1.Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December, she received a $55,000 bill from her accountant for consulting services related to her small business. Reese can pay the $55,000 bill anytime before January 30 of next year without penalty. Assume Reese's marginal tax rate is 32 percent this year and 35 percent next year, and that she can earn an after-tax rate of return of 11 percent on her investments.
a. What is the after-tax cost if she pays the $55,000 bill in December?
b. What is the after-tax cost if she pays the $55,000 bill in January? Use Exhibit 3.1. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
c. Should Reese pay the $55,000 bill in December or January?
d. What is the after-tax cost if she expects her marginal tax rate to be 24 percent next year and pays the $55,000 bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.)
2.Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $34,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume Manny’s marginal tax rate is 37 percent this year and next year, and that he can earn an after-tax rate of return of 8 percent on his investments.
a. What is the after-tax income if Manny sends his client the bill in December?
b. What is the after-tax income if Manny sends his client the bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.)
c. Based on requirements a and b, should Manny send his client the bill in December or January?
3.Daniel is considering selling two stocks that have not fared well over recent years. A friend recently informed Daniel that one of his stocks has a special designation, which allows him to treat a loss up to $36,000 on this stock as an ordinary loss rather than the typical capital loss. Daniel figures that he has a loss of $43,200 on each stock. If Daniel’s marginal tax rate is 35 percent and he has $86,400 of other capital gains (taxed at 15 percent), what is the tax savings from the special tax treatment?
4.Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $40,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume Manny’s marginal tax rate is 37 percent this year and next year, and that he can earn an after-tax rate of return of 5 percent on his investments.
a. What is the after-tax income if Manny sends his client the bill in December?
b. What is the after-tax income if Manny sends his client the bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.)
c. Based on requirement a and b, should Manny send his client the bill in December or January?
CH 5
1.Grady received $8,920 of Social Security benefits this year. Grady also reported salary and interest income this year.
What amount of the benefits must Grady include in his gross income under the following five independent situations? (Leave no answer blank. Enter zero if applicable.)
b. Grady files single and reports salary of $23,980 and interest income of $780
Amount to be included
c. Grady files married joint and reports salary of $78,600 and interest income of $680.
Amount to be included
d. Grady files married joint and reports salary of $44,000 and interest income of $880.
Amount to be included
e. Grady files married separate and reports salary of $23,980 and interest income of $780.
Amount to be included
2. Nikki works for the Shine Company, a retailer of upscale jewelry. How much taxable income does Nikki recognize under the following scenarios? (Round your answers to 2 decimal places. Leave no answer blank. Enter zero if applicable.)
a. Nikki buys a diamond ring from Shine Company for $12,300 (normal sales price, $16,550; Shine Company’s gross profit percentage is 40 percent).
Taxable Income
b. Nikki receives a 25 percent discount on jewelry restoration services offered by Shine Company. This year, Nikki had Shine Company repair a set of antique earrings (normal repair cost $735; discounted price $551.25).
Taxable Income
3. Grady is a member of a large family and received the following payments this year. For each payment, determine whether the payment constitutes realized income and determine the amount of each payment Grady must include in his gross income. (Leave no answer blank. Enter zero if applicable.)
a. A gift of $23,200 from Grady’s grandfather.
Is this realized income?
Amount to be included
b. One thousand shares of GM stock worth $184 per share inherited from Grady’s uncle. The uncle purchased the shares for $41 each, and the shares are worth $189 at year-end.
Is this realized income?
Amount to be included
c. A gift of $66,000 of Ford Motor Bonds. Grady received the bonds on October 31, and he received $1,980 of semiannual interest from the bonds on December 31.
Is this realized income?
Amount to be included
d. A loan of $5,800 for school expenses from Grady’s aunt.
Is this realized income?
Amount to be included
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