25 Pages
Chap003

Course: MBA acc, Fall 2013

School: SUNY Buffalo

Word Count: 7959

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# the cash method of accounting for his sole proprietorship. In late December he performed \$20,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 30 percent this year and will be 40 percent next year, and that he can earn an after-tax rate of return of 12 percent on his investments. Should Hank send his client the bill in...

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cash the method of accounting for his sole proprietorship. In late December he performed \$20,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 30 percent this year and will be 40 percent next year, and that he can earn an after-tax rate of return of 12 percent on his investments. Should Hank send his client the bill in December or January? Option 1: Send the \$20,000 bill in December: \$20,000 taxable income x 30 percent marginal tax rate = \$6,000 in present value tax After-tax income = Pretax income Present Value Tax = \$20,000 \$6,000 = \$14,000 14 Chapter 3 - Tax Planning Strategies and Related Limitations Option 2: Send the \$20,000 bill in January: \$20,000 taxable income x 40 percent marginal tax rate = \$8,000 in tax in one year. Present Value of Tax = \$8,000 x .893 (Discount Factor, 1 Year, 12 percent) = \$7,144 After-tax income = Pretax income Present Value Tax = \$20,000 \$7,144 = \$12,856 Sending the \$20,000 bill in December is the clear winner. (39) [LO2, LO3 PLANNING] Using the facts from the previous problem, when should Hank send the bill if he expect his marginal tax rate to be 33 percent next year? 25 percent next year? If the tax rate next year is 33 percent instead of 40 percent, Option 2 changes as follows: Option 2: Send the \$20,000 bill in January: \$20,000 taxable income x 33 percent marginal tax rate = \$6,600 in tax in one year. Present Value of Tax = \$6,600 x .893 (Discount 1 Factor, Year, 12 percent) = \$5,893.80 After-tax income = Pretax income Present Value Tax = \$20,000 \$5,893.80 = \$14,106.20 Sending the \$20,000 bill in January would be preferred. If the tax rate next year is 25 percent instead of 40 percent, Option 2 changes as follows: Option 2: Send the \$20,000 bill in January: \$20,000 taxable income x 25 percent marginal tax rate = \$5,000 in tax in one year. Present Value of Tax = \$5,000 x .893 (Discount Factor, 1 Year, 12 percent) = \$4,465.00 3-15 Chapter 3 - Tax Planning Strategies and Related Limitations After-tax income = Pretax income Present Value Tax = \$20,000 \$4,465.00 = \$15,535.00 Sending the \$20,000 bill in January would be preferred. (40) [LO3] Geraldo recently won a lottery and chose to receive \$100,000 today instead of an equivalent amount in ten years, computed using an 8 percent rate of return. Today, he learned that interest rates are expected to increase in the future. Is this good news for Geraldo given his decision? This is good news for Geraldos decision. If Geraldo chose to defer the \$100,000 at an 8 percent interest rate, the increase in interest rates would have reduced the present value of the lottery winnings. The equivalent amount in 10 years at 8 percent is approximately \$216,00. If this amount was discounted back to present value at 10 percent (instead of 8 percent), the present value would be only about \$83,000. (41) [LO3 PLANNING] Assume Rafael can earn an 8 percent after-tax rate of return. Would he

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in the time domain should have a correspondence in the frequency domain. This happens to be the case. If f (t) = f1 (t)f2 (t),vv||e-Text Main Menu| Textbook Table of Contents |Problem Solving Workbook ContentsCHAPTER 17h(t) AFour
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Delta State - BIO - 100
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Delta State - BIO - 100
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Delta State - BIO - 100
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Delta State - BIO - 100
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Delta State - BIO - 100
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Delta State - BIO - 100
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Delta State - BIO - 100
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