# Homework 2

Pages: 23 (4361 words) Published: December 10, 2012
1. Construct a balance sheet for Sophie’s Sofas given the following data. (Be sure to list the assets andliabilities in order of their liquidity.)
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Cash balances| =| \$| 8,000 |
Inventory of sofas| =| \$| 180,000 |
Store and property| =| \$| 80,000 |
Accounts receivable| =| \$| 20,000 |
Accounts payable| =| \$| 15,000 |
Long-term debt| =| \$| 150,000 |
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BALANCE SHEET OF SOPHIE’S SOFAS|
Assets| | Liabilities & Shareholders’ Equity| |
Cash| \$ | Accounts payable| \$ |
Accounts receivable| | Long-term debt| |
Inventory| | Shareholders’ equity| |
Store & property| | | |
| | | |
Total assets| \$ | Total liabilities & Shareholders' equity| \$ | |
Top of Form
2. Using Table 3.7, calculate the marginal and average tax rates for a single taxpayer with the following incomes: (Do notround intermediate calculations. Round "Average tax rate" to 2 decimal places.)| | Income | Marginal Tax Rate| Average Tax Rate|

a.| \$21,000| % | % |
b.| \$51,000| % | % |
c.| \$304,000| % | % |
d.| \$3,200,000| % | % |
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Explanation:
a.|
Taxes = (0.10 × \$8,500) + 0.15 × (\$21,000 − \$8,500) = \$2,725| Marginal tax rate = 15%|
Average tax rate = \$2,725/\$21,000 = 0.12976 = 12.98%|
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b.|
Taxes = (0.10 × \$8,500) + 0.15 × (\$34,500 − \$8,500) + 0.25 × (\$51,000 − \$34,500) = \$8,875| Marginal tax rate = 25%|
Average tax rate = \$8,875/\$51,000 = 0.17402 = 17.40%|
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c.|
Taxes = (0.10 × \$8,500) + 0.15 × (\$34,500 − \$8,500) + 0.25 × (\$83,600 − \$34,500) + 0.28 × (\$174,400 − \$83,600) + 0.33 × (\$304,000 − \$174,400) = \$85,217| Marginal tax rate = 33%|
Average tax rate = \$85,217/\$304,000 = 0.280319 = 28.03%|
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d.|
Taxes = (0.10 × \$8,500) + 0.15 × (\$34,500 − \$8,500) + 0.25 × (\$83,600 − \$34,500) + 0.28 × (\$174,400 − \$83,600) + 0.33 × (\$379,150 − \$174,400) + 0.35 × (\$3,200,000 − \$379,150) = \$1,097,314.0| Marginal tax rate = 35%|

Average tax rate = \$1,097,314.0/\$3,200,000 = 0.342911 = 34.29%| 3. The year-end 2010 balance sheet of Brandex Inc. listed common stock and other paid-in capital at \$1,400,000 andretained earnings at \$3,700,000. The next year, retained earnings were listed at \$4,000,000. The firm’s net income in 2011 was \$930,000. There were no stock repurchases during the year. What were the dividends paid by the firm in 2011?

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Dividends paid| \$ |

Explanation:
Net income = increase in retained earnings + dividends|
\$930,000 = (\$4,000,000 − \$3,700,000) + dividends dividends = \$630,000 4. You have set up your tax preparation firm as an incorporated business. You took \$77,000 from the firm as your salary. The firm’s taxable income for the year (net of your salary) was \$16,000. Assume you pay personal taxes as an unmarried taxpayer. Use the tax rates presented in Table 3-5 and Table 3-7.

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a.| How much taxes must be paid to the federal government, including both your personal taxes and the firm’s taxes?| Total taxes| \$ |
b.| By how much will you reduce the total tax bill by reducing your salary to \$57,000, thereby leaving the firm with taxable income of \$36,000?| Total taxes reduced| \$ |

Explanation: a.|
Taxes on your salary = (0.10 × \$8,500) + 0.15 × (\$34,500 − \$8,500) + 0.25 × (\$77,000 − \$34,500) = \$15,375| Taxes on corporate income = 0.15 × \$16,000 = \$2,400|
Total taxes = \$15,375 + \$2,400 = \$17,775|
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b.|
If you rearrange income so that your salary and the firm's profit are both \$57,000, then:| Taxes on your salary = (0.10 × \$8,500) + 0.15 × (\$34,500 − \$8,500) + 0.25 × (\$57,000 − \$34,500) = \$10,375| Taxes on corporate income = 0.15 × \$36,000 = \$5,400|

Total taxes = \$10,375 + \$5,400 = \$15,775|
Total taxes are reduced by \$17,775 − \$15,775 = \$2,000.|
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5. The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology. He then formed a corporation and invested \$800,000 in...