Test Questions Flashcards
The financial statements of the Acme Manufacturing Corporation contain the following information:
Current assets: $20 million
Fixed assets: $52 million (of which $8 million represents the book value of a mechanical lathe)
Current liabilities: $6 million
Long-term debt: $19 million of 5% debentures due 2049, callable at 102
Common stock: $18 million (1.8 million shares of $10 par)
Paid-in capital: $7 million
Retained earnings: $22 million
Acme decides to call in $5 million of the debentures. This will result in all of the following except:
A) a decrease to net worth. B) a decrease to working capital. C) a decrease to current liabilities. D) a decrease to long-term debt.
C) a decrease to current liabilities.
-Does not decrease current liabilities
“The key fact is that the call price is 102, a premium over the par value. That means for each $1,000 of long-term debt taken off the books, Acme has to spend $1,020. This has no effect on the current liabilities. However, the current assets (cash) decrease leading to a decrease in working capital, as well as net worth. When $5 million of debt is called in, the remaining long-term debt is reduced to $15 million.”
On January 18, your customer sold 500 shares of MNO for a loss of $5 per share. If on March 1 she bought 3 MNO calls, how much of the loss could she declare for tax purposes?
A) None B) $2,500 C) $1,500 D) $1,000
B) $2,500
-More than 30 days, can declare entire loss
“Because the purchase of the calls took place more than 30 days after the sale, the transaction is not a wash sale. She may therefore declare the entire $2,500 as a loss.”
Your customer wants to know what portion of earnings one of the companies held in her portfolio has available to pay interest expense on bonds the company currently has outstanding. You would be able to find this information
A) on the firm's most recent balance sheet. B) on a firm's income statement by subtracting preferred dividends from EBIT. C) by contacting the IRS. D) on the firm's income statement indicated as earnings before interest and taxes (EBIT).
D) on the firm’s income statement indicated as earnings before interest and taxes (EBIT).
“EBIT is the amount of money a company has retained before paying taxes and interest on outstanding debt issues. This can be found by looking at the income statement for the company.”
A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is
A) $11,750. B) $25,200. C) $18,000. D) $16,450.
d) $16,450
> basically 35% tax on deferred growth
25% income tax + 10% penalty
Younger than 59.5
“Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $47,000.”
A 38-year-old investor places $25,000 into a single premium qualified deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor withdraws $50,000. If the investor is in the 25% marginal income tax bracket, the total tax liability is
A) $16,450. B) $12.500. C) $17,500. D) $11,750.
c) $17,500
> because QUALIFIED annuity, entire withdrawal taxable
“Because this is a qualified annuity, the entire withdrawal is taxable. In this case, it is all $50,000. That $50,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $50,000.”
Having a five-year-old child, a couple wants to begin saving for her college education. They can currently budget $350 per month toward the goal. They know that college costs 13 years in the future need to be factored, but they are not too comfortable with market risk. Which would best align with their profile?
A) Variable annuity plan B) Coverdell Education Savings Account (ESA) C) Money market mutual fund D) 529 prepaid tuition plan
D) 529 prepaid tuition plan
> They want to contribute more than Coverdell ESA would allow
Coverdell ESAs and Section 529 plans are the only choices here specifically associated with saving for education. Because the Coverdell ESA can only accept $2,000 per child, per year, and the couple can currently invest more than twice that amount, the 529 plan is the better choice. Additionally, being concerned about inflation and not comfortable with market risk, investing in a 529 prepaid tuition plan enables them to purchase tomorrow’s tuition at today’s prices
A municipal bond, issued with a covenant that states, “If revenue collections are not sufficient to meet debt service requirements, the issue will be backed by the full faith and credit of the municipality,” is known as
A) a moral obligation bond. B) a double-barreled bond. C) a contingent liability bond. D) a Section 8 bond.
B) double barreled bond
When a municipal bond is backed by both a source of revenue and the taxing ability of the issuer, this is referred to as a double-barreled bond.
A client of your member firm dies. In correct order, you should
freeze the account.
accept orders from the executor.
obtain the death certificate and other legal documents.
cancel all open orders.
A) II, III, IV, I B) I, IV, III, II C) IV, I, III, II D) III, IV, I, II
C)
IV, I, III, II
Explanation
Upon the death of a client, all open orders must be canceled. The account is then frozen until proper legal documentation is received. Once that has occurred, the executor may begin conducting activity in the account.
A direct participation program shows the following operations results:
Revenues: $3 million Operating expense: $1 million Interest expense: $200,000 Management fees: $200,000 Depreciation: $3 million The profit or loss for the year is
A) a profit of $2.7 million. B) a loss of $3 million. C) a profit of $1.6 million. D) a loss of $1.4 million.
D) loss of 1.4 mil
>depreciation included
“Explanation
Taxable income for a partnership is determined as follows:
Gross revenue: $3 million
less operating expense: $1.2 million
equals net revenue: $1.8 million
less interest: $200,000
less depreciation: $3 million
equals taxable loss: $1.4 million
LO 11.g”
T/F: When equity is between the initial (50% of long market value [LMV]) requirement and the maintenance requirement (25% of LMV), an account is described as restricted.
True
When equity between initial and maintenance, account is restricted
A 38-year-old investor places $25,000 into a qualified single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is
A) $11,750. B) $18,000. C) $16,450. D) $25,200.
D) $25,200
> because qalified annuity, entire withdrawl is taxable
“Because this is a qualified annuity, the entire withdrawal is taxable. The surrender value of $72,000 has a cost basis of $0.00. That $72,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $72,000.”
T/F: For qualified annuities, the entire withdrawl is taxable
True
etire thing taxable
T/F: When withdrawing from a single premium deferred variable annuity, the entire withdrawl is taxable
True
> qualified annuities are fully taxed at withdrawl
T/F: when withdrawing from a deferred variable annuity, growth is taxable but cost basis is not
False
entire withdrawl is taxed
> deferred variable annuity is qualified so whole thing taxable
The Trade Reporting and Compliance Engine (TRACE) is a trade reporting system used to report certain bond trades to the public. Trade details must be reported to FINRA via TRACE no later than
A) 15 minutes after the order entry. B) 10 seconds after the trade execution. C) 10 seconds after the order entry. D) 15 minutes after the trade execution.
D) 15 min after execution
Explanation
Trade details must be reported to FINRA using the TRACE reporting system as soon as practical but not later than 15 minutes after execution. Once FINRA receives the trade information, it will be reported to the public immediately. The MSRB’s Real-Time Transaction Reporting System (RTRS) also has a 15-minute reporting time
