Solutions to Graded Homework 1
Problem 1:
Cash sales
225,000
Municipal bond interest income
0
Cost of goods sold
(45,000)
Cash payments for utilities
(3,500)
Cash payments for rent
(18,000)
Tax depreciation
(40,000)
Political contribution
0
OID income
823
a
Taxable Income
119,323
Tax due
41,763
b
Daniel’s after tax cash flow:
Cash sales
225,000
Interest from City of Austin bonds
3,000
Cost of goods sold
(45,000)
Cash payments for utilities
(3,500)
Cash payments for rent
(18,000)
Tax depreciation
0
Political contribution
(1,000)
OID Income
0
Tax Payment
(41,763)
After Tax Cash Flow
118,737
a
(15,670*.05=783.5; 15,670+783.5=16,423.5; 16,423,5*.05=823).
b
119,323.35=41,763
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Problem 2
1) Corporate bond:
Assuming the interest is received at the end of the six months, the bond
accrues the following after tax earnings
The bond earns $75,000*.065*.5=2,437.5. After taxes she has 2,437.5*(1.33)=1,633.
Or calculate the after tax return as .065*.5*(1.33)=.0218.
2) Municipal bond:
The bond earns $75,000*.04*.5=1,500. Since the interest is tax free after taxes she has $1,500.
Or calculate the after tax return as .04*.5=.02.
3) The stock earns $500*(1.15)=425 plus $75,000*.03*.5*(1.33)=754. 425+754=1,179.
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 Spring '10
 Staff
 Depreciation, Taxation in the United States, Generally Accepted Accounting Principles

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