Basic Accounting Skills (Securities, Derivatives and Investments) MCQ
1. 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?
Answer
Correct Answer:
As a current asset in the Marketable Securities account
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2. The unrealized gain or loss on changes in the fair value of a _________________ remains on the Balance Sheet in a separate shareholders equity account.
Answer
Correct Answer:
cash flow hedge
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3. A _____________ is a financial instrument designed to help companies cope with various kinds of risk.
Answer
Correct Answer:
derivative instrument
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4. The equity method is used to account for _________________.
Answer
Correct Answer:
minority, active investments
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5. Which of the following is a reason that lessees prefer operating leases?
Answer
Correct Answer:
All of the above are reasons that lessees prefer operating leases.
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6. Which of the following methods 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?
Answer
Correct Answer:
Capital lease method
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7. In a rental property, tenants are considered _______________.
Answer
Correct Answer:
lessees
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8. What would the investor company do under the equity method if the investee company declares dividends?
Answer
Correct Answer:
Decrease the investment account
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9. Which of the following statements about derivatives is true?
Answer
Correct Answer:
All of the above statements are true.
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10. Which of the following is NOT a perceived advantage of "off balance sheet financing"?
Answer
Correct Answer:
The debt-equity ratio will be higher.
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11. Which of the following entries records a decline in value at year end in a company marketable equity securities held as long-term investments?
Answer
Correct Answer:
Dr: Unrealized Holding Loss on Investment in Securities, Cr: Investment in Securities
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12. 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 product. How would XYZ Company report these securities on its Balance Sheet?
Answer
Correct Answer:
At market value and classified as a noncurrent asset in the Investment in Securities account
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13. An elimination entry for the parent company Investment account would typically NOT include debits to which of the following accounts?
Answer
Correct Answer:
Investments in Stock of Subsidiary Company (Parent Company)
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14. Which of the following is generally a worksheet procedure when preparing consolidated statements?
Answer
Correct Answer:
All of the above
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15. Majority investments are generally reported _________________.
Answer
Correct Answer:
by preparing consolidated statements
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16. 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 _________________.
Answer
Correct Answer:
deferred tax liability
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17. Which of the following methods 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?
Answer
Correct Answer:
Capital lease method
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18. 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?
Answer
Correct Answer:
Trading securities
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19. 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?
Answer
Correct Answer:
Equity method
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20. In which of the following situations would the lessee enjoy the economic benefits and bear the economic risks of leasing an asset?
Answer
Correct Answer:
The lease agreement contains a bargain purchase option.
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21. Which of the following account titles is not associated with the use of the market value method?
Answer
Correct Answer:
Equity in Earnings of Affiliate
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22. If an acquisition qualifies as a pooling of interest, the reported income for the consolidated enterprise will ordinarily be ___________________.
Answer
Correct Answer:
larger than for the same consolidated enterprise accounted for as a purchase
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23. 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?
Answer
Correct Answer:
$247,200
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24. Which of the following scenarios 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?
Answer
Correct Answer:
In its financial reports, a company reports interest revenue earned on tax-exempt municipal bonds held as assets.
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25. The term "cash flow hedge" refers to _________________
Answer
Correct Answer:
a transaction in which a company acquires a derivative and attempts to reduce the risk in future streams of cash flow
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26. 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?
Answer
Correct Answer:
Debt and equity securities held as securities available for sale
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27. Which of the following accounts would NOT be eliminated in the preparation of consolidated financial statements?
Answer
Correct Answer:
Common Stock - Parent Company
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28. What type of pension plan is an employee likely to prefer because it reduces the employees risk in planning for retirement?
Answer
Correct Answer:
Defined benefit plan
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29. 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?
Answer
Correct Answer:
Bargain Purchase Option
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30. Which of the following accounts would NOT be eliminated in the preparation of a consolidated financial statement?
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31. Which accounting treatment(s) for leases is/are favored by lessors and lessees?
Answer
Correct Answer:
Lessors prefer capital leases while lessees prefer operating leases.
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32. Which of the following statements is NOT descriptive of a defined contribution pension plan?
Answer
Correct Answer:
Pension benefits received during retirement are based on wages earned and number of years of employment.
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33. In the _________________, the owner or lessor merely sells the rights to use the property to the lessee for a specified period.
Answer
Correct Answer:
operating lease method
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34. The FASB requires companies to show in income each period the change in the fair value of any derivative that _________________.
Answer
Correct Answer:
does not attempt to hedge fair value or cash flow
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35. Which of the following statements about preparing consolidated financial statements is true?
Answer
Correct Answer:
All of the above statements are true.
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36. The market value method is used to account for _______________
Answer
Correct Answer:
minority, passive investments
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37. Financial statements for parent and subsidiary companies are generally consolidated for ______________________ investments.
Answer
Correct Answer:
majority, active
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38. Which of the following is an important reason for the continued legal existence of subsidiary companies?
Answer
Correct Answer:
All of the above
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39. 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?
Answer
Correct Answer:
$975,000
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40. Which of the following statements describing the effects of Investment in Securities on the Cash Flow Statement is NOT true?
Answer
Correct Answer:
In calculating cash flow from operations, Unrealized Holding Loss for securities available for sale is usually added back to Net Income.
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41. Reporting revenues and expenses for book purposes in a different period than for tax purposes results in _______________.
Answer
Correct Answer:
temporary differences
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42. Which of the following statements is NOT a criticism of the accounting for deferred income taxes?
Answer
Correct Answer:
Deferred taxes result in the effective tax rate being different from the statutory tax rate.
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43. The ownership percentage of voting stock of minority, active investments is usually ___________.
Answer
Correct Answer:
20 to 50 percent
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44. Which of the following statements is NOT true?
Answer
Correct Answer:
All of the above statements are true.
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45. When a company acquires a derivative and attempts to reduce risks involving fluctuations in a market value, the FASB ________________.
Answer
Correct Answer:
classifies the transaction as a fair value hedge
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46. Which of the following methods is used to recognize goodwill after a business acquisition is accounted for?
Answer
Correct Answer:
Purchase method
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47. Debt securities that a company intends to hold to maturity should be reported on the Balance Sheet ......
Answer
Correct Answer:
at amortized acquisition cost
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48. Eliminations to remove intercompany transactions are typically made __________________.
Answer
Correct Answer:
on a consolidated work sheet
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49. 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?
Answer
Correct Answer:
At market value
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50. A lease must be accounted for as a capital lease if it meets any one of four conditions. Which of the following is NOT one of those conditions?
Answer
Correct Answer:
The lease term is 90 percent or more of the estimated economic life of the leased property.
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51. 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?
Answer
Correct Answer:
$570
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52. 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 _____________.
Answer
Correct Answer:
deferred tax asset
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53. A derivative acquired to reduce risks involving fluctuations in a market value is called a __________________.
Answer
Correct Answer:
fair value hedge
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Accounting Skills (Securities, Derivatives And Investments) MCQs | Topic-wise
