Reference no: EM1312308

Multiple choice questions related to book value and reinsurance

1. On July 1, Year 1, P&G Company purchased $24,000 of equipment. On December 31st Year 6, the equipments accumulated depreciation totaled $20,000 and the company sold the equipment for $7,000. Based on this information:
a.The company would recognize a $4,000 gain.
b.The sale would result in a $3,000 increase in total assets.
c.The comapny would report a $4,000 cash outflow.
d.Both (a) and (b)
e.All of above.
2. XYZ Insurance Company's Year 1 premiums written and policy acquisition costs are $1,600,000 and $300,000 respectively. Since the policies cover July 1, Year 1 through June 30, Year 2, half the premiums are earned by the end of Year 1. The Year 1 loss and loss adjustment expense reserves incurred total $600,000. The insurer purchased pro rata reinsurance immediately upon writing the policies and ceded 80% of the premium, losses, and loss adjustment expenses to a reinsurer. The reinsurer paid the insurer a 20% ceding commission.
Compute the ceding commission. Select answer from below:
a.$233,000
b.$208,000
c.$160,000
d.$256,000
e.$300,000

Compute the surplus relief generated from the reinsurance transaction
a.$576,000
b.$295,000
c.$422,000
d.$258,000
e.None of above

3. Since the company's inception in Year 1, TUV Company has always had 1,000 shares of $10 par value common stock and 1,000 shares of 10% preferred stock with a $100 par value per share. The preferred stock is cumulative. TUV Company declared and paid the following dividends:
Year 2000 Dividend $6,000
Year 2001 Dividend $8,000
Year 2002 Dividend $20,000
The amount of dividends received by the common shareholders during Year 3 is:
a.$10,000
b.$2,000
c.$0
d.$4,000
e.$5,000

4. At the end of the accounting period, RST Company had the following account balances:
Cash......$17,000
Common Stock.......$2,000
Retain earnings.....?
Paid in capital in excess of par.....$8,000
Treasury stock....$1,000
Unearned revenue......$4,000
RST Company had no other accounts with non-zero balances. If RST Company's total stockholders' equity is $15,000, then its paid in retained earnings account balance is:
a.$2,000
b.$4,000
c.$3,000
d.$6,000
e.$5,000

5. Which of the following is a factor is least likely to constrain an insurer's ability to increase premium volume?
a.Variability in underwriting experience
b.The amortization of bond premiums and/or discounts
c.immediate expensing of policy acquisition expenses
d.variability on investment experience
e.none of the above