Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late...

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Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December, he performed $25,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 30 percent this year and will be 33 percent next year, and that he can earn an after-tax rate of return of 12 percent on his investments. Use Exhibit 3.1.

a. What is the after-tax income if Hank sends his client the bill in December?

After Tax Income:

b. What is the after-tax income if Hank sends his client the bill in January? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After Tax Income:

c. Should Hank send his client the bill in December or January?

A.December

B January

d. What is the after-tax income if Hank expects his marginal tax rate to be 25 percent next year and sends his client the bill in January? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After Tax Income:

e. Should Hank send his client the bill in December or January if he expects his marginal tax rate to be 30 percent this year and 25 percent next year? A.December

B.January

Exhibit 3.1.

12% .898 .907 .842 .797 .735 EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return Year 4% 5% 6% 7%

business accounting

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Answer 1

Answer #1

if the client is billed in January tax will be paid by the end of next December.so for option 2 we will have to use present value factor for tax amount at 12%.

option 1: send bill in December $25,000

Tax amount = income* tax rate

=$25,000*30%

=$7,500

after tax income = Income - tax

=$25,000-$7,500

=$17,500 ANSWER A

Option 2 : send bill in january

Tax amount = $25,000*33%

=$8,250

present value of tax = tax amount*PV factor at 12% for year 1

$8,250*0.893

=7367.25$

after tax income = $25000-$7367.25

=$17,632.75 ANSWER B

As we can see that sending bill in January is more beneficial as it present value ($17632.75) is higher than present value of sending bill in december ($17500)

so hank should send bill in January c. answer b

D.25% TAX RATE NEXT YEAR

tax amount = $25,000*25%

=$6,250

present value of tax = tax amount*PV factor at 12% for year 1

=$6,250*0.893

=$5,581.25

after tax income = $25,000-$5,581.25

=$19,418.75 ANSWER D

E.sending bill in December at 30% option 1 as calculated in A above = $17,500

25% next year = $19418.75 as calculated in D above

As we can see that sending bill in January is more beneficial as it present value ($19418.75) is higher than present value of sending bill in december ($17500)

so hank should send bill in January

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Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late...

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