IA3 1 (O

A company acquired a new machine and immediately deducted the entire cost on its current income tax return because of favorable tax depreciation rules. The company uses straight-line depreciation for financial statement purposes.

Which outcome will result from this decision?

An increase in taxes payable in future years as a result of temporary differences

What is income tax payable?

A company liability, based on profitability, to be paid to the government

When should a company create a valuation allowance for a deferred tax asset?

When there is more than a 50% probability that a company will fail to realize a portion of the asset

Which statement describes the concept of cherry-picking?

Selling debt securities that go up in value and keeping debt securities that go down in value

Company A has significant influence by owning 50,000 of the 100,000 shares of Company B common stock. During the current year, Company B earns $700,000 and pays cash dividends of $400,000.

Which amount represents the resulting increase in the equity investment account?

$150,000

How should deferred taxes be presented on the balance sheet?

As noncurrent elements of assets and liabilities

A company has income before income taxes of $879,000 for the current year. The current provision for income taxes is $140,000, and the provision for deferred income taxes is $50,000.

Which amount should be recorded as this company’s net income for the year?

$689,000

A company holds between 20% and 50% of the outstanding stock of an investee, gaining a significant influence over the investee.

Which statement accurately characterizes this company’s situation?

The investor records the proportionate share of the investor’s net income

An investor is using the equity method of accounting for investments and needs to determine at which point of the dividends of the investee should be recognized.

Which event will cause the company to make this recognition?

The investee declaring a dividend

Kretsmart has significant influence by owning 40,000 of the 100,000 outstanding shares of Jaunty Coffee Co. common stock. During the current year, Jaunty Coffee Co, earns $640,000 and pays cash dividends of $480,000.

Which amount represents the resulting increase in the Equity investments account?

$64,000

On August 1, Year 1, Company A acquired $1,500,000 face value 8% bonds of Company B at 105 plus accrued interest. The bonds were dated May 1, Year 1 and will mature on April 30, Year 6, with interest payable each October 31 and April 30. The bonds will be held to maturity.

Which amount should Company A report in the debt investments account to record the purchase of the bonds on August 1, Year 1?

$1,575,000

Corporation A has controlling interest in Corporation B. 

Which relationship is the investor?

Parent

During Year 1, Company A purchased 50,000 shares of Company B common stock for $430,000. The fair value of these shares was $505,000 at December 31, Year 1. During Year 2, Company A sold all the Company B stock for $445,000.

Which amount should be recorded for the sale of stock in Year 2 for Company A?

$60,000 loss

When may a company use a tax rate that is different than the current tax rate to calculate deferred income tax?

When an enacted tax rate is expected to apply in future years

Which difference will increase a company’s deferred tax liability?

Expenses or losses that are tax deductible before they are recognized in financial income

How should a change in tax rate that is enacted into law be reflected in existing deferred income tax accounts?

By reflecting it in net income for the period in which the tax rate change was enacted

Where should unrealized holdings gains or loses be recognized, if at all, for available for sale securities?

Recognized as other comprehensive income

What is the maximum holding period that will allow a company to classify a security as a trading security?

Three months