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Accounting for deferred tax, investments, stock dividends

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
a. $0.00
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:
2004
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:

2002 $180,000
2003 240,000

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.
b. $0.00
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

a. $1,000,000
b. $2,600,000
c. $2,000,000
d. $3,200,000

Barry corporation earns $180,000 and pays cash dividends of $60,000 during 2004. Glenon Corporation owns 3,000 of the 10,000 outstanding shares of Barry.

25. How much investment income should Glenon report in 2004?

a. $60,000
b. $54,000
c. $36,000
d. $180,000

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The solution explains various multiple choice questions relating to accounting for deferred tax, investments, stock dividends and contingent liabilities

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