Accounting 430 - Quiz 8
1) Assuming a 25 percent tax rate, compute the after-tax cost of $23,000 worth of advertising costs. (part c) a) $23,000
Because the advertising cost is deductible, its after-tax cost is $17,250 ($23,000 - [$23,000 × 25%]). d) $27,500
2) In 2013, Firm A paid $50,000 cash to purchase a tangible business asset. In 2013 and 2014, it deducted $3,140 and $7,200 depreciation with respect to the asset. Firm A’s marginal tax rate in both years was 35 percent. Compute Firm A’s adjusted basis in the asset at the end of each year. (part b) a) 2013: $39,660; 2014: $29,320
b) 2013: $46,860; 2014: $39,660
Initial cost basis$50,000
Year 1 depreciation (3,140)
Adjusted basis at end of 2013$46,860
Year 2 depreciation (7,200)
Adjusted basis at end of 2014$39,660
c) 2013: $50,000; 2014: $50,000
d) 2013: $47,959; 2014: $43,279
3) Refer to the facts in problem 2 above. Now assume that Firm A borrowed $50,000 to purchase the asset. In each year, it paid $3,800 annual interest on the debt. The interest payments were deductible. How does this change in facts affect Firm A’s adjusted basis in the asset at the end of each year? (part b) a) It decreases the basis by $3,800 each year.
b) It decreases the basis by $2,470 ($3,800 – [$3,800 x 35% tax rate]). c) It increases the basis by $3,800 each year.
d) It has no effect on the basis.
The use of leverage has no effect on Firm A’s adjusted basis in the asset. 4) Company XYZ manufactures a tangible product and sells the product at wholesale. In its first year of operations, XYZ manufactured 1,000 units of product and incurred $200,000 direct material cost and $130,000 direct labor costs. For financial statement purposes, XYZ capitalized $85,000 indirect costs to inventory. For tax purposes, it had to capitalize $116,000 indirect costs to inventory under the unicap rules. At the end of its first year, XYZ held 260 units in inventory. Compute XYZ’s cost of goods sold...
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