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Income Taxes and Stock Transactions

1. McDowell Corp has an income tax rate of 35%, taxable income of $662,000, and income before income tax of $597,000. Which of the following would be included in the entry to record income tax expense?
a. Prepaid income tax is credited for $231,700
b. Income tax payable is credited for $208,950
c. Income tax expense is debited for $208,950
d. Deferred tax liability is credited for $22,750

2. If a corporation has outstanding 1,000 shares of $9 cumulative preferred stock of $100 par and dividends have not been paid for the preceding three years what is the amount of preferred dividends that must be declared in the current year before a dividend can be declared on common stock?
a. $9,000
b. $27,000
c. $18,000
d. $36,000

3. If a corporation reacquires its own stock, the stock is listed on the balance sheet in the?
a. Current assets section
b. stockholders section
c. stockholders equity section
d. current liabilities section
e. other assets section

4. When a company "passes the dividend", the dividends are said to be:
a. preferred
b. in arrears
c. cumulative
d. declared

Solution Preview

1. McDowell Corp has an income tax rate of 35%, taxable income of $662,000, and income before income tax of $597,000. Which of the following would be included in the entry to record income tax expense?

The entry would be:

Income tax expense 208,950 ($597,000*.35)
Deferred income tax (asset) 22,750 ($231,700-$208,950)
Income tax payable 231,700 ($662,000*.35)

Thus, answer b is correct.

2. If a corporation has outstanding 1,000 shares of $9 cumulative preferred stock ...

Solution Summary

This solution answers four questions:

(1) Given a company's book and tax income, as well as its income tax rate, what will the entry to record the transaction contain?

(2) If a corporation has outstanding shares of cumulative preferred stock and dividends have not been paid for the preceding three years what is the amount of preferred dividends that must be declared in the current year before a dividend can be declared on common stock?

(3) If a corporation reacquires its own stock, where on the balance sheet is the stock is listed?

(4) What has happened to dividends when a company "passes the dividend"?

$2.19