FOR ORDER THIS AND ANY OTHER COURSE,ASSIGNMENTS,QUIZES,EXAM,TEST BANKS OR SOLUTION MANUALS
CONTACT US AT WHISPERHILLS@GMAIL.COM
Chapter 2—Financial Background
MULTIPLE CHOICE
1. The
income statement is intended to inform the reader of:
|
a.
|
the overall financial condition of the firm at a point
in time
|
|
b.
|
how much the firm has earned during an accounting
period
|
|
c.
|
how much income has been distributed to shareholders
|
|
d.
|
the cash flow generated by the firm over a period of
time
|
ANS: B PTS: 1 NAT: f LOC: k
TOP: Accounting
Systems and Financial Statements
2. Which
of the following does not cause accounting profit and cash flow to differ
|
a.
|
depreciation
|
|
b.
|
sales made on credit
|
|
c.
|
payroll expense
|
|
d.
|
inventory purchased, but not yet sold
|
ANS: C PTS: 1 NAT: f LOC: k
TOP: Accounting
Systems and Financial Statements
3. Differences
between net income and cash flow come from:
|
a.
|
accounts receivable
|
|
b.
|
depreciation
|
|
c.
|
short term securities
|
|
d.
|
a and b
|
ANS: D PTS: 1 NAT: f LOC: k
TOP: Accounting
Systems and Financial Statements
4. The
accounting matching principle dictates that we
|
a.
|
match expenses up with the employees that incur them
|
|
b.
|
prorate the cost of an asset over it's expected
economic life
|
|
c.
|
invoice the customer as soon as the merchandise is produced
|
|
d.
|
all of the above
|
ANS: B PTS: 1 NAT: f LOC: k
TOP: Accounting
Systems and Financial Statements
5. Depreciation,
from an accounting viewpoint, can best be thought of as:
|
a.
|
accounting for the physical deterioration of an asset
|
|
b.
|
writing off assets like patents, trademarks, and
copyrights
|
|
c.
|
matching income produced by the depreciable asset with
the cost of buying it
|
|
d.
|
allocating the cost of the depreciable asset to the
periods in which it gives service
|
ANS: D PTS: 1 NAT: f LOC: k
TOP: Accounting
Systems and Financial Statements
6. Which
of the following causes net income to differ from cash flow?
|
a.
|
depreciation
|
|
b.
|
the purchase of inventory on credit
|
|
c.
|
the sale of merchandise on credit
|
|
d.
|
all of the above
|
ANS: D PTS: 1 NAT: f LOC: k
TOP: Accounting
Systems and Financial Statements
7. Managers
whose bonuses are based on the income of the firm tend to overstate the value
of accounts receivable and inventory with the following result:
|
a.
|
the firm's value is less than it is held out to be
|
|
b.
|
profit is more than it is held out to be
|
|
c.
|
the firm's value is more than it is held out to be
|
|
d.
|
liabilities are less than they are held out to be
|
ANS: A PTS: 1 NAT: k LOC: b
TOP: Accounting
Systems and Financial Statements
8. The
process of totaling all of the transactions for a recent period and bringing a
company's records up to date is referred to as:
|
a.
|
closing the books.
|
|
b.
|
double entry.
|
|
c.
|
ending the period.
|
|
d.
|
starting over.
|
ANS: A PTS: 1 NAT: f LOC: k
TOP: Accounting
Systems and Financial Statements
9. Which
of the following does not appear on the income statement?
|
a.
|
Cost of Goods Sold
|
|
b.
|
Depreciation Expense
|
|
c.
|
Accumulated Depreciation
|
|
d.
|
Earnings Before Interest and Tax
|
|
e.
|
Gross Margin
|
ANS: C PTS: 1 NAT: f LOC: k
TOP: The
Income Statement
10. Holding
all other variables constant, a increase in EAT can be caused by a decrease in:
|
a.
|
Depreciation expense
|
|
b.
|
The cost ratio
|
|
c.
|
The tax rate
|
|
d.
|
Both a and c
|
|
e.
|
a, b, and c are correct.
|
ANS: E PTS: 1 NAT: f LOC: k
TOP: The
Income Statement
11. Holding
all other variables constant, an increase in COGS will lead to:
|
a.
|
a decreased cost ratio
|
|
b.
|
a higher gross margin
|
|
c.
|
lower net income or EAT
|
|
d.
|
paying more in taxes
|
ANS: C PTS: 1 NAT: f LOC: k
TOP: The
Income Statement
12. The
income statement line item that shows the performance of operating activities
without consideration of financing is
|
a.
|
Net Income
|
|
b.
|
EBIT
|
|
c.
|
EBT
|
|
d.
|
Total Assets
|
ANS: B PTS: 1 NAT: f LOC: k
TOP: The
Income Statement
13. EBIT
is also called:
|
a.
|
net profit
|
|
b.
|
operating profit
|
|
c.
|
pretax profit
|
|
d.
|
gross profit
|
ANS: B PTS: 1 NAT: f LOC: k
TOP: The
Income Statement
14. Which
of the following equations is correct?
|
a.
|
Dividends = Net income - Change in Retained Earnings
|
|
b.
|
Dividends = Net income + Change in Retained Earnings
|
|
c.
|
Dividends = Change in Retained earnings - Net income
|
|
d.
|
none of the above
|
ANS: A PTS: 1 NAT: c LOC: k
TOP: Income
Statement
15. Which
of the following is not included in the calculation of current assets?
|
a.
|
Accruals
|
|
b.
|
Accounts Receivable
|
|
c.
|
Allowance for Doubtful Accounts
|
|
d.
|
Cash
|
|
e.
|
Inventory
|
ANS: A PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
16. Which
of the following does not appear on the right hand side of the balance sheet?
|
a.
|
Current Liabilities
|
|
b.
|
Accounts Receivable
|
|
c.
|
Retained Earnings
|
|
d.
|
Long Term Debt
|
|
e.
|
Total Equity
|
ANS: B PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
17. Net
working capital can be referred to as:
|
a.
|
total assets minus current liabilities
|
|
b.
|
current assets minus total liabilities
|
|
c.
|
cash minus current liabilities
|
|
d.
|
current assets minus current liabilities
|
ANS: D PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
18. When
an account is determined to be uncollectible, "writing off" the bad
debt usually involves:
|
a.
|
reducing the receivables balance and the bad debt
reserve by the amount of the account
|
|
b.
|
writing a letter to the customer demanding payment
|
|
c.
|
"expensing" the amount deemed uncollectible
|
|
d.
|
all of the above
|
ANS: A PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
19. Inventory
in a manufacturing firm differs from that in a retailing company because it
includes
|
a.
|
an additional category referred to as materials
|
|
b.
|
finished goods inventory
|
|
c.
|
"work in process" inventory
|
|
d.
|
all of the above
|
ANS: C PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
20. The
procedure for a payroll accrual requires identifying the portion of the payroll
that falls after the payday but within the accounting period, and:
|
a.
|
paying employees that amount.
|
|
b.
|
recording the amount as an unusual cost
|
|
c.
|
providing for both the expense and the liability for
the unpaid payroll with an accrual entry when the books a closed
|
|
d.
|
preparing a supporting note on the financial statement
as to the amount of the unpaid payroll
|
ANS: C PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
21. Accounting
accruals are important in
|
a.
|
accounting for depreciation
|
|
b.
|
providing for unpaid payroll, rent, interest, and other
expenses that relate to the current accounting period
|
|
c.
|
drawing checks on the last day of the current
accounting period to properly reflect expense in that period
|
|
d.
|
providing for bad debts that may eventually be deemed
uncollectible
|
ANS: B PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
22. The
net book value of an asset is
|
a.
|
Original cost less the current year's depreciation
expense.
|
|
b.
|
Original cost less accumulated depreciation.
|
|
c.
|
Current market value of the asset less associated
selling expense.
|
|
d.
|
Current market value of the asset.
|
ANS: B PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
23. Which
of the following will increase equity?
|
a.
|
An increase in dividends paid
|
|
b.
|
Issuance of new stock
|
|
c.
|
An increase in retained earnings from net income or EAT
|
|
d.
|
Both b & c
|
|
e.
|
All of the above
|
ANS: D PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
24. The
two forms of equity infusion are
|
a.
|
Long term debt and common stock
|
|
b.
|
Direct investment in the company's stock and the
retention of earnings
|
|
c.
|
Net working capital and accumulated depreciation
|
|
d.
|
Preferred stock and long-term debt
|
|
e.
|
Dividends and retained earnings
|
ANS: B PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
25. Which
of the following would cause a decrease in cash:
|
a.
|
Lengthening the time it takes to collect receivables
from 15 to 30 days.
|
|
b.
|
Selling fixed assets for more than book value
|
|
c.
|
An increase in accrued salaries expense
|
|
d.
|
Paying suppliers in 60 days versus 45 days
|
ANS: A PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
26. When
a receivable is written off as uncollectible, entries will usually be made into
which accounts?
|
a.
|
bad debt reserve
|
|
b.
|
bad debt expenses
|
|
c.
|
accounts receivable
|
|
d.
|
both a and b
|
|
e.
|
both a and c
|
ANS: E PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
27. Inventory
reserve is conceptually similar to:
|
a.
|
bad debt expense
|
|
b.
|
work in process
|
|
c.
|
allowance for doubtful accounts
|
|
d.
|
none of the above
|
ANS: C PTS: 1 NAT: f LOC: k
TOP: The
Balance Sheet
28. During
the last year Alpha Co had Net Income of $150, paid $20 in dividends, and sold
new stock for $40. Beginning equity for the year was $700. Ending Equity was
|
a.
|
$830
|
|
b.
|
$840
|
|
c.
|
$850
|
|
d.
|
$870
|
ANS: D PTS: 1 NAT: c LOC: k
TOP: The
Balance Sheet
29. Uncollected
receivables are normally
|
a.
|
depreciated.
|
|
b.
|
expensed.
|
|
c.
|
not reported.
|
|
d.
|
written off.
|
ANS: D PTS: 1 NAT: f LOC: k
TOP: Balance
Sheet
30. Management
is prone to overstate:
|
a.
|
accounts receivable and inventory.
|
|
b.
|
accounts receivable, but not inventory.
|
|
c.
|
inventory, but not accounts receivable.
|
|
d.
|
neither accounts receivable nor inventory.
|
ANS: A PTS: 1 NAT: b LOC: k
TOP: Balance
Sheet
31. Which
of the following is a consumption tax?
|
a.
|
ad valorem tax
|
|
b.
|
real estate tax
|
|
c.
|
excise tax
|
|
d.
|
personal property tax
|
ANS: C PTS: 1 NAT: f LOC: m
TOP: Taxing
Authorities and Tax Bases
32. The
tax schedule for married couples filing jointly:
|
a.
|
results in less tax than would be paid by a single
person if only one spouse works.
|
|
b.
|
saves on taxes regardless of whether one or both
spouses work
|
|
c.
|
results in most two income families paying more tax
than if they were single
|
|
d.
|
a and c
|
ANS: D PTS: 1 NAT: f LOC: m
TOP: Individual
Income Taxes
33. In
order to compare the yields on municipal and corporate bonds the investor must
restate the yield of either the taxable corporate bond to an after tax basis or
the municipal bond to a pretax equivalent because
|
a.
|
corporate bonds are tax free
|
|
b.
|
municipal bonds are tax free and investors must compare
rates on an equal basis
|
|
c.
|
a municipal bond is typically safer than a taxable
corporate bond
|
|
d.
|
such restatements are not necessary for most taxpayers
|
ANS: B PTS: 1 NAT: f LOC: m
TOP: Personal
Taxes
34. Taxable
income is
|
a.
|
total income excluding exempt items less deductions and
exemptions
|
|
b.
|
gross income less deductions
|
|
c.
|
the sum of everything a person makes.
|
|
d.
|
gross income less state taxes, mortgage interest, and
charitable contributions
|
ANS: A PTS: 1 NAT: f LOC: m
TOP: Personal
Taxes
35. The
marriage penalty refers to
|
a.
|
Married people have less freedom than their single
friends
|
|
b.
|
It generally costs more money to support a family than
two single people
|
|
c.
|
Two-income married couples generally pay more taxes
than they would if they were single and had the same two incomes
|
|
d.
|
Married people generally work harder than single people
|
ANS: C PTS: 1 NAT: f LOC: m
TOP: Personal
Taxes
36. The
relevant tax rate for investment decisions is the
|
a.
|
average rate
|
|
b.
|
lowest rate
|
|
c.
|
marginal rate
|
|
d.
|
effective rate
|
ANS: C PTS: 1 NAT: f LOC: m
TOP: Personal
Taxes
37. Investors
pay federal income taxes on the interest earned on bonds issued by:
|
a.
|
cities.
|
|
b.
|
counties.
|
|
c.
|
states.
|
|
d.
|
the federal government.
|
ANS: D PTS: 1 NAT: f LOC: o
TOP: Personal
Taxes
38. In
addition to raising money, the government uses the tax system to
|
a.
|
Promote a larger and more comprehensive government
authority
|
|
b.
|
Incentivize desirable behavior on the part of taxpayers
|
|
c.
|
Support our position as the world's strongest nation
|
|
d.
|
Keep the nation growing as rapidly as possible
|
ANS: B PTS: 1 NAT: f LOC: m
TOP: Personal/Corporate
Taxes
39. The
corporate tax schedule seems not to be progressive. Which statement is correct.
|
a.
|
The idea of progressive taxes refers only to
individuals, the corporate schedule is intentionally not progressive.
|
|
b.
|
The corporate schedule is indeed not progressive
because the rates do not increase steadily as income increases.
|
|
c.
|
Corporate taxes are progressive because the more money
a corporation makes, the more taxes it pays.
|
|
d.
|
Corporate taxes are conceptually progressive. The ups
and downs in the schedule are designed to take away the benefit of low early
rates for companies with large incomes.
|
ANS: D PTS: 1 NAT: f LOC: m
TOP: Corporate
Taxes
40. Which
of the following best describes how corporations are taxed on dividend income?
|
a.
|
Like individuals, corporations are taxed on all
dividends received.
|
|
b.
|
Seventy percent of dividend income received by
corporations is tax exempt.
|
|
c.
|
Varying amounts of dividend income received by
corporations are tax exempt, depending on the percent of the paying
corporation that the receiving corporation owns.
|
|
d.
|
In order to avoid triple taxation of earnings, dividend
income received by one corporation from another in which it owns stock is
100% tax exempt.
|
ANS: C PTS: 1 NAT: f LOC: m
TOP: Corporate
Taxes
41. The
federal tax system allows firms that have a tax loss in a year to apply the
loss against past and future earnings. The process is referred to as loss
carrybacks and carryforwards and permits the loss to be:
|
a.
|
carried forward for 20 years after having been carried
back evenly over the past two years
|
|
b.
|
carried back or forward for as many as 20 years.
|
|
c.
|
spread evenly over the last two years and evenly over
the next 20 years
|
|
d.
|
carried back two years and forward as many as 20 years.
|
ANS: D PTS: 1 NAT: f LOC: m
TOP: Corporate
Taxes
42. If
a firm that's doing very well pays the same return to equity and debt share
holders, and needs to raise more money, it may be wise to use debt because
|
a.
|
interest is tax deductible resulting in a lower cost to
the firm.
|
|
b.
|
Equity is the less desirable source of capital.
|
|
c.
|
borrowing is always less of an effort than raising
additional equity capital.
|
|
d.
|
all of the above
|
ANS: A PTS: 1 NAT: f LOC: i
TOP: Corporate
Taxes
43. Three
years ago a piece of equipment was purchased for $10,000. Assuming an
eight-year life and straight-line depreciation, financial statements for the
third year will show:
|
a.
|
depreciation expense of $3,000 on the income statement,
and accumulated depreciation of $3,000 on the balance sheet.
|
|
b.
|
depreciation expense of $1,250 on the income statement,
and accumulated depreciation of $3,000 on the balance sheet.
|
|
c.
|
depreciation expense of $1,250 on the income statement,
and accumulated depreciation of $3,750 on the balance sheet.
|
|
d.
|
depreciation expense of $1,250 on the income statement,
and accumulated depreciation of $1,250 on the balance sheet.
|
ANS: C
Annual depreciation: $10,000/8 = $1,250
Accumulated after 3 years: $1,250 _ 3 = $3,750
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: m TOP: Accounting Systems and Financial Statements
44. Selected
accounts are listed below. How much is the firm's operating income?
|
Accrued payroll
|
$ 2,000
|
|
Sales
|
45,000
|
|
Cost of goods sold
|
26,000
|
|
Interest expense
|
1,000
|
|
Expenses (other than interest)
|
8,000
|
|
a.
|
$8,000
|
|
b.
|
$10,000
|
|
c.
|
$9,000
|
|
d.
|
$11,000
|
ANS: D PTS: 1 OBJ: TYPE: Problems
NAT: c LOC: k TOP: The Income Statement
45. Wessel
Corp. plans to sell 1,000 units in 2005 at an average sale price of $45 each.
Cost of goods sold will be 40% of the sale price. Depreciation expense will be
$3,000, interest expense $2,500, and other expenses will be $4,000. Wessel's
tax rate is 20%. What will Wessel Corp's net income be for 2005?
|
a.
|
$ 3,500
|
|
b.
|
$ 6,800
|
|
c.
|
$14,000
|
|
d.
|
$16,400
|
|
e.
|
$28,400
|
ANS: C
($45,000-.4($45,000)-$3,000-$2,500-$4,000) 
(1-.2)=$14,000
(1-.2)=$14,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Income Statement
46. Three
years ago a machine was purchased for $5,000. Assuming a ten-year life and
straight line depreciation with a no salvage value, which of the following will
appear on the income statement and balance sheet respectively after four years?
|
a.
|
depreciation expense of $2,000, accumulated
depreciation of $2,000.
|
|
b.
|
depreciation expense of $500, accumulated depreciation
of $2,000.
|
|
c.
|
accumulated depreciation of $2,000, depreciation
expense of $500.
|
|
d.
|
accumulated depreciation of $500, depreciation expense
of $2,000.
|
|
e.
|
depreciation expense of $1,500, accumulated
depreciation of $500.
|
ANS: B
Annual depreciation: $5,000/10=$500
Accumulated depreciation: $500 ´
4=$2,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: m TOP: The Balance Sheet
47. Gowen,
Inc. began the year with equity of $1,000,000 and 100,000 shares of stock
outstanding. During the year the firm paid a dividend of $1.50 per share.
Year-end equity was $1,100,000. Assuming no other factors impacted equity, what
was Gowen, Inc.'s net income for the year?
|
a.
|
$100,000
|
|
b.
|
$150,000
|
|
c.
|
$200,000
|
|
d.
|
$250,000
|
|
e.
|
$300,000
|
ANS: D
Dividend: $1.50 ´ 100,000=$150,000
$1,100,000=$1,000,000 + Net Income -
$150,000
Net Income = $250,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
48. Albert
Corp. bought a machine for $10,000 thirteen years ago. It has been depreciated
on a straight line basis over a 20 year life with no salvage value. The firm
just sold the machine for $6,000. How much gain/loss should be reported on the
sale.
|
a.
|
$4,000 loss
|
|
b.
|
$2,500 loss
|
|
c.
|
No gain or loss should be recorded
|
|
d.
|
$2,500 gain
|
|
e.
|
$4,000 gain
|
ANS: D
$6,000-($10,000-13´ ($10,000/20)) = $2,500
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
49. The
following items are components of a firm's balance sheet. How much is the
firm's working capital (net working capital)?
|
Cash
|
$ 2,000
|
|
Long-term debt
|
10,000
|
|
Inventory
|
12,000
|
|
Owners' equity
|
62,000
|
|
Accounts payable
|
8,000
|
|
Accruals
|
1,500
|
|
Accumulated depreciation
|
6,000
|
|
Accounts receivable
|
14,000
|
|
a.
|
$14,500
|
|
b.
|
$ 2,500
|
|
c.
|
$18,500
|
|
d.
|
$12,500
|
ANS: C
Current Assets - Current Liabilities:
$2,000+$14,000+$12,000 - $8,000 - $1,500=$18,500
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
50. The
following items are components of a traditional balance sheet. How much is the
total equity of the firm?
|
Long-term debt
|
$ 12,000
|
|
Common stock
|
15,000
|
|
Accounts payable
|
8,000
|
|
Paid in excess
|
6,000
|
|
Accrued interest payable
|
1,500
|
|
Plant and equipment
|
60,000
|
|
Retained earnings
|
28,000
|
|
Accounts receivable
|
22,000
|
|
a.
|
$62,500
|
|
b.
|
$49,000
|
|
c.
|
$93,000
|
|
d.
|
$97,000
|
ANS: B
Sum the equity accounts: $15,000+$6,000+$28,000=$49,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
51. The
following items are components of a traditional balance sheet. How much are the
total assets of the firm?
|
Plant and equipment
|
$ 42,000
|
|
Common stock
|
15,000
|
|
Cash
|
8,000
|
|
Inventory
|
21,000
|
|
Bad debt reserve
|
6,000
|
|
Paid in excess
|
6,000
|
|
Accumulated depreciation
|
28,000
|
|
Accounts receivable
|
22,000
|
|
a.
|
$87,000
|
|
b.
|
$65,000
|
|
c.
|
$59,000
|
|
d.
|
$93,000
|
ANS: C
Sum assets less reserves: $8,000+$21,000+$22,000 -
$6,000+$42,000 - $28,000=$59,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
52. Belvedere,
Inc. has an annual payroll of $250,000. The firm pays employees every two weeks
on Friday afternoon. Last month, the books were closed on the Thursday after
payday. How much is the payroll accrual at the end of the month? (Round to
nearest $)
|
a.
|
$2,852
|
|
b.
|
$3,846
|
|
c.
|
$4,780
|
|
d.
|
$5,119
|
ANS: B
Payroll Accrual = 250,000 ´ (4 days / 260 days) = $3,846
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
53. The
Johnson Company bought a truck costing $60,000 two years ago. The truck's
estimated life was six years at the time of purchase. It was accounted for by
using straight line depreciation with zero salvage value. If the truck was sold
yesterday for $65,000, what is the capital gain that must be reported on the
sale of the truck?
|
a.
|
$20,000
|
|
b.
|
$25,000
|
|
c.
|
$30,000
|
|
d.
|
$35,000
|
|
e.
|
$40,000
|
ANS: B
Book Value of Truck = 60,000 - (2 ´
$10,000) = $40,000
Gain on Sale = $65,000 - 40,000 = $25,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
54. A
firm had a piece of machinery that cost $7,000 when new and has accumulated
$4,500 in depreciation. If the machine is sold for $4,000, which of the
following is true?
|
a.
|
The firm has a taxable gain of $4,000 on the sale of
the machine
|
|
b.
|
The firm has a taxable gain of $1,500 on the sale of
the machine
|
|
c.
|
The firm has a deductible loss of $3,000 on the sale of
the machine
|
|
d.
|
The firm has a taxable gain of $7,000 on the sale of
the machine
|
ANS: B
Book Value = 7,000 - 4,500 = 2,500
Gain on Sale = 4,000 - 2,500 = 1,500
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
55. Grass
Enterprises just closed a good year. It had Sales of $10 million, EBIT of $1
million and Net Income of $500,000. The firm also paid dividends of $150,000
during the year. If Grass started the year with equity of $900,000, what will
it's year ending equity be?
|
a.
|
$1,900,000
|
|
b.
|
$1,400,000
|
|
c.
|
$1,250,000
|
|
d.
|
$850,000
|
ANS: C
Beginning equity + EAT - Dividends = Ending equity
900,000 + 500,000 -150,000 = $1,250,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
56. Exxon
Corp. bought an oil rig exactly 6 years ago for $100,000,000. Exxon depreciates
oil rigs straight line over 10 years assuming no salvage value. The rig was
just sold to British Petroleum for $30,000,000. What Capital Gain/Loss will
Exxon report on this transaction?
|
a.
|
Gain of $30,000,000
|
|
b.
|
Gain of $10,000,000
|
|
c.
|
Loss of $10,000,000
|
|
d.
|
Loss of $30,000,000
|
ANS: C
Book Value = 100,000,000 - (6 ´
10,000,000) = 40,000,000
Loss on Sale = 40,000,000 - 30,000,000 = -$10,000,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
57. Ben
bought an ice cream machine 2 years ago for $8,000. The depreciation life for
ice cream machines is 4 years. Ben uses straight line depreciation and a
convention of taking one-half year's depreciation in the first year. Ben just
sold his machine to Jerry for $6,000. What will be Ben's Capital Gain/(Loss) on
this transaction?
|
a.
|
$1,000
|
|
b.
|
$2,000
|
|
c.
|
$5,000
|
|
d.
|
($2,000)
|
ANS: A
Book Value = 8,000 - (2,000 ´ 1.5) =
5,000
Gain on Sale = 6,000 - 5,000 = $1,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
58. Toys
For U, Inc. just purchased a new asset costing $500,000. The machine will be
depreciated straight-line over a 10-year period using the convention of taking
a half year's depreciation in the first year. Given the following information
about old assets the firm already had, calculate net fixed assets at year end.
|
Gross Fixed Assets
|
$2,000,000
|
|
Accumulated. Depreciation
|
$960,000
|
|
Continuing Annual Depreciation Expense
|
$240,000
|
|
a.
|
$765,000
|
|
b.
|
$925,000
|
|
c.
|
$1,275,000
|
|
d.
|
$1,600,000
|
ANS: C
Total Depreciation for year: $240,000+$25,000=$265,000
|
Fixed Assets
|
Beginning
|
Additions
|
Ending .
|
|
Gross
|
$2,000,000
|
$500,000
|
$2,500,000
|
|
Accum. Depr.
|
960,000
|
265,000
|
1,225,000
|
|
Net
|
$1,040,000
|
$235,000
|
$1,275,000
|
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: The Balance Sheet
59. Selected
financial statement accounts are as follows. How much is the firm's ending
equity?
|
Income for the year
|
$25,000
|
|
Dividends paid
|
6,000
|
|
Beginning equity for the year
|
56,000
|
|
Additional stock sold
|
22,000
|
|
a.
|
$103,000
|
|
b.
|
$97,000
|
|
c.
|
$19,000
|
|
d.
|
$85,000
|
ANS: B
Ending equity = Beginning equity + net income - dividends
+ new stock sold
= $56,000+$25,000 - $6,000+22,000=$97,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: Equity
60. The
Tappan family has taxable income of $50,000. Tax tables indicate that the first
$20,000 of income will be taxed at 24% and all income above $20,000 will be
taxed at 30%. What are the Tappan's marginal and average tax rates?
|
a.
|
Marginal = 29.8%; Average = 30.0%
|
|
b.
|
Marginal = 28.2%; Average = 27.6%
|
|
c.
|
Marginal = 30.0%; Average = 30.0%
|
|
d.
|
Marginal = 30.0%; Average = 27.6%
|
|
e.
|
Marginal = 24.0%; Average = 30.0%
|
ANS: D
($20,000 ´ .24 + $30,000 ´ .3)/$50,000 = 27.6%
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: m TOP: Progressive Tax Systems | Marginal and Average Rates
61. The
following is a listing of tax considerations for a family. How much is the
family's taxable income?
|
3 exemptions
|
$ 3,050
|
per exemption
|
|
Salary
|
45,000
|
|
|
Real estate taxes
|
5,000
|
|
|
Interest from savings account
|
1,500
|
|
|
Interest from municipal bond
|
2,000
|
|
|
Interest on mortgage
|
3,000
|
|
|
Contributions to church
|
1,500
|
|
|
Loss on sale of stock held for 3 years
|
6,000
|
|
a.
|
$25,800
|
|
b.
|
$24,850
|
|
c.
|
$30,800
|
|
d.
|
$24,300
|
ANS: B
$45,000+$1,500 - $5,000 - $3,000 - 1,500 - $3,000 -
$9,150 = $24,850
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: k TOP: Individual Income Taxes
62. The
following tax schedule applies to an individual. Her taxable income is $40,000.
How much is her total tax?
10% of the first $10,000
15% of the next $15,000
25% of the next $10,000
35% of the next $20,000
|
a.
|
$8,500
|
|
b.
|
$10,000
|
|
c.
|
$7,500
|
|
d.
|
$7,000
|
ANS: C
$10,000(.1) + $15,000(.15) + $10,000(.25) + $5,000(.35) =
$7,500
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: m TOP: Personal Taxes
63. The
following is a listing of tax considerations for a family. How much is the
their taxable income?
|
2 exemptions
|
$ 3,050
|
per exemption
|
|
Salary income of husband
|
40,000
|
|
|
Real estate taxes
|
4,000
|
|
|
Interest from savings account
|
800
|
|
|
Interest on mortgage
|
2,800
|
|
|
Contributions to church
|
600
|
|
a.
|
$36,800
|
|
b.
|
$23,200
|
|
c.
|
$27,300
|
|
d.
|
$24,800
|
ANS: C
$40,000+$800 - $4,000 - $2,800 - $600 - $6,100=$27,300
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: m TOP: Individual Income Taxes
64. Assume
a municipal bond is issued by the State of New York. Its yield is stated at 6%.
A taxable corporate bond of equivalent quality is yielding 9%. You are in the
35% tax bracket and your son is in the 10% tax bracket. Which would be the
correct investment strategy for both you and your son?
|
a.
|
you and your son should acquire the municipal bond
|
|
b.
|
your son should acquire the municipal bond, but you
should acquire the corporate bond
|
|
c.
|
you and your son should acquire the corporate bond
|
|
d.
|
your son should acquire the corporate bond, but you
should acquire the municipal bond
|
ANS: D
Your after tax yield on the corporate bond:
9%(.65)=5.85%<6%
Son's after tax yield on the corporate bond:
9%(.90)=8.1%>6%
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: g TOP: Personal Taxes
65. A
corporate bond is yielding 9%. You are in the 35% tax bracket. What is the
after tax yield on the bond?
|
a.
|
5.85%
|
|
b.
|
8.10%
|
|
c.
|
3.90%
|
|
d.
|
12.15%
|
ANS: A
9%(.65)=5.85%
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: g TOP: Personal Taxes
66. Assume
Corporation A owns 51% of Corporation B. If Corporation A received $1,000,000
in dividends from Corporation B, how much would be taxable to Corporation A?
|
a.
|
510,000
|
|
b.
|
800,000
|
|
c.
|
200,000
|
|
d.
|
0
|
ANS: C
Exemption: $1,000,000 (.8)=$800,000
PTS: 1 OBJ: TYPE: Problems NAT: c
LOC: m TOP: Corporate Taxes
67. Depreciation
expense of $2,000.00 will cause:
|
a.
|
Accounts receivable to be reduced by $2,000.00
|
|
b.
|
Cash to be reduced by $2,000.00
|
|
c.
|
Accumulated Depreciation to increase by $2,000.00
|
|
d.
|
Accounts Payable to increase by $2,000.00
|
ANS: C PTS: 1 NAT: c LOC: m
TOP: Balance
Sheet
68. Which
of the following is not part of working capital?
|
a.
|
Accumulated depreciation
|
|
b.
|
Accounts Payable
|
|
c.
|
Accounts Receivable
|
|
d.
|
Inventory
|
ANS: A PTS: 1 NAT: f LOC: m
TOP: Balance
Sheet
69. An
accrual is best defined as:
|
a.
|
A completed transaction that results in a liability
|
|
b.
|
An accumulation of a liability in regard to an
incomplete transaction
|
|
c.
|
A completed transaction that results in an asset
|
|
d.
|
Any liability that has not been paid
|
ANS: B PTS: 1 NAT: f LOC: m
TOP: Balance
Sheet
70. Which
is equivalent to EBIT assuming the firm has no leverage?
|
a.
|
EBT
|
|
b.
|
EAT
|
|
c.
|
EAT + Depreciation
|
|
d.
|
Gross Margin + Depreciation
|
ANS: A PTS: 1 NAT: f LOC: k
TOP: Income
Statement
71. Which
of the following is a tax deductible expense?
|
a.
|
Repayment of the principle portion of a loan
|
|
b.
|
Dividends
|
|
c.
|
The purchase of inventory
|
|
d.
|
Depreciation
|
ANS: D PTS: 1 NAT: f LOC: m
TOP: Income
Statement and Balance Sheet
72. When
must a vendor be paid in full under the terms of 2/10, n. 30?
|
a.
|
10 days from today
|
|
b.
|
On February 10th
|
|
c.
|
On the 30th of the current month
|
|
d.
|
30 days from today
|
ANS: D PTS: 1 NAT: f LOC: m
TOP: Balance
Sheet
73. Retained
earnings are:
|
a.
|
a liability
|
|
b.
|
profits that have not been distributed to shareholders
as dividends
|
|
c.
|
the equivalent of stock
|
|
d.
|
the same as cash
|
ANS: B PTS: 1 NAT: f LOC: m
TOP: Balance
Sheet
74. Which
of the following is not a common tax base?
|
a.
|
income
|
|
b.
|
wealth
|
|
c.
|
marital status
|
|
d.
|
comsumption
|
ANS: C PTS: 1 NAT: f LOC: m
TOP: Tax
Environment
75. If
the state tax rate is 20% and the federal tax rate is 30%, what is the total
effective tax rate?
|
a.
|
34%
|
|
b.
|
50%
|
|
c.
|
44%
|
|
d.
|
37%
|
ANS: C
30% + 20%*(1 - 30%) = 44%
PTS: 1 NAT: c LOC: m TOP: Income taxes
76. Why
would a corporation purchase the stock of another corporation?
|
a.
|
To prevent double taxation of its shareholders
|
|
b.
|
Because dividends received by a corporation are
partially tax exempt
|
|
c.
|
It is equivalent to a tax carried forward
|
|
d.
|
It is equivalent to a tax carried back
|
ANS: B PTS: 1 NAT: f LOC: m
TOP: Corporate
Taxes
TRUE/FALSE
1. The
three most important financial statements are the balance sheet, income
statement, and statement of retained earnings.
ANS: F PTS: 1 NAT: f LOC: m
TOP: Accounting
Systems and Financial Statements
2. A
business's financial statements are numerical representations of what it is
physically doing.
ANS: T PTS: 1 NAT: f LOC: m
TOP: Accounting
Systems and Financial Statements
3. To
many people, income is their paycheck, but in accounting it is typically viewed
as the excess of revenue received over costs and expenses.
ANS: T PTS: 1 NAT: f LOC: k
TOP: Accounting
Systems and Financial Statements
4. All
entries in the accounting books must be made by the last day of the accounting
period so that the firm may close their books.
ANS: F PTS: 1 NAT: f LOC: m
TOP: Accounting
Systems and Financial Statements
5. The
double entry system of accounting breaks every entry into two parts each
affecting a different account.
ANS: T PTS: 1 NAT: f LOC: m
TOP: Accounting
Systems and Financial Statements
6. The
income statement reflects flows of money over a period of time. The balance
sheet represents stocks of money at a point in time.
ANS: T PTS: 1 NAT: f LOC: m
TOP: Accounting
Systems and Financial Statements
7. EBIT
is earnings before income taxes.
ANS: F PTS: 1 NAT: f LOC: k
TOP: The
Income Statement
8. Cost
(of goods sold) includes only items that are closely related to production.
ANS: T PTS: 1 NAT: f LOC: m
TOP: The
Income Statement
9. In
a manufacturing firm, there are two inventory accounts, called raw materials
and finished goods.
ANS: F PTS: 1 NAT: f LOC: m
TOP: The
Income Statement
10. The
traditional income statement is intended to measure profits by identifying cash
flows in and out of the firm over an accounting period.
ANS: F PTS: 1 NAT: f LOC: k
TOP: The
Income Statement
11. EBIT
(earnings before interest and taxes) is the earnings measure designed to
provide information on operational performance.
ANS: T PTS: 1 NAT: f LOC: k
TOP: The
Income Statement
12. A
decrease in financial leverage results in a larger tax liability because
interest is tax deductible.
ANS: T PTS: 1 NAT: f LOC: m
TOP: The
Income Statement
13. The
income statement measures the flow of funds in and out of the firm over a
period of time.
ANS: F PTS: 1 NAT: f LOC: k
TOP: The
Income Statement
14. EBIT
is a business's profit before consideration of financing charges.
ANS: T PTS: 1 NAT: f LOC: k
TOP: The
Income Statement
15. Accounts
payable is listed as a liability and therefore, by definition, requires the
payment of interest by the borrower.
ANS: F PTS: 1 NAT: f LOC: m
TOP: The
Balance Sheet
16. Accounts
receivable represents credit sales that have not yet been paid by customers.
ANS: T PTS: 1 NAT: f LOC: m
TOP: The
Balance Sheet
17. Generally,
merchandise is sold on credit under terms such as 2/10, net 30, meaning the
buyer may deduct 10% from the bill if he pays within 2 days or pay the full
amount within thirty days.
ANS: F PTS: 1 NAT: f LOC: m
TOP: The
Balance Sheet
18. The
balance sheet can be thought of as a listing of all of sources and uses of cash
over a specific period of time.
ANS: F PTS: 1 NAT: f LOC: m
TOP: Balance
Sheet
19. Leverage
is the use of equity financing.
ANS: F PTS: 1 NAT: f LOC: m
TOP: The
Balance Sheet
20. Net
book value is equal to market value less accumulated depreciation.
ANS: F PTS: 1 NAT: f LOC: m
TOP: The
Balance Sheet
21. Vendors
extend trade credit when they deliver product without demanding immediate
payment.
ANS: T PTS: 1 NAT: f LOC: m
TOP: The
Balance Sheet
22. If
machinery that cost $8,000 when new, has accumulated depreciation of $4,500,
and is sold for $4,000, the gain recognized on the sale would be $4,000.
ANS: F
Cost: $8,000-$4,500=$3,500
Gain/(loss): $4,000-$3,500=$500
PTS: 1 NAT: c LOC: k TOP: The Balance Sheet
23. Although
depreciation is a noncash expense, the government still allows the deduction on
the firm's tax return.
ANS: T PTS: 1 NAT: f LOC: m
TOP: The
Balance Sheet
24. The
tax system taxes capital gains more aggressively than ordinary income.
ANS: F PTS: 1 NAT: f LOC: m
TOP: Personal
Taxes
25. Preferred
stock is referred to as a cross between debt and common equity because it has
some characteristics of each.
ANS: T PTS: 1 NAT: f LOC: g
TOP: The
Balance Sheet
26. Wealth
taxes are levied by cities and counties on the value of real estate. They are
also called ad valorem taxes.
ANS: T PTS: 1 NAT: f LOC: m
TOP: Taxing
Authorities and Tax Bases
27. The
government uses the tax system to collect revenue and to incentivize people to
act in ways it deems beneficial.
ANS: T PTS: 1 NAT: f LOC: m
TOP: The
Other Purpose of the Tax System
28. A
progressive tax system taxes incremental income at progressively higher rates.
ANS: T PTS: 1 NAT: f LOC: m
TOP: Progressive
Tax Systems | Marginal and Average Rates
29. Congress
intended preferential tax treatment on capital gains, recognizing that offering
an incentive to capital investments is healthy for the economy.
ANS: T PTS: 1 NAT: f LOC: m
TOP: Income
Taxes
30. Municipal
bonds are debt obligations of the states, municipalities and political
subdivisions. They are exempt from federal taxation
ANS: T PTS: 1 NAT: f LOC: g
TOP: Income
Taxes
31. The
taxation of proprietorships is about the same as that of corporations.
ANS: F PTS: 1 NAT: f LOC: m
TOP: Taxes
32. A
company has a loss of $15,000 this year, a profit of $3,000 last year, a profit
of $8,000 two years ago, and another profit of $2,000 three years ago. It makes
sense to file amended returns for the last three years.
ANS: F PTS: 1 NAT: f LOC: m
TOP: Corporate
Taxes
33. The
corporate tax table seems dissimilar to individual tax tables in
that corporate rates are not always increased as income
increases.
ANS: T PTS: 1 NAT: f LOC: m
TOP: Corporate
Taxes
34. The
corporate tax system takes away the benefit of low rates on early income as
income increases.
ANS: T PTS: 1 NAT: f LOC: m
TOP: Corporate
taxes
MATCHING
Match the following:
|
a.
|
Earnings distributed to a firm's owners
|
|
b.
|
The amount paid for stock above its par value
|
|
c.
|
The accumulated earnings of a company that have not
been distributed to shareholders as dividends.
|
|
d.
|
The par value of outstanding stock
|
1. Retained
earnings
2. Dividends
3. Paid
in excess
4. Common
stock
1. ANS: C PTS: 1 TOP: Financial Statements
2. ANS: A PTS: 1 TOP: Financial Statements
3. ANS: B PTS: 1 TOP: Financial Statements
4. ANS: D PTS: 1 TOP: Financial Statements
ESSAY
1. If
it makes tax sense to finance businesses with debt, why do firms typically
borrow less than half of their capital, i.e., what are the negatives of debt
financing?
ANS:
Debt increases a firm's risk because it may fail if
earnings aren't sufficient to pay the interest. As debt increases, so does the
risk of failure, and lenders eventually refuse to lend more money. Hence the
risk associated with debt limits the amount any firm can borrow.
PTS: 1 NAT: f LOC: m TOP: Debt Financing
2. The
corporate tax system appears not to be progressive, but in fact it's more
progressive that the personal system. Explain.
ANS:
The corporate system recovers the benefit of lower rates
on the first money earned as income increases substantially, the personal
system does not do that directly.
PTS: 1 NAT: f LOC: m TOP: Corporate Taxes
3. The
tax treatment of capital gains is a big political issue. Republicans generally
favor lower rates on capital gains while Democrats do not. Why is the issue so
politically sensitive?
ANS:
Wealthier people tend to invest in stocks and other
assets that are likely to produce long term capital gains. Hence favorable
treatment of capital gains is seen as a tax break for the rich at the expense
of the middle and lower classes.
PTS: 1 NAT: f LOC: m TOP: Capital Gains
PROBLEM
1. The
following question(s) refer to the year-end account balances for UBUS, Inc. The
accounts are listed in alphabetical order, NOT in the order they appear on the
financial statements. The applicable tax rate is 40%.
UBUS Income Statement
|
Cost of Goods Sold
|
330
|
|
Depreciation Expense
|
35
|
|
Interest Expense
|
20
|
|
Operating Expense (excluding depreciation)
|
115
|
|
Sales
|
600
|
|
Tax
|
???
|
UBUS Balance Sheet
|
Accounts Payable
|
35
|
|
Accounts Receivable
|
65
|
|
Accruals
|
30
|
|
Accumulated Depreciation
|
(175)
|
|
Cash
|
35
|
|
Common Stock
|
120
|
|
Fixed Assets (gross)
|
390
|
|
Inventory
|
135
|
|
Long Term Debt
|
200
|
|
Retained Earnings
|
65
|
a) What was UBUS Inc.'s earnings before interest and taxes
(EBIT)?
|
a.
|
$155
|
|
b.
|
$120
|
|
c.
|
$100
|
|
d.
|
$215
|
|
e.
|
$200
|
b) What is UBUS Inc.'s tax liability?
|
a.
|
$48
|
|
b.
|
$60
|
|
c.
|
$55
|
|
d.
|
$40
|
|
e.
|
$35
|
c) What was UBUS Inc.'s Net Income?
|
a.
|
$72
|
|
b.
|
$45
|
|
c.
|
$60
|
|
d.
|
($20)
|
|
e.
|
$100
|
d) What is UBUS Inc.'s Total Assets?
|
a.
|
$420
|
|
b.
|
$570
|
|
c.
|
$625
|
|
d.
|
$450
|
|
e.
|
$490
|
e) What is UBUS Inc.'s Total Equity?
|
a.
|
$115
|
|
b.
|
$120
|
|
c.
|
$185
|
|
d.
|
$205
|
|
e.
|
$240
|
f) What is UBUS Inc.'s Net Working Capital?
|
a.
|
$35
|
|
b.
|
$70
|
|
c.
|
$100
|
|
d.
|
$130
|
|
e.
|
$170
|
ANS:
a) b
$600-$330-$115-$35=$120
b) d
EBT=$120-$20=$100
Tax=$100 ´ .4=$40
c) c
$100 - $40=$60
d) d
$35+$65+$135+$390-$175=$450
e) c
$120 + $65 = $185
f) e
$35+$65+$135-$35-$30=$170
PTS: 1 NAT: c LOC: k
TOP: The
Income Statement and The Balance Sheet
2. The
following is a listing of tax considerations for John and Jane Alexander, who
file jointly and have two children.
|
John's salary
|
$45,000
|
|
Jane's salary
|
50,000
|
|
Real estate taxes
|
4,000
|
|
Interest from savings account
|
1,500
|
|
Interest from Arizona bonds
|
2,000
|
|
Interest on home mortgage
|
3,000
|
|
Contributions to charities
|
1,500
|
|
Gain on sale of stock held for 5 years
|
6,000
|
Assume the following hypothetical tax table:
|
0 - $10,000
|
10%
|
|
$10,000 - $35,000
|
15%
|
|
$35,000 - $65,000
|
25%
|
|
over $65,000
|
30%
|
The personal exemption rate is $3,050
The long-term capital gains rate for this family is 18%.
|
a.
|
How much is the Alexanders' taxable income?
|
|
b.
|
What is the tax on their ordinary income?
|
|
c.
|
What is their capital gains tax?
|
|
d.
|
What is their overall average tax rate including the
tax on capital gains?
|
|
e.
|
What is their marginal tax rate on ordinary income?
|
ANS:
|
a.
|
Taxable income
Salaries + interest + capital gain - re tax - mortgage
- charity - exemptions
$95,000+$1,500+6,000 - $4,000 - $3,000 - $1,500 -
$12,200 = $81,800
|
|
b.
|
Ordinary taxable income: $81,800 - $6,000 = $75,800
$10,000(.1) + $25,000(.15) + $30,000(.25) + $10,800(.30)
= $15,490
|
|
c.
|
Capital gains tax:
$6,000(.18) = $1,080
|
|
d.
|
Average tax rate:
($15,490 + $1,080) / $81,800 = 20.3%
|
|
e.
|
Marginal tax rate on ordinary income: 30%
|
PTS: 1 NAT: c LOC: k TOP: Personal Taxes
3. XYZ
Inc. has taxable income of $14,000,000 in 20xx.
|
a.
|
What is their tax liability using the corporate income
tax schedule?
|
|
b.
|
How would it change if they had losses of $4,000,000
two years ago and no income last year?
|
ANS:
|
a.
|
First $10M is taxed at 34% the remainder at 35%:
$10,000,000 (.34) + $4,000,000 (.35) = $4,800,000
|
|
b.
|
$10,000,000 (.34) = $3,400,000
|
PTS: 1 NAT: c LOC: k TOP: Corporate Taxes
4. The
Smith family has the following income
|
Salaries
|
$88,000
|
|
Dividends
|
4,000
|
|
Interest on General Motors
|
9,000
|
|
Interest on Boston Bonds
|
8,000
|
|
Interest on savings accounts
|
2,000
|
During the tax year they sold a vacation home for $65,000
that they had acquired several years ago for $58,000. They also sold some of
their GM stock, receiving $22,000 after brokerage commissions. The shares had
originally been purchased for $30,000. They paid $19,000 interest on their home
mortgage and $3,000 interest on credit card debt. They paid state income tax of
$7,000 and real estate tax of $3,000. They donated $2,000 to their church. They
also paid $1,400 toward the support of an elderly parent. The Smith's have two
small children. The personal exemption rate is $3,050. What is the Smith's
taxable income? Show all calculations clearly.
ANS:
Ordinary Income: $88,000+$4,000+$9,000+$2,000=$103,000
|
Capital Gain/(Loss):
|
Vacation Home:
$65,000 - $58,000 = $7,000
|
|
|
|
GM stock
|
$22,000 - $30,000 = ($8,000)
|
|
|
|
($1,000)
|
|
Deductions:
|
Mortgage interest:
|
$19,000
|
|
|
|
Local taxes
|
10,000
|
Exemptions: $3,050 x
4 = $12,200
|
|
|
Charity
|
2,000
|
|
|
|
|
$31,000
|
|
Taxable income: $103,000 - $1,000 - $31,000 - $12,200 =
$58,800
Note: Ignore exempt income, credit card interest, and
support of elderly parent.
PTS: 1 NAT: c LOC: m TOP: Personal Taxes
5. A
family has taxable income of $150,000. What is their tax liability if the
relevant tax table is as follows:
|
0 - $ 12,000
|
10%
|
|
$12,000 - $ 40,000
|
15%
|
|
$40,000 - $ 90,000
|
27%
|
|
$90,000 - $160,000
|
30%
|
|
|
|
ANS:
|
$12000 x .10 =
|
$ 1,200
|
|
$28000 x .15 =
|
$ 4,200
|
|
$50000 x .27 =
|
$13,500
|
|
$60000 x .30 =
|
$18,000
|
|
|
$36,900
|
PTS: 1 NAT: c LOC: m TOP: Personal Taxes
6. What
is the corporate tax paid by a firm with taxable income of $300,000, given the
following tax tables.
|
$0 - $50,000
|
15%
|
|
$50,000 - $75,000
|
25%
|
|
$75,000 - $100,000
|
34%
|
|
$100,000- $335,000
|
39%
|
ANS:
($50,000 ´ 0.15) + ($25,000 ´ 0.25) + ($25,000 ´ 0.34)
+ ($200,000 ´ 0.39)
=
$7,500 + $6,250 + $8,500 + $78,000 = $100,250
PTS: 1 NAT: c LOC: k TOP: Corporate Taxes
No comments:
Post a Comment