Question & Answer

Courtney recently received a speeding ticket on her way to the university.  Her fine was $200.  Is this considered a tax?  Why or why not?

To help pay for the city’s new stadium, the city of Birmingham recently enacted a 1 percent surcharge on hotel rooms. Is this a tax?  Why or why not?

Why is the liabilities section of the balance sheet of primary significance to bankers?

If the general objective of our tax system is to raise revenue, why does the income tax allow deductions for charitable contributions and retirement plan contributions?

One common argument for imposing so-called sin taxes is the social goal of reducing demand for such products.  Using cigarettes as an example, is there a segment of the population that might be sensitive to price and for whom high taxes might discourage purchases?

Dontae stated that he didn’t want to earn any more money because it would “put him in a higher tax bracket.”  What is wrong with Dontae’s reasoning?

Describe the three different tax rates discussed in the chapter and how taxpayers might use them.

Which is a more appropriate tax rate to use to compare taxpayers’ tax burdens – the average or the effective tax rate?  Why?

Which is the largest tax collected by the U.S. government?  What types of taxpayers are subject to this tax?

What is the tax base for the Social Security and Medicare taxes for an employee or employer?  What is the tax base for Social Security and Medicare taxes for a self-employed individual?  Is the self-employment tax in addition to or in lieu of federal income tax?

What is the distinguishing feature of an excise tax?

What is the distinguishing feature of an excise tax?

What are some of the taxes that currently are unique to state and local governments?  What are some of the taxes that the federal, state, and local governments each utilize?

What are some of the taxes that currently are unique to state and local governments?  What are some of the taxes that the federal, state, and local governments each utilize?

What is the difference between a sales tax and a use tax?

What is an ad valorem tax?  Name an example of this type of tax.

When we calculate average and effective tax rates, do we consider implicit taxes?  What effect does this have on taxpayers’ perception of equity?

Assume now that the firm has monopoly power in hiring out equipment, and thus faces a downward-sloping demand curve. Draw in two such demand curves on a diagram like Figure 10.13(b), one crossing the MC curve in the horizontal section, and one in the vertical section. How much will the firm supply in each case and at what price? (You will need to draw in MR curves too.) Is the MC curve still the supply curve?

Coldwell, Inc. issued a $100,000, 4-year, 10% note at face value to Flint Hills Bank on January 1, 2014, and received $100,000 cash. The note requires annual interest payments each December 31. Prepare Coldwell’s journal entries to record (a) the issuance of the note and (b) the December 31 interest payment.

Explain why reclassification adjustments are necessary.

What is the difference between the income and substitution effects?  For which types of taxpayers is the income effect more likely descriptive?  For which types of taxpayers is the substitution effect more likely descriptive?

What is the difference between horizontal and vertical equity?  How do tax preferences affect people’s view of horizontal equity?

} Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December, he performed $20,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 32 percent this year and will be 37 percent next year, and that he can earn an after-tax rate of return of 12 percent on his investments. Should Hank send his client the bill in December or January?

What are some of the key obstacles for the FASB and IASB within their accounting guidance in the area of cash flow reporting? Explain.

Cost driver; cost categories; appropriateness of regression; relevant information Susan looked at her long-distance telephone bill with dismay. After leaving her job last year to become a self-employed consultant, her long-distance charges had grown considerably. She had not changed long-distance plans for years, partly because she hated taking the time to review the range of service providers and plans. However, the size of her long-distance bill made it clear that it was time to make a change. She had recently seen numerous advertisements by telephone companies offering much lower rates than she was currently paying, but she was sure that at least some of those plans offered low rates only for night and weekend calls. Susan called her current long-distance service provider and asked how she could obtain a lower rate. She mentioned hearing that a competitor was currently offering long distance at 5c per minute. In responding to the service representative’s questions, Susan verified that most of her long-distance calls are weekday and out of state. She also agreed that her activity over the past two months—approximately 500 minutes of long distance per month—was her best estimate for future calling activity. Given this information, the service representative suggested that Susan buy the following long-distance service plan:                                (i)                             Up to 500 minutes of long distance for a flat fee of $20 per month.                              (ii)                             No refunds would be provided for usage less than 500 minutes per month.                            (iii)                             Any minutes over 500 per month would be billed at 10c per minute.                            (iv)                             No service change fee or cancellation fee would apply.                                                                                 Required (a)          What is the cost driver for Susan’s long-distance telephone costs, assuming that the cost object is her consulting business? (b)          In the proposed service plan, which of the costs are fixed and which are variable? Explain. (c)           Would regression analysis be an appropriate tool for Susan to use in deciding whether to buy the new service plan? Why? (d)          Is the cost of Susan’s current long-distance service plan relevant to this decision? Why? (e)           Explain why Susan cannot be certain whether the new service plan will reduce her long-distance costs. (f)           List additional information that might be relevant to Susan in deciding whether to buy the new service plan. (g)          Are Susan’s long-distance services most likely a discretionary cost? Explain. (h)          Are Susan’s long-distance services most likely a direct or indirect cost, assuming that the cost object is an individual consulting job? Explain. (i)            Describe the pros and cons of the new service plan.