In the Previous Year, a Firm Failed to Record Premium

question 31

Multiple Choice

In the previous year, a firm failed to record premium amortization of $40,000 and $30,000, respectively, on its bonds payable and held to maturity bond investments. These errors affect both income before tax and taxable income. The firm's tax rate is 30%. As a result of this error, net income was:

• A) Understated by $7,000.
• B) Overstated by $7,000.
• C) Understated by $33,000.
• D) Overstated by $33,000.

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Definitions:

Secret Formula

A proprietary and confidential composition or recipe that gives a product its unique characteristics and is closely guarded to maintain a competitive advantage.

Joint Stock Company

a business entity in which shares of the company's stock can be bought and sold by shareholders.

Partnership Agreement

A binding contract between partners that outlines the rules, responsibilities, and financial arrangements of their partnership.

Transferable Share

A share in a company that can be transferred from the current owner to another party without restrictions.