Homework 2

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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| $ | |
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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...
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