1. ABC owns 15 percent of XYZ Corporation. What tax benefit does ABC derive from this situation?

A. Seventy percent of the dividends paid by XYZ to ABC is exempt from income taxes.

B. ABC can exclude 30 percent of any XYZ dividends received from its taxable income.

C. ABC receives no tax benefit but XYZ is only taxed on 30 percent of its net income.

D. All dividend income ABC receives from XYZ is tax-exempt.

E. ABC benefits because it is able to treat any XYZ dividends it receives as interest income.

2. Why must some debt be eliminated when a firm enters a lease agreement?

A. Lessors require an increase in equity to offset the lease obligation which is accomplished by replacing other current debt with equity.

B. Leases are all debt which causes an imbalance in the firm’s debt-to-equity ratio.

C. Lessors require lessees to reduce their debt to demonstrate ability to make the lease payments.

D. FASB 13 requires a debt offset equal to the present value of the lease payments.

E. FASB 13 requires lease payments be offset by an equal decrease in debt payments.