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Test answers for Accounting Skills Test (Securities, Derivatives and Investments) 2016

(6 / 74, CL) Last updated: July 26
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6 Answered Test Questions:

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

Answers:

• at acquisition cost

• at market value

• at amortized acquisition cost

• None of the above

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

Answers:

• Common Stock (Subsidiary Company)

• Retained Earnings (Subsidiary Company)

• Equity of Earnings of Subsidiary Company (Parent Company)

• Investments in Stock of Subsidiary Company (Parent Company)

3. 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?

Answers:

• Market value method

• Equity method

• Consolidation method

• All of the above are acceptable.

4. 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?

Answers:

• The lease contains a bargain purchase price option.

• The lease transfers ownership of property to the lessee.

• The lease term is 90 percent or more of the estimated economic life of the leased property.

• All of the above are conditions that would cause the lease to be capitalized.

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

Answers:

• derivative instrument

• hedge fund

• bond

• stock option

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

Answers:

• stock option

• trading bond

• fair value hedge

• unfair value hedge


74 NOT Answered Yet Test Questions:

(hold on, will be updated soon)
7. In which of the following situations would the lessee enjoy the economic benefits and bear the economic risks of leasing an asset?

Answers:

• An asset with an economic life of 10 years is leased for 4 years.

• The lease agreement contains a bargain purchase option.

• At the end of the lease term, the lessee returns the leased asset to the lessor.

• The present value of the lease payments is $70,000 and the fair market value of the leased asset is $95,000.

8. Which of the following statements is NOT descriptive of a defined contribution pension plan?

Answers:

• This type of plan defines the employer's contribution to the plan.

• The amounts to be received by employees depend on the investment performance of the pension plan.

• Pension benefits received during retirement are based on wages earned and number of years of employment.

• The employer's pension expense equals the amount contributed to the pension fund.

9. Which of the following accounts would NOT be eliminated in the preparation of a consolidated financial statement?

Answers:

• Equity in Earnings of Subsidiary Company (Parent Company)

• Accounts Receivable (Intercompany)

• Sales (Intercompany)

• Dividends Declared (Parent Company)

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

Answers:

• attempts to reduce the risk in future steams of cash flows

• does not attempt to hedge fair value or cash flow

• Both (a) and (b)

• Neither (a) nor (b)

11. Which of the following is an important reason for the continued legal existence of subsidiary companies?

Answers:

• To reduce the financial risk of one segment becoming insolvent

• To meet more effectively the requirements of state corporation and tax legislation

• To expand with a minimum of capital investment

• All of the above

12. Which of the following statements about preparing consolidated financial statements is true?

Answers:

• The parent owns more than 50 percent of the voting stock of the subsidiary.

• The parent owns 100 percent of the voting stock of a real estate subsidiary.

• The parent owns 100 percent of the voting stock of a finance subsidiary.

• All of the above statements are true.

13. 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?

Answers:

• $119,100

• $120,000

• $105,600

• $106,500

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

Answers:

• temporary differences

• permanent differences

• tax liability

• tax obligation

15. 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?

Answers:

• Operating lease method

• Capital lease method

• Rental lease method

• None of the above

16. 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?

Answers:

• As a deferred tax asset of $24,000

• As a deferred tax liability of $24,000

• As a deferred tax asset of $32,000

• As a deferred tax liability of $32,000

17. 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?

Answers:

• $36,000

• $25,200

• $10,800

• None of the above

18. 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?

Answers:

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

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

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

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

19. 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?

Answers:

• $210,000

• $12,000

• $199,500

• $211,500

20. Which of the following is a reason that lessees prefer operating leases?

Answers:

• Capital leases result in an increased debt-equity ratio.

• Capital leases result in earlier recognition of expenses.

• Operating leases result in the non-recognition of lease assets and lease liabilities.

• All of the above are reasons that lessees prefer operating leases.

21. 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 _____________.

Answers:

• permanent difference

• liability

• deferred tax asset

• deferred tax liability

22. 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?

Answers:

• Debt securities that the company intends to hold to maturity

• Debt and equity securities held as trading securities

• Debt and equity securities held as securities available for sale

• None of the above

23. 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?

Answers:

• At acquisition cost

• At market value

• At amortized acquisition cost

• None of the above

24. 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 _________________.

Answers:

• permanent difference

• temporary difference

• deferred tax liability

• tax obligation

25. 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?

Answers:

• $250,000

• $168,496

• $210,620

• $160,620

26. 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?

Answers:

• $10,800

• $7,000

• $15,000

• $10,000

27. 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?

Answers:

• $58,500

• $53,300

• $50,700

• None of the above

28. Which of the following accounts would NOT be eliminated in the preparation of consolidated financial statements?

Answers:

• Common Stock - Parent Company

• Common Stock - Subsidiary Company

• Investment in Stock of Subsidiary Company (Parent Company)

• All of the above

29. 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?

Answers:

• Held to maturity securities

• Trading securities

• Available for sale securities

• Investment in securities

30. Which of the following is NOT a perceived advantage of "off balance sheet financing"?

Answers:

• The debt-equity ratio will be higher.

• Future credit ratings might be higher.

• Future borrowing costs might be lower.

• All of the above are perceived advantages of off balance sheet financing.

31. 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 permanent difference on its Balance Sheet for the current year?

Answers:

• As a deferred tax asset of $16,000

• As a deferred tax liability of $16,000

• Nothing would be reported on the Balance Sheet because a permanent difference has no effect on deferred taxes.

• None of the above

32. 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?

Answers:

• A realized gain of $6,500

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

• A realized gain of $10,400

• An unrealized gain of $10,400

33. 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?

Answers:

• As a current asset in the Marketable Securities account

• As a current asset in the Investment in Securities account

• As a noncurrent asset in the Marketable Securities account

• As a noncurrent asset in the Investment in Securities account

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

Answers:

• larger than for the same consolidated enterprise accounted for as a purchase

• smaller than for the same consolidated enterprise accounted for as a purchase

• equal to the same consolidated enterprise accounted for as a purchase

• adjusted for goodwill amortization

35. 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?

Answers:

• $16,200

• $30,600

• $23,400

• $5,400

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

Answers:

• Non-vesting plan

• Defined contribution plan

• Non-funded plan

• Defined benefit plan

37. 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?

Answers:

• A company uses straight-line depreciation for book purchases and ACRS for tax purposes.

• 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.

• In its financial reports, a company reports interest revenue earned on tax-exempt municipal bonds held as assets.

• A company uses the percentage of completion basis for book purposes, but uses the completed contract basis for tax purposes.

38. Which of the following statements is NOT true?

Answers:

• Consolidated net income is the same amount as that which results when the parent uses the equity method for an unconsolidated subsidiary.

• Consolidated retained earnings is the same amount as that which results when the parent uses the equity method for an unconsolidated subsidiary.

• The consolidation process eliminates the Equity in Earnings of Subsidiary account.

• All of the above statements are true.

39. Which of the following statements is NOT a criticism of the accounting for deferred income taxes?

Answers:

• Payment of deferred taxes may be deferred indefinitely.

• The amount on the Balance Sheet for deferred income taxes is not an obligation.

• Deferred taxes result in the effective tax rate being different from the statutory tax rate.

• The amount on the Balance Sheet for deferred income taxes is an undiscounted amount.

40. 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?

Answers:

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

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

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

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

41. 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?

Answers:

• $570

• $428

• $0

• $1,710

42. 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?

Answers:

• $224,000

• $248,000

• $208,000

• None of the above

43. 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?

Answers:

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

• 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.

• 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

• Both (a) and (b) are true.

44. 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?

Answers:

• $0

• $7,876

• $39,380

• None of the above

45. Which of the following statements describing the effects of Investment in Securities on the Cash Flow Statement is NOT true?

Answers:

• 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.

• In calculating cash flow from operations, Unrealized Holding Loss for securities available for sale is usually added back to Net Income.

• 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.

• All of the above statements are true.

46. Which of the following account titles is not associated with the use of the market value method?

Answers:

• Unrealized Holding Loss on Investment in Securities

• Unrealized Holding Gain on Investment in Securities

• Equity in Earnings of Affiliate

• Investment in Securities

47. 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?

Answers:

• Book income exceeded taxable income.

• Taxable income exceeded book income.

• Book income equaled taxable income.

• The difference between book income and taxable income is due to a permanent difference.

48. 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?

Answers:

• $79,200

• $83,000

• $100,000

• $75,800

49. 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?

Answers:

• Operating lease method

• Capital lease method

• Rental lease method

• None of the above

50. Given the following entry, how has the lessee accounted for the lease?

Dr: Interest Expense
Dr: Liability - Present value of lease obligation
Cr: Cash

Answers:

• Sales type lease

• Operating lease

• Capital lease

• None of the above

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

Answers:

• Zero to 20 percent

• 20 to 50 percent

• Over 50 percent

• 100 percent

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

Answers:

• Both generally prefer operating leases.

• Both generally prefer capital leases.

• Lessors prefer capital leases while lessees prefer operating leases.

• Lessors prefer operating leases while lessees prefer capital leases.

53. Majority investments are generally reported _________________.

Answers:

• by preparing consolidated statements

• by applying the equity method

• in one-line presentations on the Balance Sheet (as investments)

• by applying the market value method

54. 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?

Answers:

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

• 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.

• 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.

• Both (a) and (c) are true.

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

Answers:

• fair value hedge

• a derivative that is not used to hedge some fair value or cash flow

• cash flow hedge

• None of the above

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

Answers:

• operating lease method

• capital lease method

• owner lease method

• buyer lease method

57. 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. In Year 2, XYZ Company reported a current liability for income taxes of $39,000.

Given the above information, what amount of income tax expense did XYZ Company report on its Year 2 Income Statement?

Answers:

• $39,000

• $44,400

• $33,600

• $49,800

58. 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?

Answers:

• Interest Expense of $6,820 and Depreciation Expense of $15,500

• Rent Expense of $20,000

• Interest Expense of $4,500 and Depreciation Expense of $15,500

• Interest Expense of $6,820 and Depreciation Expense of $20,000

59. 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?

Answers:

• Tax Form

• Stock Option Agreement

• Loan Agreement

• Bargain Purchase Option

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

Answers:

• minority, passive investments

• minority, active investments

• majority, active investments

• None of the above

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

Answers:

• Elimination of the parent company's investment account

• Elimination of intercompany receivables and payables

• Elimination of intercompany sales and purchases

• All of the above

62. XYZ Company reports book income of $96,000 and taxable income of $120,000 (the $24,000 difference is attributed to warranty expenses). The statutory tax rate is 30 percent and the company reports a current liability for income taxes payable of $36,000 on its Year 1 Balance Sheet. In its Income Statement, the company reports income tax expense at an effective rate of 37.5 percent.

Given the above information, the difference between the statutory tax rate and the effective tax rate is due to __________________.

Answers:

• a temporary difference that resulted in book income exceeding taxable income

• a temporary difference that resulted in taxable income exceeding book income

• a permanent difference that resulted in book income exceeding taxable income

• a permanent difference that resulted in taxable income exceeding book income

63. 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?

Answers:

• Book income exceeded taxable income.

• Taxable income exceeded book income.

• Book income equaled taxable income.

• The difference between book income and taxable income is due to a permanent difference.

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

Answers:

• in separate books for the consolidated entity

• in the parent company's books

• on a consolidated work sheet

• in the subsidiary company's books

65. The term "cash flow hedge" refers to _________________.

Answers:

• a transaction in which a company acquires a derivative and attempts to reduce risks involving fluctuations in a market value

• a transaction in which a company acquires a derivative and attempts to reduce the risk in future streams of cash flow

• a transaction that must be recorded and continue to be reported at the acquiring cost

• All of the above

66. 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?

Answers:

• $192,000

• $201,600

• $216,000

• $225,600

67. Which of the following statements about derivatives is true?

Answers:

• A derivative can be an asset.

• A derivative can be a liability.

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

• All of the above statements are true.

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

Answers:

• minority, passive

• minority, active

• majority, active

• None of the above

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

Answers:

• Increase the investment account

• Decrease the investment account

• Increase the revenue account

• Decrease the revenue account

70. 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 is XYZ's effective tax rate for Year 4?

Answers:

• $224,000/$580,000 = .386

• $224,000/$660,000 = .339

• $224,000/$620,000 = .361

• None of the above

71. 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?

Answers:

• As a deferred tax asset of $7,200

• As a deferred tax liability of $7,200

• As a deferred tax asset of $6,300

• As a deferred tax liability of $6,300

72. 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 is XYZ Company's taxable income for Year 4?

Answers:

• $560,000

• $620,000

• $520,000

• None of the above

73. 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?

Answers:

• $600,000

• $735,000

• $780,000

• $585,000

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

Answers:

• classifies the transaction as a fair value hedge

• classifies the transaction as a cash flow hedge

• requires the derivative to be recorded and continue to be reported at the acquiring cost

• All of the above

75. 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?

Answers:

• $46,936

• $31,600

• $56,000

• $40,664

76. Which of the following methods is used to recognize goodwill after a business acquisition is accounted for?

Answers:

• Pooling of interests method

• Purchase method

• Either pooling of interests or purchase method

• Neither pooling of interest or purchase method

77. 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?

Answers:

• $220,000

• $247,200

• $244,200

• $234,000

78. 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?

Answers:

• On its 12/31 Year 1 Balance Sheet, XYZ Company would report the Sells stock at its cost of $58,500.

• On its Income Statement for the year ending 12/31 Year 1, XYZ Company would report an unrealized holding loss of $5,200.

• On its Income Statement for the year ending 12/31 Year 2, XYZ Company would report an unrealized holding loss of $2,600.

• None of the above statements is true.

79. XYZ Company reports book income of $96,000 and taxable income of $120,000 (the $24,000 difference is attributed to warranty expenses). The statutory tax rate is 30 percent and the company reports a current liability for income taxes payable of $36,000 on its Year 1 Balance Sheet. In its Income Statement, the company reports income tax expense at an effective rate of 37.5 percent.

Given the above information, what amount of income tax expense did XYZ Company report in Year 1?

Answers:

• $36,000

• $21,600

• $17,280

• $33,750

80. The equity method is used to account for _________________.

Answers:

• minority, passive investments

• minority, active investments

• majority, active investments

• All of the above