Accounting Skills Test (Securities, Derivatives and Investments)

Accounting Skills Test (Securities, Derivatives and Investments)

Which of the following statements about derivatives is true?

a. A derivative can be an asset.

b. A derivative can be a liability.

c. A derivative is presented on the Balance Sheet at its fair market value at the end of the period.

d. All of the above statements are true.

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

a. Common Stock (Subsidiary Company)

b. Retained Earnings (Subsidiary Company)

c. Equity of Earnings of Subsidiary Company (Parent Company)

d. Investments in Stock of Subsidiary Company (Parent Company)

On its December 31 Year 2 Balance Sheet, XYZ Company reports a current liability for income tax payable of $180,000. During the year, the company's Deferred Tax Liability account increased by $54,000 based on a tax rate of 40 percent applying to the future period of taxable income. The tax rate for Year 2 was 30 percent.

Given the above information, how did XYZ's book and taxable income relate in Year 2?

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.

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

XYZ Company has three securities in its portfolio available for sale, as follows:
Security 1: Beatty, Cost: $78,000, 12/31/06 Market Value: $93,600, 12/31/07 Market Value:$100,100
Security 2: Cole, Cost: $117,000, 12/31/06 Market Value: $120,900, 12/31/07 Market Value:$0
Security 3: Sells, Cost: $58,500, 12/31/06 Market Value: $53,500, 12/31/07 Market Value:$50,700
The Cole stock was sold in Year 2 for $127,400.

Assume that on 12/31 Year 2, XYZ Company reclassifies the Sells stock to A "trading security" status.

Given the above information, what amount would be reported for the Sells stock in XYZ's trading security portfolio?

a. $58,500

b. $53,300

c. $50,700

d. None of the above

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?

a. At acquisition cost and classified as a current asset in the Marketable Securities account

b. At acquisition cost and classified as a noncurrent asset in the Investment in Securities account

c. At market value and classified as a current asset in the Marketable Securities account

d. At market value and classified as a noncurrent asset in the Investment in Securities account

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

Which of the following is generally a worksheet procedure when preparing consolidated statements?

a. Elimination of the parent company's investment account

b. Elimination of intercompany receivables and payables

c. Elimination of intercompany sales and purchases

d. All of the above

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

Which of the following entries records a decline in value at year end in a company's marketable equity securities held as long-term investments?

a. Dr: Investment in Securities, Cr: Unrealized Holding Loss on Investment in Securities

b. Dr: Unrealized Holding Loss on Investment in Securities, Cr: Investment in Securities

c. Dr: Realized Loss on Valuation of Marketable Investments, Cr: Investment in Securities

d. Dr: Realized Gain on Valuation of Marketable Equity Investments, Cr: Investment in Securities

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

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.

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

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?

a. As a realized loss on trading security of $11,000

b. As an unrealized loss on trading securities of $8,000

c. As a realized loss on trading securities of $3,000

d. As an unrealized loss on trading securities of $3,000

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)

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.

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. Assume that a tax rate of 30 percent will apply in the future period of taxable income. For Year 2, excess depreciation for tax purposes is $18,000.
Given the above information, what would be the balance in the deferred tax liability account at the end of Year 2?

a. $16,200

b. $30,600

c. $23,400

d. $5,400

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

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.

XYZ Company has three securities in its portfolio available for sale, as follows:
Security 1: Beatty, Cost: $78,000, 12/31/06 Market Value: $93,600, 12/31/07 Market Value:$100,100
Security 2: Cole, Cost: $117,000, 12/31/06 Market Value: $120,900, 12/31/07 Market Value:$0
Security 3: Sells, Cost: $58,500, 12/31/06 Market Value: $53,500, 12/31/07 Market Value:$50,700

The Cole stock was sold in Year 2 for $127,400.

Given the above information, which of the following statements is true?

a. On its 12/31 Year 1 Balance Sheet, XYZ Company would report the Beatty stock at its cost of $78,000.

b. On its Income Statement for the year ending 12/31 Year 1, XYZ Company would report an unrealized holding gain on the Beatty stock of $15,600.

c. On its 12/31 Tear 1 Balance Sheet, XYZ Company would report an unrealized holding gain on the Beatty stock of $15,600 in a shareholders' equity account

d. Both (a) and (b) are true.

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

In computing its income tax expense for the current year (its first year of operations), XYZ Company has an $18,000 temporary difference (accelerated depreciation for tax purposes). It is assumed that a tax rate of 35 percent will apply to the future period of taxable income. The company's income for tax purposes is $282,000 and the current tax rate is 40 percent. How would XYZ Company report the tax effect of the temporary difference on its Balance Sheet for the current year?

a. As a deferred tax asset of $7,200

b. As a deferred tax liability of $7,200  

c. As a deferred tax asset of $6,300

d. As a deferred tax liability of $6,300

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

The equity method is used to account for ______________.

a. minority, passive investments

b. minority, active investments

c. majority, active investments

d. All of the above

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

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

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

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

In a rental property, tenants are considered ____________.

a. lessors

b. rent collectors

c. debtors

d. lessees

In computing its income tax expense for the current year (its first year of operations), XYZ Company has an $18,000 temporary difference (accelerated depreciation for tax purposes). It is assumed that a tax rate of 35 percent will apply to the future period of taxable income. The company's income for tax purposes is $282,000 and the current tax rate is 40 percent. What amount would XYZ Company report as income tax expense for the current year?

a. $119,100

b. $120,000

c. $105,600

d. $106,500

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

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.

XYZ Company reports income tax expense of $224,000 on its Income Statement for the year ending December 31 Year 4. Included in Year 4's income is interest revenue of $40,000 from some tax-exempt municipal bonds that the company owns. In computing its income tax expense of $224,000, the company also had a temporary difference of $80,000, which will result in a future tax deduction. It is assumed that a tax rate of 30 percent will apply to the future tax deduction. The tax rate for Year 4 (the company's first year of operations) is 40 percent.

Given the above information, how would XYZ Company report the tax effect of the temporary difference on its Balance Sheet for the current year?

a. As a deferred tax asset of $24,000

b. As a deferred tax liability of $24,000

c. As a deferred tax asset of $32,000

d. As a deferred tax liability of $32,000

XYZ Company has three securities in its portfolio available for sale, as follows:
Security 1: Beatty, Cost: $78,000, 12/31/06 Market Value: $93,600, 12/31/07 Market Value:$100,100
Security 2: Cole, CoSt: $117,000, 12/31/06 Market Value: $120,900, 12/31/07 Market Value:$0
Security 3: Sells, Cost: $58,500, 12/31/06 Market Value: $53,500, 12/31/07 Market Value:$50,700
The Cole stock was sold in Year 2 for $127,400.
Given the above information, which of the following statements is true?

a. On its 12/31 Year 2 Balance Sheet, XYZ Company would report the Beatty stock at its market value of $100,100.

b. On its Income Statement for the year ending 12/31 Year 2, XYZ would report an unrealized holding gain on the Beatty stock of $6,500.

c. On its 12/31 Year 2 Balance Sheet, XYZ Company would report an unrealized holding gain on the Beatty stock of $22,100 in a shareholders' equity account.

d. Both (a) and (c) are true.

On its December 31 Year 2 Balance Sheet, XYZ Company reports a current liability for income tax payable of $180,000. During the year, the company's Deferred Tax Liability account increased by $54,000 based on a tax rate of 40 percent applying to the future period of taxable income. The tax rate for Year 2 was 30 percent. What is XYZ's book income for Year 2?

a. $600,000

b. $735,000

c. $780,000

d. $585,000

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.

XYZ Company reports income tax expense of $224,000 on its Income Statement for the year ending December 31 Year 4. Included in Year 4's income is interest revenue of $40,000 from some tax-exempt municipal bonds that the company owns. In computing its income tax expense of $224,000, the company also had a temporary difference of $80,000, which will result in a future tax deduction. It is assumed that a tax rate of 30 percent will apply to the future tax deduction. The tax rate for Year 4 (the company's first year of operations) is 40 percent.

Given the above information, what amount would XYZ Company report as current income tax payable on its Year 4 Balance Sheet?

a. $224,000

b. $248,000

c. $208,000

d. None of the above

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

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

XYZ Company has three securities in its portfolio available for sale, as follows:

Security 1: Beatty, Cost: $78,000, 12/31/06 Market Value: $93,600, 12/31/07 Market Value:$100,100
Security 2: Cole, CoSt: $117,000, 12/31/06 Market Value: $120,900, 12/31/07 Market Value:$0
Security 3: Sells, Cost: $58,500, 12/31/06 Market Value: $53,500, 12/31/07 Market Value:$50,700

The Cole stock was sold in Year 2 for $127,400.

Given the above information, what would XYZ Company report on its income Statement for the year ending 12/31 Year 2 relative to the sale of the Cole stock in Year 2?

a. A realized gain of $6,500

b. A realized gain of $6,500 and an unrealized gain of $3,900

c. A realized gain of $10,400

d. An unrealized gain of $10,400