Choose the Statement That Correctly Summarizes the Tax Advantage of Raising

question 121

Multiple Choice

Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of ordinary shares:

• A) The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax.
• B) Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible.
• C) A corporation must pay tax on the sales price of shares issued, but is not taxed on the amount received when bonds are issued.
• D) Both interest and dividends paid are deductible in computing taxable income, but since interest must be paid annually, the corporation usually gets a larger tax deduction over the life of the bonds payable.

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Definitions:

Closing Entries

Journal entries made at the end of an accounting period to transfer the balances of temporary accounts to permanent accounts, preparing the accounts for the next period.

Merchandising Business

A type of business that purchases goods and sells them to consumers without changing their form.

Service Business

A business that provides intangible products or services to customers, often involving skilled labor or professional expertise.

Gross Profit

The difference between revenue and the cost of goods sold, before accounting for certain other costs such as operating expenses.