty costs during Year 1 totaled $48,000. The tax rate for Year 1 is 30 percent. Given the above information, how did book and tax income relate in Year 1?

5. When temporary differences that give rise to future tax deductions are multiplied by the enacted income tax rate expected to apply in the future periods of the deduction, the result is _____________.

6. During Year 1, XYZ Company receives a four-month, 6 percent note in the amount of $28,500. How much interest will XYZ Company earn if it holds the note to maturity?

7. A lease must be accounted for as a capital lease if it meets any one of four conditions. Which one is NOT one of those conditions?

8. The MNO Bank actively trades in debt securities with the intent of earning profits from short-term differences in market prices. How should the bank report the debt securities on its Balance Sheet?

9. Eliminations to remove intercompany transactions are typically made __________________.

10. Debt securities that a company intends to hold to maturity should be reported on the Balance Sheet ......

11. Which method is used to recognize goodwill after a business acquisition is accounted for?

12. When a company acquires a derivative and attempts to reduce risks involving fluctuations in a market value, the FASB ________________.

13. On January 1 of Year 1, XYZ Company leases some equipment from ABC Supply under a four-year operating lease. Lease payments of $20,000 are payable at the end of each year. The first payment is due on December 31 of Year 1. Using an interest rate of 11 percent, the present value of the four payments is $62,000 on January 1 of Year 1. Given the above information, what expenses related to this lease would XYZ Company report on its Year 1 Income Statement?

14. Which statement is NOT true?

15. The ownership percentage of voting stock of minority, active investments is usually ___________.

16. XYZ Company reports book income of $720,000 for Year 1, which includes a Warranty Expense of $80,000. For tax purposes, warranty costs are not deductible until incurred. Actual expenditures for warranty costs during Year 1 totaled $48,000. The tax rate for Year 1 is 30 percent. Given the above information, what amount should XYZ Company report as a current liability for Income Tax Payable on its December 31 Year 1 Balance Sheet?

17. Which statement is NOT a criticism of the accounting for deferred income taxes?

18. Reporting revenues and expenses for book purposes in a different period than for tax purposes results in _______________.

19. XYZ Company purchases a machine early in Year 1. For book purposes, XYZ Company uses straight-line depreciation. For tax purposes, the company follows ACRS. Excess depreciation for tax purposes in Year 1 is $36,000. Assuming that a tax rate of 30 percent will apply in the future period of taxable income, what is the amount of income taxes deferred in Year 1?

20. XYZ Company reports book income of $600,000 and income for tax purposes of $570,000. The $30,000 difference is caused by the use of ACRS for tax purposes. Assume that the current tax rate is 35 percent and that a tax rate of 40 percent will apply to the future period of taxable income. What is the amount of taxes currently payable?

21. Which statement describing the effects of Investment in Securities on the Cash Flow Statement is NOT true?

22. XYZ Company includes in its book income $75,000 of interest on municipal bonds. The company reports a current liability of $270,000 for income tax payable on its Balance Sheet. The tax rate is 30 percent. What net income will XYZ Company report on its Income Statement?

23. Which one is an important reason for the continued legal existence of subsidiary companies?

24. Financial statements for parent and subsidiary companies are generally consolidated for ........... investments.

25. The market value method is used to account for _______________

26. Which statement about preparing consolidated financial statements is true?

27. The FASB requires companies to show in income each period the change in the fair value of any derivative that _________________.

28. In the ..... , the owner or lessor merely sells the rights to use the property to the lessee for a specified period.

29. Which statement is NOT descriptive of a defined contribution pension plan?

30. On January 1 of Year 1, XYZ Company leases equipment under a capital lease that calls for five payments of $25,000 at the end of each year. The first payment is due on December 31 of Year 1. Using 12 percent interest, the present value of the lease liability is $90,000 on January 1 of Year 1. How much of the first payment of $25,000 is interest expense?

31. Which accounting treatment(s) for leases is/are favored by lessors and lessees?

32. On January 1 of Year 1, the XYZ Company Clinic leases some diagnostic equipment under a capital lease for six years. Using 10 percent interest, the present value of the lease liability is $244,000 on January 1 of Year 1. After the first lease payment is made on December 31 of Year 1, the clinic reports a lease liability of $212,400. Given the above information, what is the amount of each lease payment?

33. Which account would NOT be eliminated in the preparation of a consolidated financial statement?

34. What gives the lessee the right to purchase the asset for a price less than the predicted fair market value of the asset when the option is exercised?

35. What type of pension plan is an employee likely to prefer because it reduces the employee's risk in planning for retirement?

36. On January 1 of Year 1, XYZ Company leases a building and records the leasehold asset and the liability at $210,620, which is the present value of five end-of-year payments of $50,000, each discounted at 6 percent. The asset has a useful life of five years and a zero salvage value. When the first lease payment is made on December 31 of Year 1, what amount would XYZ Company record for interest expense?

37. Which account would NOT be eliminated in the preparation of consolidated financial statements?

38. XYZ Company purchases some debt securities in Year 2 with the intent of selling the securities when XYZ needs the cash for its operations. Given generally accepted accounting principles, which of the following categories would this investment fall under?

39. The term 'cash flow hedge' refers to _________________.

40. Which scenario is NOT an example of a situation resulting in a temporary difference and which, therefore, would NOT result in the debiting or crediting of a deferred income tax account?

41. XYZ Company purchases securities at a cost of $220,000 on April 16. At the time of purchase, XYZ pays a 5 percent commission ($11,000), a 6 percent tax ($13,200), and a transfer fee ($3,000). What amount should the company record as the acquisition cost of the securities?

42. If an acquisition qualifies as a pooling of interest, the reported income for the consolidated enterprise will ordinarily be .......... .

43. Which account title is not associated with the use of the market value method?

44. Given the following entry, how has the lessee accounted for the lease? Dr: Interest Expense Dr: Liability - Present value of lease obligation Cr: Cash

45. In which situation would the lessee enjoy the economic benefits and bear the economic risks of leasing an asset?

46. According to generally accepted accounting principles, which of the following methods must be used to account for investment in common stock of 20 percent to 50 percent?

47. The MNO Bank often purchases and sells debt and equity securities for their short-term profit potential. How should the bank account for these securities?

48. Which method of recording leases recognizes the signing of the lease as the acquisition of a long-term asset and the incurring of a long-term liability for lease payments?

49. When temporary differences that will result in future taxable income are multiplied by the enacted income tax rate expected to apply in the future period of the taxable income, the result is _________________.

50. Majority investments are generally reported ........... .

51. Which one is generally a worksheet procedure when preparing consolidated statements?

52. An elimination entry for the parent company's Investment account would typically NOT include debits to which accounts?

53. XYZ Company acquires common stock of the ABC Company for the purpose of developing a long-term relationship with ABC, which is a major supplier of the raw material used to manufacture XYZ's product. How would XYZ Company report these securities on its Balance Sheet?

54. Which entry records a decline in value at year end in a company's marketable equity securities held as long-term investments?

55. Which one is NOT a perceived advantage of 'off balance sheet financing'?

56. Which statement about derivatives is true?

57. What would the investor company do under the equity method if the investee company declares dividends?

58. XYZ Company purchases some ABC Company stock for $56,000 on January 1 of Year 1. At December 31 of Year 1, the market value of the ABC stock is $48,000. On July 1 of Year 2, XYZ Company sells all of the ABC stock for $45,000. XYZ Company accounted for the initial investment as a trading security. Given this information, how would XYZ Company report the investment in the ABC stock on its December 31 Year 2 Income Statement?

59. In a rental property, tenants are considered _______________.

60. Which method of recording leases requires the lessee to amortize the leasehold over its useful life and recognize each lease payment as part payment of interest and part payment of principal?

61. Which one is a reason that lessees prefer operating leases?

62. The equity method is used to account for ......

63. A ....... is a financial instrument designed to help companies cope with various kinds of risk.

64. The unrealized gain or loss on changes in the fair value of a _________________ remains on the Balance Sheet in a separate shareholders' equity account

65. XYZ Company acquires marketable securities in Year 1 at a cost of $90,000. The securities can be readily converted into cash and XYZ Company intends to do so when it needs cash. How would XYZ Company report this investment on its Year 1 Balance Sheet?