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problem 1: Ace Company has a 25 percent marginal tax rate and employs a 10% discount rate to find out NPV. The firm started a venture which will yield the given before-tax cash flows: year 0, $28,000; year 1, $60,000; year 2, $90,000; year 3, $85,000.

a) If the before tax cash flows represent taxable income in the year received, find out the NPV of the cash flows to Ace..

b) find out the NPV if Ace can defer the receipt of years 0, 1 and 2 cash flows/until year 3. (It would receive no cash in years 0, 1, and 2 and would receive all the cash flows in year 3).

c) find out the NPV if ACE can defer paying tax on years 0 and 1 cash flows until year 2. (It would receive $90,000 cash in year 2 however would pay tax on $178,000 of income). This would as well still receive $85,000 of cash in year 3.

problem 2: Kline Company, an accrual basis calendar year corporation, reported $560,000 net income before tax on its financial statements made in accordance with GAAP for 2012. Kline’s records reveal the given information: (Kline’s MTR is 35%. and all items have been correctly reported under GAAP).

The allowance for bad debts as of January 1, 2012 was $80,000. prepare-offs for the year totaled $20,000, and the addition to allowance for the year was $50,000. The allowance as of December 31 was $110,000.

Kline paid $75,000 fine to the State of New Jersey for a violation of state pollution control laws.

Kline’s lawyers established an estimated fund for the pending lawsuit, which they anticipate to cost the company $125,000. This liability meets the fixed and determinable standard relating to contingent liabilities under GAAP. Kline really paid out $120,000 relating to this law suit in 2012.

Kline received $45,000 in Municipal Bond interest which is not taxable.

Kline had tax depreciation of $89,000 and book depreciation of $94,000

find out Kline’s taxable income and prepare the required journal entry to record the tax expense, tax payable and deferred account, if any.

problem 3: Good Health Company Inc. starts business in 2008 and has operating results as listed below. In the year 2010 it generated a net operating loss of $385,000. This loss is determined after the company had filed its 2012 return. The given table shows Good Health Company’s taxable income and tax before consideration of any NOLD. The tax rate for all years is 35%.

Year                   2008        2009        2010           2011        2012
Taxable Income    80,000      95,000     (385,000)    120,000    19,000
Tax                    28,000      33,250     -0-             42,000-    6,650

Recompute the Good Health Company’s taxable income and tax and also any refunds due. Also find out any net operating loss carryover to years subsequent to 2012. Suppose that the company elects to carry any losses back (two years) then forward.

problem 4: The books of Seal Company, a calendar year taxpayer, had assets and associated information (as described below) as of December 31, 2012. Seal’s policy is to record depreciation on December 31 by way of a journal entry. Seal as well takes benefit of any early prepare-offs of its purchased assets allowed by law. Based on the information given compute Seal’s maximum depreciation deduction for 2012. The office equipment purchased is new and Seal’s taxable income for the year is $1,000,000. Bonus depreciation in effect for 2012 is 50%. Seal purchased office equipment of $240,000 on February 1, 2012.The expensing election for 2012 is $500,000 and the threshold is $2,000,000.

Asset                        Basis         Year Purchased
Manufacturing Tools    120,000         2011
Trucks                      300,000         2010
Water Trans, Equip     150,000         2009
Fencing—Plant           90,000           2008

problem 5: This year, the Coral Company Inc. produced $650,000 from its routine business operations. In addition, it sold the given assets, all of which were held for more than 12 months. In addition in the five prior years the company recorded section 1231 losses of $54,000 in total of which $31,000 was formerly recaptured under the look-back rule. find out Coral’s taxable income for 2012 and the characterization of its section 1231 gains if any.

ASSET              BASIS        ACCUM. DEPR.    SALES PRICE
EQUIP-P            $90,000        $25,000          $120,0000   
EQUIP-C            450,000        100,000          450,000   
FURN.               184,000        22,000            148,000   
TRANS. EQUIP    800,000        640,000          240,000   
LAND-BUS          280,000         -0-               390,000
BLDG*               700,000        500,000          370,000

*BLDG has $100,000 of accelerated depreciation, which is part of the $500,000 reflected above.

problem 6: Jim Student has asked you to find out if his educational four scholarships are taxable. The scholarship only covers his tuition. What Internal Revenue Code sections and Treasury Regulation(s) would cover this issue?

Taxation, Accounting

  • Category:- Taxation
  • Reference No.:- M9745

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