MCQ - Finance & Accounting MCQs

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With regard to estimated income tax, estates

  • A. Must make quarterly estimated tax payments starting no later than the second quarter following the one in which the estate was established.
  • B. Are exempt from paying estimated tax during the estates first two taxable years.
  • C. Must make quarterly estimated tax payments only if the estates income is required to be distributed currently.
  • D. Are not required to make payments of estimated tax.
  • Correct Answer: Option
    (b) The requirement is to determine the correct statement regarding an estates estimated income taxes. Trusts and estates must make quarterly estimated tax payments, except that an estate is exempt from making estimated tax payments for taxable years ending within two years of the decedents death.

A distribution from estate income, that was currently required, was made to the estates sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiarys gross income is limited to the estates

  • A. Capital gain income.
  • B. Ordinary gross income.
  • C. Distributable net income.
  • D. Net investment income.
  • Correct Answer: Option
    (c) The requirement is to determine the maximum amount to be included in the beneficiarys gross income for a distribution from estate income that was currently required. Distributable net income (DNI) is the maximum amount of distributions that can be taxed to beneficiaries as well as the maximum amount of distributions deduction for an estate.

Under the terms of the will of Melvin Crane, $10,000 a year is to be paid to his widow and $5,000 a year is to be paid to his daughter out of the estates income during the period of estate administration. No charitable contributions are made by the estate. During 2012, the estate made the required distributions to Cranes widow and daughter and for the entire year the estates distributable net income was $12,000. What amount of the $10,000 distribution received from the estate must Cranes widow include in her gross income for 2012?

  • A. $0
  • B. $ 4,000
  • C. $ 8,000
  • D. $10,000
  • Correct Answer: Option
    (c) The requirement is to determine the amount of the estates $10,000 distribution that must be included in gross income by Cranes widow. The maximum amount that is taxable to beneficiaries is limited to the estates distributable net income (DNI). Since distributions to multiple beneficiaries exceed DNI, the estates $12,000 of DNI must be prorated to distributions to determine the portion of each distribution that must be included in gross income. Since distributions to the widow and daughter totaled $15,000, the portion of the $10,000 distribution that must be included in the widow gross income equals ($10,000/$15,000) $12,000 = $8,000.

For 2013, the generation-skipping transfer tax is imposed

  • A. Instead of the gift tax.
  • B. Instead of the estate tax.
  • C. At the highest tax rate under the transfer tax rate schedule.
  • D. When an individual makes a gift to a grandparent.
  • Correct Answer: Option
    (c) The requirement is to determine the correct statement regarding the generation-skipping transfer tax. The generation-skipping transfer tax is imposed as a separate tax in addition to the federal gift and estate taxes, and is designed to prevent an individual from escaping an entire generation of gift and estate taxes by transferring property to a person that is two or more generations below that of the transferor. The tax is imposed at the highest tax rate (40% for 2013) under the transfer tax rate schedule.

In 2006, Edwin Ryan bought 100 shares of a listed stock for $5,000. In June 2012, when the stock fair market value was $7,000, Edwin gave this stock to his sister, Lynn. No gift tax was paid. Lynn died in October 2012, bequeathing this stock to Edwin, when the stocks fair market value was $9,000. Lynns executor did not elect the alternate valuation. What is Edwins basis for this stock after he inherits it from Lynns estate?

  • A. $0
  • B. $5,000
  • C. $7,000
  • D. $9,000
  • Correct Answer: Option
    (b) The requirement is to determine Edwins basis for the stock inherited from Lynns estate. A special rule applies if a decedent (Lynn) acquires appreciated property as a gift within one year of death, and this property passes to the donor (Edwin) or donors spouse. Then the donors (Edwins) basis is the basis of the property in the hands of the decedent (Lynn) before death. Since Lynn had received the stock as a gift, Lynns basis before death ($5,000) becomes the basis of the stock to Edwin.

In 2006, Edwin Ryan bought 100 shares of a listed stock for $5,000. In June 2012, when the stocks fair market value was $7,000, Edwin gave this stock to his sister, Lynn. No gift tax was paid. Lynn died in October 2012, bequeathing this stock to Edwin, when the stocks fair market value was $9,000. Lynns executor did not elect the alternate valuation. What is Edwins basis for this stock after he inherits it from Lynns estate?

  • A. $0
  • B. $5,000
  • C. $7,000
  • D. $9,000
  • Correct Answer: Option
    (b) The requirement is to determine Edwins basis for the stock inherited from Lynns estate. A special rule applies if a decedent (Lynn) acquires appreciated property as a gift within one year of death, and this property passes to the donor (Edwin) or donors spouse. Then the donors (Edwins) basis is the basis of the property in the hands of the decedent (Lynn) before death. Since Lynn had received the stock as a gift, Lynns basis before death ($5,000) becomes the basis of the stock to Edwin.

Alan Curtis, a US citizen, died on March 1, 2013, leaving an adjusted gross estate with a fair market value of $5,400,000 at the date of death. Under the terms of Alans will, $3,000,000 was bequeathed outright to his widow, free of all estate and inheritance taxes. The remainder of Alans estate was left to his mother. Alan made no taxable gifts during his lifetime. In computing the taxable estate, the executor of Alans estate should claim a marital deduction of

  • A. $ 450,000
  • B. $ 780,800
  • C. $ 900,000
  • D. $3,000,000
  • Correct Answer: Option
    (d) The requirement is to determine the amount of marital deduction that can be claimed in computing Alans taxable estate. In computing the taxable estate of a decedent, an unlimited marital deduction is allowed for the portion of the decedents estate that passes to the decedents surviving spouse. Since $3,000,000 was bequeathed outright to Alans widow, Alans estate will receive a marital deduction of $3,000,000.

Alan Curtis, a US citizen, died on March 1, 2013, leaving an adjusted gross estate with a fair market value of $5,400,000 at the date of death. Under the terms of Alans will, $3,000,000 was bequeathed outright to his widow, free of all estate and inheritance taxes. The remainder of Alans estate was left to his mother. Alan made no taxable gifts during his lifetime. Disregarding extensions of time for filing, within how many months after the date of Alans death is the federal estate tax return due?

  • A. 2 1/2
  • B. 3 1/2
  • C. 9
  • D. 12
  • Correct Answer: Option
    (c) The requirement is to determine within how many months after the date of Alans death his federal estate tax return should be filed. The federal estate tax return (Form 706) must be filed and the tax paid within nine months of the decedents death, unless an extension of time has been granted.

Ross, a calendar-year, cash-basis taxpayer who died in June 2012, was entitled to receive a $10,000 accounting fee that had not been collected before the date of death. The executor of Ross estate collected the full $10,000 in July 2012. This $10,000 should appear in

  • A. Only the decedents final individual income tax return.
  • B. Only the estates fiduciary income tax return.
  • C. Only the estate tax return.
  • D. Both the fiduciary income tax return and the estate tax return.
  • Correct Answer: Option
    (d) The requirement is to determine the proper income and estate tax treatment of an accounting fee earned by Ross before death, that was subsequently collected by the executor of Ross estate. Since Ross was a calendar-year, cash-method taxpayer, the income would not be included on Ross final individual income tax return because payment had not been received. Since the accounting fee would not be included in Ross final income tax return because of Ross cash method of accounting, the accounting fee would be income in respect of a decedent. For estate tax purposes, income in respect of a decedent will be included in the decedents gross estate at its fair market value on the appropriate valuation date. For income tax purposes, the income tax basis of the decedent (zero) transfers over to the estate or beneficiary who collects the fee. The recipient of the income must classify it in the same manner (i.e., ordinary income) as would have the decedent. Thus, the accounting fee must be included in Ross� gross estate and must also be included in the estates fiduciary income tax return (Form 1041) because the fee was collected by the executor of Ross estate.

Proceeds of a life insurance policy payable to the estates executor, as the estates representative, are

  • A. Includible in the decedents gross estate only if the premiums had been paid by the insured.
  • B. Includible in the decedents gross estate only if the policy was taken out within three years of the insureds death under the contemplation of death rule.
  • C. Always includible in the decedents gross estate.
  • D. Never includible in the decedents gross estate.
  • Correct Answer: Option
    (c) The requirement is to determine when the proceeds of life insurance payable to the estates executor, as the estates representative, are includible in the decedents gross estate. The proceeds of life insurance on the decedents life are always included in the decedents gross estate if (1) they are receivable by the estate, (2) the decedent possessed any incident of ownership in the policy, or (3) they are receivable by another (e.g., the estates executor) for the benefit of the estate.

With regard to the federal estate tax, the alternate valuation date

  • A. Is required to be used if the fair market value of the estates assets has increased since the decedents date of death.
  • B. If elected on the first return filed for the estate, may be revoked in an amended return provided that the first return was filed on time.
  • C. Must be used for valuation of the estates liabilities if such date is used for valuation of the estates assets.
  • D. Can be elected only if its use decreases both the value of the gross estate and the estate tax liability.
  • Correct Answer: Option
    (d) The requirement is to determine the correct statement regarding the use of the alternate valuation date in computing the federal estate tax. An executor of an estate can elect to use the alternate valuation date (the date six months after the decedents death) to value the assets included in a decedents gross estate only if its use decreases both the value of the gross estate and the amount of estate tax liability. Answer (a) is incorrect because the alternate valuation date cannot be used if its use increases the value of the gross estate. Answer (b) is incorrect because the use of the alternate valuation date is an irrevocable election. Answer (c) is incorrect because the alternate valuation date is only used to value an estates assets, not its liabilities.

Eng and Lew, both US citizens, died in 2013. Eng made taxable lifetime gifts of $400,000 that are not included in Engs gross estate. Lew made no lifetime gifts. At the dates of death, Engs gross estate was $3,600,000, and Lews gross estate was $4,800,000. A federal estate tax return must be filed for Eng Lew

  • A. No No
  • B. No Yes
  • C. Yes No
  • D. Yes Yes
  • Correct Answer: Option
    A

Which one of the following is a valid deduction from a decedents gross estate?

  • A. Foreign death taxes.
  • B. Income tax paid on income earned and received after the decedents death.
  • C. Federal estate taxes.
  • D. Unpaid income taxes on income received by the decedent before death.
  • Correct Answer: Option
    D

Following are the fair market values of Walds assets at the date of death: Personal effects and jewelry $1,750,000 Land bought by Wald with Walds funds five years prior to death and held with Walds sister as joint tenants with right of survivorship 3,800,000 The executor of Walds estate did not elect the alternate valuation date. The amount includible as Walds gross estate in the federal estate tax return is

  • A. $1,750,000
  • B. $3,800,000
  • C. $5,000,000
  • D. $5,550,000
  • Correct Answer: Option
    D

In connection with a buy-sell agreement funded by a cross-purchase insurance arrangement, business associate Adam bought a policy on Burrs life to finance the purchase of Burrs interest. Adam, the beneficiary, paid the premiums and retained all incidents of ownership. On the death of Burr, the insurance proceeds will be

  • A. Includible in Burrs gross estate, if Burr owns 50% or more of the stock of the corporation.
  • B. Includible in Burrs gross estate only if Burr had purchased a similar policy on Adams life at the same time and for the same purpose.
  • C. Includible in Burrs gross estate, if Adam has the right to veto Burrs power to borrow on the policy that Burr owns on Adams life.
  • D. Excludible from Burrs gross estate.
  • Correct Answer: Option
    D

Fred and Amy Kehl, both US citizens, are married. All of their real and personal property is owned by them as tenants by the entirety or as joint tenants with right of survivorship. The gross estate of the first spouse to die

  • A. Includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration.
  • B. Includes only the property that had been acquired with the funds of the deceased spouse.
  • C. Is governed by the federal statutory provisions relating to jointly held property, rather than by the decedents interest in community property vested by state law, if the Kehls reside in a community property state.
  • D. Includes one-third of the value of all real estate owned by the Kehls, as the dower right in the case of the wife or curtesy right in the case of the husband.
  • Correct Answer: Option
    A

Which of the following credits may be offset against the gross estate tax to determine the net estate tax of a US citizen dying during 2013? Applicable credit Credit for gift taxes paid on gifts made after 1976

  • A. Yes Yes
  • B. No No
  • C. No Yes
  • D. Yes No
  • Correct Answer: Option
    D

What amount of a decedents taxable estate is effectively taxfree if the maximum basic exclusion amount is taken during 2013?

  • A. $1,000,000
  • B. $1,455,800
  • C. $3,500,000
  • D. $5,000,000
  • Correct Answer: Option
    D

If the executor of a decedents estate elects the alternate valuation date and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedents death?

  • A. 12
  • B. 9
  • C. 6
  • D. 3
  • Correct Answer: Option
    C

Bell, a cash-basis calendar-year taxpayer, died on June 1, 2012. In 2012, prior to her death, Bell incurred $2,000 in medical expenses. The executor of the estate paid the medical expenses, which were a claim against the estate, on July 1, 2012. If the executor files the appropriate waiver, the medical expenses are deductible on

  • A. The estate tax return.
  • B. Bells final income tax return.
  • C. The estate income tax return.
  • D. The executors income tax return.
  • Correct Answer: Option
    B

Fred and Ethel (brother and sister), residents of a noncommunity property state, own unimproved land that they hold in joint tenancy with rights of survivorship. The land cost $100,000 of which Ethel paid $80,000 and Fred paid $20,000. Ethel died during 2013 when the land was worth $300,000, and $240,000 was included in Ethels gross estate. What is Freds basis for the property after Ethels death?

  • A. $140,000
  • B. $240,000
  • C. $260,000
  • D. $300,000
  • Correct Answer: Option
    C

Raff created a joint bank account for himself and his friends son, Dave. There is a gift to Dave when

  • A. Raff creates the account.
  • B. Raff dies.
  • C. Dave draws on the account for his own benefit.
  • D. Dave is notified by Raff that the account has been created.
  • Correct Answer: Option
    C

When Jim and Nina became engaged in April 2012, Jim gave Nina a ring that had a fair market value of $50,000. After their wedding in July 2012, Jim gave Nina $75,000 in cash so that Nina could have her own bank account. Both Jim and Nina are US citizens. What was the amount of Jim�s 2012 marital deduction?

  • A. $ 63,000
  • B. $ 75,000
  • C. $113,000
  • D. $125,000
  • Correct Answer: Option
    B

On July 1, 2012, Vega made a transfer by gift in an amount sufficient to require the filing of a gift tax return. Vega was still alive in 2013. If Vega did not request an extension of time for filing the 2012 gift tax return, the due date for filing was

  • A. March 15, 2013.
  • B. April 15, 2013.
  • C. June 15, 2013.
  • D. June 30, 2013.
  • Correct Answer: Option
    B

Which of the following requires filing a gift tax return, if the transfer exceeds the available annual gift tax exclusion?

  • A. Medical expenses paid directly to a physician on behalf of an individual unrelated to the donor.
  • B. Tuition paid directly to an accredited university on behalf of an individual unrelated to the donor.
  • C. Payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor.
  • D. Campaign expenses paid to a political organization
  • Correct Answer: Option
    C

Under the unified rate schedule for 2013,

  • A. Lifetime taxable gifts are taxed on a noncumulative basis.
  • B. Transfers at death are taxed on a noncumulative basis.
  • C. Lifetime taxable gifts and transfers at death are taxed on a cumulative basis.
  • D. The gift tax rates are 5% higher than the estate tax rates.
  • Correct Answer: Option
    C

During 2013, Blake transferred a corporate bond with a face amount and fair market value of $20,000 to a trust for the benefit of her sixteen-year old child. Annual interest on this bond is $2,000, which is to be accumulated in the trust and distributed to the child on reaching the age of twenty-one. The bond is then to be distributed to the donor or her successor-in-interest in liquidation of the trust. Present value of the total interest to be received by the child is $8,710. The amount of the gift that is excludable from taxable gifts is

  • A. $20,000
  • B. $14,000
  • C. $ 8,710
  • D. $0
  • Correct Answer: Option
    D

In 2012, Sayers, who is single, gave an outright gift of $50,000 to a friend, Johnson, who needed the money to pay medical expenses. In filing the 2012 gift tax return, Sayers was entitled to a maximum exclusion of

  • A. $0
  • B. $12,000
  • C. $13,000
  • D. $50,000
  • Correct Answer: Option
    C

Steve and Kay Briar, US citizens, were married for the entire 2012 calendar year. In 2012, Steve gave a $30,000 cash gift to his sister. The Briars made no other gifts in 2012. They each signed a timely election to treat the $30,000 gift as made one-half by each spouse. Disregarding the applicable credit and estate tax consequences, what amount of the 2012 gift is taxable to the Briars?

  • A. $30,000
  • B. $ 6,000
  • C. $ 4,000
  • D. $0
  • Correct Answer: Option
    C

An organization offers its customers credit terms of 5/10 net 20. One-third of the customers take the cash discount and the remaining customers pay on day 20. On average, 20 units are sold per day, priced at $10,000 each. The rate of sales is uniform throughout the year. Using a 360-day year, the organization has days sales outstanding in accounts receivable, to the nearest full day, of

  • A. 13 days.
  • B. 15 days
  • C. 17 days.
  • D. 20 days.
  • Correct Answer: Option
    C

If everything else remains constant and a firm increases its cash conversion cycle, its profitability will likely

  • A. Increase.
  • B. Increase if earnings are positive.
  • C. Decrease.
  • D. Not be affected.
  • Correct Answer: Option
    C

The length of time between the acquisition of inventory and payment for it is called the

  • A. Operating cycle.
  • B. Inventory conversion period.
  • C. Accounts receivable period.
  • D. Accounts payable deferral period.
  • Correct Answer: Option
    D

Jones Company has $5,000,000 of average inventory and cost of sales of $30,000,000. Using a 365-day year, calculate the firms inventory conversion period.

  • A. 30.25 days.
  • B. 60.83 days.
  • C. 45.00 days.
  • D. 72.44 days.
  • Correct Answer: Option
    B

Eagle Sporting Goods has $2.5 million in inventory and $2 million in accounts receivable. Its average daily sales are $100,000. The firms payables deferral period is 30 days and average daily cost of sales are $50,000. What is the length of the firms cash conversion period?

  • A. 100 days.
  • B. 60 days.
  • C. 50 days.
  • D. 40 days.
  • Correct Answer: Option
    D

Which of the following actions is likely to reduce the length of a firms cash conversion cycle?

  • A. Which of the following actions is likely to reduce the length of a firm�s cash conversion cycle?
  • B. Adopting a new inventory system that increases the inventory conversion period.
  • C. Increasing the average days sales outstanding on its accounts receivable.
  • D. Reducing the amount of time the firm takes to pay its suppliers.
  • Correct Answer: Option
    A

Determining the appropriate level of working capital for a firm requires

  • A. Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets.
  • B. Changing the capital structure and dividend policy of the firm.
  • C. Maintaining short-term debt at the lowest possible level because it is generally more expensive than longterm debt.
  • D. Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.
  • Correct Answer: Option
    D

All of the following statements in regard to working capital are correct except:

  • A. Current liabilities are an important source of financing for many small firms.
  • B. Profitability varies inversely with liquidity.
  • C. The hedging approach to financing involves matching maturities of debt with specific financing needs.
  • D. Financing permanent inventory buildup with longterm debt is an example of an aggressive working capital policy.
  • Correct Answer: Option
    D

Which of the following is not a function of financial management?

  • A. Financing.
  • B. Risk-management.
  • C. Internal control.
  • D. Capital budgeting.
  • Correct Answer: Option
    C

Clay Corporation follows an aggressive financing policy in its working capital management while Lott Corporation follows a conservative financing policy. Which one of the following statements is correct?

  • A. Clay has a low ratio of short-term debt to total debt while Lott has a high ratio of short-term debt to total debt.
  • B. Clay has a low current ratio while Lott has a high current ratio.
  • C. Clay has less liquidity risk while Lott has more liquidity risk.
  • D. Clays interest charges are lower than Lotts interest charges.
  • Correct Answer: Option
    B

The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firms maturing obligations is the policy that finances

  • A. Fluctuating current assets with long-term debt.
  • B. Permanent current assets with long-term debt.
  • C. Permanent current assets with short-term debt.
  • D. Fluctuating current assets with short-term debt.
  • Correct Answer: Option
    C

Starrs Company has current assets of $400,000 and current liabilities of $300,000. Starrs could increase its net working capital by the

  • A. Prepayment of $50,000 of next years rent.
  • B. Refinancing of $50,000 of short-term debt with long-term debt.
  • C. Acquisition of land valued at $50,000 through the issuance of common stock.
  • D. Purchase of $50,000 of trading securities for cash.
  • Correct Answer: Option
    B

If a firm increases its cash balance by issuing additional shares of common stock, net working capital

  • A. Remains unchanged and the current ratio remains unchanged.
  • B. Increases and the current ratio remains unchanged.
  • C. Increases and the current ratio decreases.
  • D. Increases and the current ratio increases.
  • Correct Answer: Option
    D

As a company becomes more conservative with respect to working capital policy, it would tend to have a(n)

  • A. Increase in the ratio of current liabilities to noncurrent liabilities.
  • B. Decrease in the operating cycle.
  • C. Decrease in the quick ratio.
  • D. Increase in the ratio of current assets to noncurrent assets.
  • Correct Answer: Option
    D

As a company becomes more conservative in its working capital policy, it would tend to have a(n)

  • A. Decrease in its acid test ratio.
  • B. Increase in the ratio of current liabilities to noncurrent liabilities.
  • C. Increase in the ratio of current assets to units of output.
  • D. Increase in funds invested in common stock and a decrease in funds invested in marketable securities.
  • Correct Answer: Option
    C

Since Marsh, Inc., is experiencing a sharp increase in sales activity and a steady increase in production, the management of Marsh has adopted an aggressive working capital policy. Therefore, the companys current level of net working capital

  • A. Would most likely be the same as in any other type of business condition as business cycles tend to balance out over time.
  • B. Would most likely be lower than under other business conditions in order that the company can maximize profits while minimizing working capital investment.
  • C. Would most likely be higher than under other business conditions so that there will be sufficient funds to replenish assets.
  • D. Would most likely be higher than under other business conditions as the companys profits are increasing.
  • Correct Answer: Option
    B

Which one of the following would increase the net working capital of a firm?

  • A. Cash payment of payroll taxes payable.
  • B. Purchase of a new plant financed by a 20-year mortgage.
  • C. Cash collection of accounts receivable.
  • D. Refinancing a short-term note payable with a 2-year note payable.
  • Correct Answer: Option
    D

Mason Companys board of directors has determined 4 options to increase working capital next year. Option 1 is to increase current assets by $120 and decrease current liabilities by $50. Option 2 is to increase current assets by $180 and increase current liabilities by $30. Option 3 is to decrease current assets by $140 and increase current liabilities by $20. Option 4 is to decrease current assets by $100 and decrease current liabilities by $75. Which option should Mason choose to maximize net working capital?

  • A. Option 1.
  • B. Option 2.
  • C. Option 3
  • D. Option 4
  • Correct Answer: Option
    A

During the year, Mason Companys current assets increased by $120,000, current liabilities decreased by $50,000, and net working capital

  • A. Increased by $70,000.
  • B. Did not change.
  • C. Decreased by $170,000.
  • D. Increased by $170,000.
  • Correct Answer: Option
    D

All of the following statements in regard to working capital are true except

  • A. Current liabilities are an important source of financing for many small firms.
  • B. Profitability varies inversely with liquidity.
  • C. The hedging approach to financing involves matching maturities of debt with specific financing needs.
  • D. Financing permanent inventory buildup with long-term debt is an example of an aggressive working capital policy.
  • Correct Answer: Option
    D

Determining the appropriate level of working capital for a firm requires

  • A. Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets.
  • B. Changing the capital structure and dividend policy for the firm.
  • C. Maintaining short-term debt at the lowest possible level because it is ordinarily more expensive than long-term debt.
  • D. Offsetting the profitability of current assets and current liabilities against the probability of technical insolvency.
  • Correct Answer: Option
    D