Chapter 5
Multiple Choice Questions
1. The noncash expense item on a bank's Report of Income designed to shelter a bank's
current earnings from taxes and to help prepare for bad loans is called:D
A) Short-term debt interest
B) Noninterest expense
C) Provision for taxes
D) Provision for possible loan losses
E) None of the above.
2．Banks depend heavily upon borrowed funds supplied by customers with little owners' capital invested. This means that banks make heavy use of: A
A) Financial leverage
B) Capital restructuring
C) Operating Leverage
D) Margin borrowing
E) None of the above.
3. Large U.S. banks must use which of the methods listed below to determine their
provision for loan loss expense? C
A) Experience method
B) Reserve method
C) Specific charge-off method
D) Historical cost method
E) None of the above.
4. A bank's temporary lending of excess reserves to other banks is labeled on the
balance sheet as: B
A) Fed Funds Purchased
B) Fed Funds Sold
C) Money Market Deposits
D) Securities Purchased for Resale
E) None of the above
market. Which two accounts on the bank's balance sheet are going to be affected?
D
A) Retained earnings and capital surplus accounts
B) Subordinated notes and debentures and commons stock outstanding accounts
C) Retained earnings and common stock outstanding accounts
D) Common stock outstanding and capital surplus accounts
E) Only the common stock outstanding account is affected
6. A bank which starts with ALL of $1.48 million at the beginning of the year, charges
off worthless loans of $.94 million during the year, recovers $.12 million on loans previously charged off and charges current income for a $1.02 million provision for loan losses will have an ALL at the end of the year of: B
A) $.66 million
B) $3.32 million
C) $1.68 million
D) $1.28 million
E) The same amount as at the beginning of the year
7. A bank that has total interest income of $67 million and total noninterest income of
$14. million. This bank has total interest expenses of $35 million and total
noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net income? A
A) $7
B) -$14
C) $18
D) $32
E) None of the above
8.You know the following information about the Miller State Bank
Gross Loans $300
Miscellaneous Assets $50
Deposits $390
Total Equity $50
Common Stock Par $5
NonDeposit Borrowings $60
Investment Securities $150
Net Premises $40
Surplus $5
Allowance for Loan Losses $50
Deposits $390
Total Assets $500
Gross Premises $70
Given this information, what is this firm’s Net Loans?A
A) $250
B) $350
C) $500
D) $50
E) $150
9.You know the following information about the Davis National Bank
Total Interest Expenses ($500)
Total Non Interest Income $100
Securities Gains (Losses) $ 50
Income Taxes ($ 80)
Dividends to Stockholders ($ 40)
Total Interest Income $800
Total Non Interest Expenses ($150)
Provision for Loan Losses ($100)
Given this information, what is this firm’s Net Income? D
A) $300
B) $150
C) ($50)
D) $120
E) $80
10.You know the following information about the Webb State Bank
Accumulated Depreciation $40
Net Loans $600
Fed Funds Purchased and Repurchase Agreements $200
Cash and Due from Banks $50
Trading Account Securities $40
Miscellaneous Assets $100
Deposits $500
Undivided Profits $140
Gross Premises $90
Surplus $40
Subordinated Debt $100
Investment Securities $160
Common Stock Par $20
Gross Loans $700
Given this information, what is this firm’s Total Assets? A
A) $1000
B) $300
C) $800
D) $200
E) $500
Problems
5-4If you know the following figures:
Gross Loans 300 Trading Account Securities 2 Allowance for Loan Losses 15 Other Real Estate Owned 4 Federal Funds Sold 26 Goodwill and other Intangibles 3 Common Stock 12 Total Liabilities 380 Surplus 19 Preferred Stock 3 Total Equity Capital 49 Nondeposit Borrowings 20 Cash and Due from Banks 9 Bank Premises and Equipment, Net 29 Miscellaneous Assets 38
Bank Premises and Equipment, Gross 34
Please calculate these items:
Total Assets
Net Loans
Undivided Profit
Investment Securities
Depreciation
Total Deposits
5-5.Hokie High Bank has Gross Loans of $550 million with an ALL account of $30 million. Two years ago the bank made a loan for $10 million to finance the Hokie Hotel. One million dollars
in principal was repaid before the borrowers defaulted on the loan. The Loan Committee at Hokie High Bank believes the hotel will sell at auction for $7 million and they want to charge-off the remainder immediately.
a. The dollar figure for Net Loans before the charge-off is ?
b. After the charge-off, what are the dollar figures for Gross Loans, ALL and Net Loans assuming no other transactions.
c. If the Hokie Hotel sells at auction for $8 million, how with the affect the pertinent balance
sheet accounts?
5-9. See if you can determine the amount of Rosebush State Bank’s current net income after taxes
from the figures below (stated in millions of dollars) and the amount of its retained earnings from current income that it will be able to reinvest in the bank. (Be sure to arrange all the figures given in correct sequence to derive the bank’s Report of Income.)
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