During Its First Year of Operations a Company Recorded Accrued

question 26

Multiple Choice

During its first year of operations a company recorded accrued expenses totaling $375,000 for book purposes.For tax purposes,$175,000 of the expenses are deductible during the first year of operations and $200,000 are deductible during the second year of operations.The enacted income tax rate was 40% during the first year of operations and 45% during the second year of operations.The balance sheet at the end of the first year of operations will report a deferred tax

• A)asset of $80,000.
• B)liability of $80,000.
• C)liability of $90,000.
• D)asset of $90,000.

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Definitions:

M&M Proposition I

Modigliani and Miller's principle suggesting the irrelevance of financial leverage on a company's valuation in an ideal market.

Debt-Equity Ratio

A calculation of a firm's financial leverage determined by dividing its overall liabilities by the equity of its shareholders.

Interest Tax Shield

The reduction in income taxes that results from the deductibility of interest payments from taxable income.

Capital Structure

The combination of debt and equity financing that a company uses to fund its operations and growth.