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ACC 307 Week 1 Chapter 4 Homework

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Chapter 4: 6, 28, 41, 42, and 47

Question 6

On December 29, 2014, an employee received a $5,000 check from her employer’s client. The check was payable to the employer. The employee did not remit the funds to the employer until December 30, 2014. The employer deposited the check on December 31, 2014, but the bank did not credit the employer’s bank account until January 2, 2015. When is the cash basis employer required to include the $5,000 in gross income?

 

Question 28

Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are:

  • A taxable corporate bond yielding 5% before tax, and the interest can be reinvested at 5% before tax.
  • A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return).
  • Land that will increase in value.

The gain on the land will be classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income. How much must the land increase in value to yield a greater after-tax return than either of the bonds? Given: Compound amount of $1 and compound value of annuity payments at the end of five years:

Interest Rate

$1 Compounded for 5 Years

$1 Annuity Compounded for 5 Years

5%

1.28

5.53

4%

1.22

5.42

3.6%

1.19

5.37

Land should increase in value by 5% annually to yield a greater after-tax return than either of the bonds.

 

Question 41

Troy, a cash basis taxpayer, is employed by Eagle Corporation, also a cash basis taxpayer. Troy is a full-time employee of the corporation and receives a salary of $60,000 per year. He also receives a bonus equal to 10% of all collections from clients he serviced during the year. Determine the tax consequences of the following events to the corporation and to Troy:

  1. On December 31, 2014, Troy was visiting a customer. The customer gave Troy a $10,000 check payable to the corporation for appraisal services Troy performed during 2014. Troy did not deliver the check to the corporation until January 2015.
  2. The facts are the same as in (a), except that the corporation is an accrual basis taxpayer and Troy deposited the check on December 31, but the bank did not add the deposit to the corporation’s account until January 2015.
  3. The facts are the same as in (a), except that the customer told Troy to hold the check until January 2015 when the customer could make a bank deposit that would cover the check.

 

Question 42

Faye, Gary, and Heidi each have a one-third interest in the capital and profits of the FGH Partnership. Each partner had a capital account of $50,000 at the beginning of the tax year. The partnership profits for the tax year were $270,000. Changes in their capital accounts during the tax year were as follows:

 

Faye

Gary

Heidi

Total

Beginning balance

$ 50,000

$ 50,000

$ 50,000

$150,000

 

Withdrawals

(20,000)

(35,000)

(10,000)

(65,000)

Additional contributions

0

0

5,000

5,000

Allocation of profits

90,000

90,000

90,000

270,000

Ending balance

$120,000

$105,000

$135,000

$360,000

 

In arriving at the $270,000 of partnership profits, the partnership deducted $2,400 ($800 for each partner) in premiums paid for group term life insurance on the partners. Faye and Gary are 39 years old, and Heidi is 35 years old. Other employees are also eligible for group term life insurance equal to their annual salary. These premiums of $10,000 have been deducted in calculating the partnership profits of $270,000. Compute each partner’s gross income from the partnership for the tax year.

 

Question 47

Roy decides to buy a personal residence and goes to the bank for a $150,000 loan. The bank tells him that he can borrow the funds at 4% if his father will guarantee the debt. Roy’s father, Hal, owns a $150,000 CD currently yielding 3.5%. The Federal rate is 3%. Hal agrees to either of the following:

  • Roy borrows from the bank with Hal’s guarantee to the bank.
  • Cash in the CD (with no penalty) and lend Roy the funds at 2% interest.

Hal is in the 33% marginal tax bracket. Roy, whose only source of income is his salary, is in the 15% marginal tax bracket. The interest Roy pays on the mortgage will be deductible by him. Which option will maximize the family’s after-tax wealth?

 
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