Assume That a Company Has Earned Income During the Year

question 8

Multiple Choice

Assume that a company has earned income during the year, and has not yet paid any income taxes. At the end of the year, what entry, if any, should be recorded using accrual accounting to reflect the fact that the company will have to pay taxes on the income it has earned?

• A) No entry is needed, since no cash payment has yet been made.
• B) An entry reducing an asset, increasing an expense, and decreasing equity
• C) An entry increasing a liability, increasing an expense, and decreasing equity
• D) An entry decreasing a liability, increasing an expense, and reducing equity

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Definitions:

Depository Institution

A financial institution that accepts deposits from individuals and provides loan services.

Investment Bank

A financial institution that provides advisory services, financing, and investment services to individuals, corporations, and governments.

Short-term Debt Securities

Financial instruments that represent borrowed funds which must be repaid within a short time frame, typically less than one year.

Money Markets

Financial markets for short-term borrowing and lending, dealing with assets that have high liquidity and short maturities.