Accounting Skills (Securities, Derivatives and Investments) MCQs
Accounting Skills (Securities, Derivatives and Investments) MCQs
Our team has conducted extensive research to compile a set of Accounting Skills (Securities, Derivatives and Investments) MCQs. We encourage you to test your Accounting Skills (Securities, Derivatives and Investments) knowledge by answering these 60+ multiple-choice questions provided below.
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1: A derivative acquired to reduce risks involving fluctuations in a market value is called a __________________.
A. stock option
B. trading bond
C. fair value hedge
D. unfair value hedge
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?
A. $250,000
B. $168,496
C. $210,620
D. $160,620
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?
A. $79,200
B. $83,000
C. $100,000
D. $75,800
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?
A. Book income exceeded taxable income.
B. Taxable income exceeded book income.
C. Book income equaled taxable income.
D. The difference between book income and taxable income is due to a permanent difference.
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 _____________.
A. permanent difference
B. liability
C. deferred tax asset
D. deferred tax liability
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?
A. $570
B. $428
C. $0
D. $1,710
7: 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?
A. The lease contains a bargain purchase price option.
B. The lease transfers ownership of property to the lessee.
C. The lease term is 90 percent or more of the estimated economic life of the leased property.
D. All of the above are conditions that would cause the lease to be capitalized
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?
A. At acquisition cost
B. At market value
C. At amortized acquisition cost
D. None of the above
9: Eliminations to remove intercompany transactions are typically made __________________.
A. in separate books for the consolidated entity
B. in the parent company's books
C. on a consolidated work sheet
D. in the subsidiary company's books
10: Debt securities that a company intends to hold to maturity should be reported on the Balance Sheet ......
A. at acquisition cost
B. at market value
C. at amortized acquisition cost
D. None of the above
11: Which of the following methods is used to recognize goodwill after a business acquisition is accounted for?
A. Pooling of interests method
B. Purchase method
C. Either pooling of interests or purchase method
D. Neither pooling of interest or purchase method
12: When a company acquires a derivative and attempts to reduce risks involving fluctuations in a market value, the FASB ________________.
A. classifies the transaction as a fair value hedge
B. classifies the transaction as a cash flow hedge
C. requires the derivative to be recorded and continue to be reported at the acquiring cost
D. All of the above
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?
A. Interest Expense of $6,820 and Depreciation Expense of $15,500
B. Rent Expense of $20,000
C. Interest Expense of $4,500 and Depreciation Expense of $15,500
D. Interest Expense of $6,820 and Depreciation Expense of $20,000
14: Which of the following statements is NOT true?
A. Consolidated net income is the same amount as that which results when the parent uses the equity method for an unconsolidated subsidiary.
B. Consolidated retained earnings is the same amount as that which results when the parent uses the equity method for an unconsolidated subsidiary.
C. The consolidation process eliminates the Equity in Earnings of Subsidiary account.
D. All of the above statements are true.
15: The ownership percentage of voting stock of minority, active investments is usually ___________.
A. Zero to 20 percent
B. 20 to 50 percent
C. Over 50 percent
D. 100 percent
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?
A. $192,000
B. $201,600
C. $216,000
D. $225,600
17: Which of the following statements is NOT a criticism of the accounting for deferred income taxes?
A. Payment of deferred taxes may be deferred indefinitely.
B. The amount on the Balance Sheet for deferred income taxes is not an obligation.
C. Deferred taxes result in the effective tax rate being different from the statutory tax rate.
D. The amount on the Balance Sheet for deferred income taxes is an undiscounted amount.
18: Reporting revenues and expenses for book purposes in a different period than for tax purposes results in _______________.
A. temporary differences
B. permanent differences
C. tax liability
D. tax obligation
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?
A. $36,000
B. $25,200
C. $10,800
D. None of the above
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?
A. $210,000
B. $12,000
C. $199,500
D. $211,500
21: Which of the following statements describing the effects of Investment in Securities on the Cash Flow Statement is NOT true?
A. When a company uses the market value method for securities available for sale, calculating cash flow from operations normally requires no adjustment to net income.
B. In calculating cash flow from operations, Unrealized Holding Loss for securities available for sale is usually added back to Net Income.
C. In calculating cash flow from operations, there is usually a subtraction from Net Income if a company uses the equity method, and if it received dividends less than its share of investee's earnings.
D. All of the above statements are 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?
A. $705,000
B. $900,000
C. $975,000
D. $630,000
23: Which of the following is an important reason for the continued legal existence of subsidiary companies?
A. To reduce the financial risk of one segment becoming insolvent
B. To meet more effectively the requirements of state corporation and tax legislation
C. To expand with a minimum of capital investment
D. All of the above
24: Financial statements for parent and subsidiary companies are generally consolidated for ______________________ investments.
A. minority, passive
B. minority, active
C. majority, active
D. None of the above
25: The market value method is used to account for _______________
A. minority, passive investments
B. minority, active investments
C. majority, active investments
D. None of the above
26: Which of the following statements about preparing consolidated financial statements is true?
A. The parent owns more than 50 percent of the voting stock of the subsidiary.
B. The parent owns 100 percent of the voting stock of a real estate subsidiary.
C. The parent owns 100 percent of the voting stock of a finance subsidiary.
D. All of the above statements are true.
27: The FASB requires companies to show in income each period the change in the fair value of any derivative that _________________.
A. attempts to reduce the risk in future steams of cash flows
B. does not attempt to hedge fair value or cash flow
C. Both (a) and (b)
D. Neither (a) nor (b)
28: In the _________________, the owner or lessor merely sells the rights to use the property to the lessee for a specified period.
A. operating lease method
B. capital lease method
C. owner lease method
D. buyer lease method
29: Which of the following statements is NOT descriptive of a defined contribution pension plan?
A. This type of plan defines the employer's contribution to the plan.
B. The amounts to be received by employees depend on the investment performance of the pension plan.
C. Pension benefits received during retirement are based on wages earned and number of years of employment.
D. The employer's pension expense equals the amount contributed to the pension fund.
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?
A. $10,800
B. $7,000
C. $15,000
D. $10,000
31: Which accounting treatment(s) for leases is/are favored by lessors and lessees?
A. Both generally prefer operating leases.
B. Both generally prefer capital leases.
C. Lessors prefer capital leases while lessees prefer operating leases.
D. Lessors prefer operating leases while lessees prefer capital leases
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?
A. $46,936
B. $31,600
C. $56,000
D. $40,664
33: Which of the following accounts would NOT be eliminated in the preparation of a consolidated financial statement?
A. Equity in Earnings of Subsidiary Company (Parent Company)
B. Accounts Receivable (Intercompany)
C. Sales (Intercompany)
D. Dividends Declared (Parent Company)
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?
A. Tax Form
B. Stock Option Agreement
C. Loan Agreement
D. Bargain Purchase Option
35: What type of pension plan is an employee likely to prefer because it reduces the employees risk in planning for retirement?
A. Non-vesting plan
B. Defined contribution plan
C. Non-funded plan
D. Defined benefit plan
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?
A. $0
B. $7,876
C. $39,380
D. None of the above
37: Which of the following accounts would NOT be eliminated in the preparation of consolidated financial statements?
A. Common Stock - Parent Company
B. Common Stock - Subsidiary Company
C. Investment in Stock of Subsidiary Company (Parent Company)
D. All of the above
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?
A. Debt securities that the company intends to hold to maturity
B. Debt and equity securities held as trading securities
C. Debt and equity securities held as securities available for sale
D. None of the above
39: The term "cash flow hedge" refers to _________________
A. a transaction in which a company acquires a derivative and attempts to reduce risks involving fluctuations in a market value
B. a transaction in which a company acquires a derivative and attempts to reduce the risk in future streams of cash flow
C. a transaction that must be recorded and continue to be reported at the acquiring cost
D. All of the above
40: 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?
A. A company uses straight-line depreciation for book purchases and ACRS for tax purposes.
B. Estimated warranty costs are expensed in the year of sale but warranty costs are deducted for tax purposes in the year when repairs are made.
C. In its financial reports, a company reports interest revenue earned on tax-exempt municipal bonds held as assets.
D. A company uses the percentage of completion basis for book purposes, but uses the completed contract basis for tax purposes
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?
A. $220,000
B. $247,200
C. $244,200
D. $234,000
42: If an acquisition qualifies as a pooling of interest, the reported income for the consolidated enterprise will ordinarily be ___________________.
A. larger than for the same consolidated enterprise accounted for as a purchase
B. smaller than for the same consolidated enterprise accounted for as a purchase
C. equal to the same consolidated enterprise accounted for as a purchase
D. adjusted for goodwill amortization
43: Which of the following account titles is not associated with the use of the market value method?
A. Unrealized Holding Loss on Investment in Securities
B. Unrealized Holding Gain on Investment in Securities
C. Equity in Earnings of Affiliate
D. Investment in Securities
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
A. Sales type lease
B. Operating lease
C. Capital lease
D. None of the above
45: In which of the following situations would the lessee enjoy the economic benefits and bear the economic risks of leasing an asset?
A. An asset with an economic life of 10 years is leased for 4 years.
B. The lease agreement contains a bargain purchase option.
C. At the end of the lease term, the lessee returns the leased asset to the lessor.
D. The present value of the lease payments is $70,000 and the fair market value of the leased asset is $95,000.
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?
A. Market value method
B. Equity method
C. Consolidation method
D. All of the above are acceptable.
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?
A. Held to maturity securities
B. Trading securities
C. Available for sale securities
D. Investment in securities
48: 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?
A. Operating lease method
B. Capital lease method
C. Rental lease method
D. None of the above
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 _________________.
A. permanent difference
B. temporary difference
C. deferred tax liability
D. tax obligation
50: Majority investments are generally reported _________________.
A. by preparing consolidated statements
B. by applying the equity method
C. in one-line presentations on the Balance Sheet (as investments)
D. by applying the market value method
Accounting Skills (Securities, Derivatives and Investments) MCQs
