4. The rationale for interperiod income tax allocation is to
a. recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date.
b. recognize a distribution of earnings to the taxing agent.
c. reconcile the tax consequences of permanent and temporary differences appearing on the current year's financial statements.
d. adjust income tax expense on the income statement to be in agreement with income taxes payable on the balance sheet.
11. In accounting for investments in debt securities that are classified as trading securities,
a. a discount is reported separately.
b. a premium is reported separately
c. any discount or premium is not amortized.
d. none of these.
14. Tax rates other than the current tax rate may be used to calculate the deferred income tax on the balance sheet if
a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
d. it appears likely that a future tax rate will be less than the current tax rate.
16. Which of the following is correct about the effective interest method of amortization?
a. The effective interest method applied to investments in debt securities is different from that applied to bonds payable.
b. Amortization of a discount decreases from period to period.
c. Amortization of a premium decreases from period to period.
d. The effective interest method produces a constant rate of return on the book value of the investment from period to period.
19. The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding
a. increases common stock outstanding and increases total stockholders' equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not change total stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.
Lansing Co. at the end of 2004, its first year of operations, prepared reconciliation between pretax financial income and taxable income as follows:
Pretax financial income $900,000
Estimate litigation expense $1,200,000
Extra depreciation for taxes -$1,800,000
Taxable income $300,000
The estimated litigation expense of $1,200,000 will be deductible in 2005 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $600,000 in each of the next three years. The income tax rate is 30% for all years.
20. Income tax payable is
b. B. $90,000
c. C. $180,000
d. D. $270,000
21. Fynn company reported the following results for the year ended December 31, 2004, its first year of operations:
Income (per books before income taxes) $350,000
Taxable income 560,000
The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2005. What should Flynn record as a net deferred tax asset or liability for the year ended December 31, 2004, assuming that the enacted tax rates in effect are 40% in 2004 and 35% in 2005?
a. $84,000 deferred tax liability
b. $73,500 deferred tax asset
c. $84,000 deferred tax asset
d. $73,500 deferred tax liability
23. Trey, Inc. reports a taxable and financial loss of $390,000 for 2004. Its pretax financial income for the last two years was as follows:
The amount that Trey, Inc reports as a net loss for financial reporting purposes in 2004, assuming that it uses the carryback provisions and that the tax rate is 30% for all periods affected is
a. $390,000 loss.
c. $117,000 loss
d. $273,000 loss
24. On June 30, 2004, when Vietti Co.'s stock was selling at $65 per share, its capital accounts were as follows:
Capital stock (par value $25; 40,000 shares issued) $1,000,000
Premium on capital stock 600,000
Retained earnings 4,200,000
If a 100% stock dividend were declared and distributed, capital stock would be
25. How much investment income should Glenon report in 2004?
The solution explains various multiple choice questions relating to accounting for deferred tax, investments, stock dividends and contingent liabilities
Multiple choice questions (sample Business Analysis quiz): preferred stock, securities, cash dividends and more...
Can you help me get started on this assignment?
1. The cumulative feature of preferred stock
A) limits the amount of cumulative dividends to the par value of the preferred stock.
B) requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.
C) means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock.
D) enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends.
2. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
A) investor sells the investment.
B) investee declares a dividend.
C) investee pays a dividend.
D) earnings are reported by the investee in its financial statements.
3. Securities which could be classified as held-to-maturity are
A) redeemable preferred stock.
C) municipal bonds.
D) treasury stock.
4. Cash dividends are paid on the basis of the number of shares
D) outstanding less the number of treasury shares.
5. Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are
A) held-to-maturity debt securities.
B) trading debt securities.
C) available-for-sale debt securities.
D) never-sell debt securities.
6. King Co. issued 100,000 shares of $10 par common stock for $1,200,000. King acquired 8,000 shares of its own common stock at $15 per share. Three months later King sold 4,000 of these shares at $19 per share. If the cost method is used to record treasury stock transactions, to record the sale of the 4,000 treasury shares, King should credit
A) Treasury Stock for $76,000.
B) Treasury Stock for $40,000 and Paid-in Capital from Treasury Stock for $36,000.
C) Treasury Stock for $60,000 and Paid-in Capital from Treasury Stock for $16,000.
D) Treasury Stock for $60,000 and Paid-in Capital in Excess of Par for $16,000.
7. During 2007, Cartel Company issued at 104 three hundred, $1,000 bonds due in ten years. One detachable stock warrant entitling the holder to purchase 15 shares of Cartel's common stock was attached to each bond. At the date of issuance, the market value of the bonds, without the stock warrants, was quoted at 96. The market value of each detachable warrant was quoted at $40. What amount, if any, of the proceeds from the issuance should be accounted for as part of Cartel's stockholders' equity?
8. Stock warrants outstanding should be classified as
B) reductions of capital contributed in excess of par value.
D) none of these.
9. Presenting consolidated financial statements this year when statements of individual companies were presented last year is
A) a correction of an error.
B) an accounting change that should be reported prospectively.
C) an accounting change that should be reported by restating the financial statements of all prior periods presented.
D) NOT an accounting change.
10. Recognition of tax benefits in the loss year due to a loss carryforward requires
A) the establishment of a deferred tax liability.
B) the establishment of a deferred tax asset.
C) the establishment of an income tax refund receivable.
D) only a note to the financial statements.
11. Solo Co. purchased $300,000 of bonds for $315,000. If Solo intends to hold the securities to maturity, the entry to record the investment includes
A) a debit to Held-to-Maturity Securities at $300,000.
B) a credit to Premium on Investments of $15,000.
C) a debit to Held-to-Maturity Securities at $315,000.
D) none of these.
12. The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should
A) continue to depreciate the building over the original 50-year life.
B) depreciate the remaining book value over the remaining life of the asset.
C) adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
D) adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
13. Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2007, Marin had net earnings of $300,000 and paid dividends of $30,000. Dane mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?
A) Understate, overstate, overstate
B) Overstate, understate, understate
C) Overstate, overstate, overstate
D) Understate, understate, understate
14. The deferred tax expense is the
A) increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
B) increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
C) increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
D) decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.
15. Which of the following best describes a possible result of treasury stock transactions by a corporation?
A) May increase but not decrease retained earnings.
B) May increase net income if the cost method is used.
C) May decrease but not increase retained earnings.
D) May decrease but not increase net income.
16. On January 1, 2007, Magee Corp. purchased 40% of the voting common stock of Reed, Inc. and appropriately accounts for its investment by the equity method. During 2007, Reed reported earnings of $360,000 and paid dividends of $120,000. Magee assumes that all of Reed's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividend-received deduction. Magee's current enacted income tax rate is 25%. The increase in Magee's deferred income tax liability for this temporary difference is
17. At December 31, 2007, Malle Corp. had the following equity securities that were purchased during 2007, its first year of operation:
All market declines are considered temporary. Fair value adjustments at December 31, 2007 should be established with a corresponding charge against
18. A company uses the equity method to account for an investment. This would result in what type of difference and in what type of deferred income tax?
type of difference defferd tax
a. permanent assets
b. permanent liability
c. temporary assets
d. temporaty liability
19. An executive compensation plan in which the executive may receive compensation in cash, shares of stock, or a combination of both, is known as ______________ plan.
A) a nonqualified stock option
B) a performance-type
C) a stock appreciation rights
D) both a performance-type and a stock appreciation rights
20. Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is
A) the ease with which convertible debt is sold even if the company has a poor credit rating.
B) the fact that equity capital has issue costs that convertible debt does not.
C) that many corporations can obtain financing at lower rates.
D) that convertible bonds will always sell at a premium.
21. When investments in debt securities are purchased between interest payment dates, preferably the
A) securities account should include accrued interest.
B) accrued interest is debited to Interest Expense.
C) accrued interest is debited to Interest Revenue.
D) accrued interest is debited to Interest Receivable.
22. At the December 31, 2007 balance sheet date, Garth Brooks Corporation reports an accrued receivable for financial reporting purposes but NOT for tax purposes. When this asset is recovered in 2008, a future taxable amount will occur and
A) pretax financial income will exceed taxable income in 2008.
B) Garth will record a decrease in a deferred tax liability in 2008.
C) total income tax expense for 2008 will exceed current tax expense for 2008.
D) Garth will record an increase in a deferred tax asset in 2008.
23. The stockholders' equity section of Lawton Corporation as of December 31, 2006, was as follows:
Common stock par value $2 authourized 20,000 shares
issued and outstanding shares 20,000
paid in capital in excess of par 30,000
retained earnings 75,000
On March 1, 2007, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. On March 1, 2007, the fair market value of the stock was $6 per share. For the two months ended February 28, 2007, Lawton sustained a net loss of $10,000.
What amount should Lawton report as retained earnings as of March 1, 2007?
24. On December 1, 2007, Howell Company issued at 103, two hundred of its 9%, $1,000 bonds. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Howell's common stock. On December 1, 2007, the market value of the bonds, without the stock warrants, was 95, and the market value of each stock purchase warrant was $50. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be
25. Adler Corporation has 50,000 shares of $10 par common stock authorized. The following transactions took place during 2008, the first year of the corporation's existence:
Sold 5,000 shares of common stock for $18 per share.
Issued 5,000 shares of common stock in exchange for a patent valued at $100,000.
At the end of the Adler's first year, total paid-in capital amounted to
26. On January 1, 2007, Golden Corporation had 110,000 shares of its $5 par value common stock outstanding. On June 1, the corporation acquired 10,000 shares of stock to be held in the treasury. On December 1, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 16, 2007. What was the impact of the 10% stock dividend on the balance of the retained earnings account?
A) $50,000 decrease
B) $80,000 decrease
C) $88,000 decrease
D) No effect
27. Darby Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into 2,000 shares of common stock (par value $40). At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, and the stock is quoted on the market at $60 per share. If the bonds are converted into common, what is the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds?
28. Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line?
A) The cumulative effect on prior years, net of tax, in the current retained earnings statement
B) Restatement of prior years' income statements
C) Recomputation of current and future years' depreciation
D) All of these are required.
29. A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be
A) the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year.
B) totally eliminated from the financial statements if the amount is related to a noncurrent asset.
C) based on the classification of the related asset or liability for financial reporting purposes.
D) the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.
30. Which of the following differences would result in future taxable amounts?
A) Expenses or losses that are tax deductible after they are recognized in financial income.
B) Revenues or gains that are taxable before they are recognized in financial income.
C) Revenues or gains that are recognized in financial income but are never included in taxable income.
D) Expenses or losses that are tax deductible before they are recognized in financial income.