Question & Answer

Using the information provided in BE4-2, prepare a condensed multiple-step income statement for Brisky Corporation.

If the regulator imposed such rules, would they cause the firm to make a loss if it faced a downward-sloping LRMSC curve? (Clues: Where would the LRAC curve be relative to the LRMC curve? What would be the effect of externalities and the addition of the Z factor on the price?)

Is an asset’s initial or cost basis simply its purchase price? Explain.

Connie recently provided legal services to the Winterhaven LLC and received a 5 percent interest in the LLC as compensation. Winterhaven currently has $50,000 of accounts payable and no other liabilities. The current fair market value of Winterhaven’s capital is $200,000. a. If Connie receives a 5 percent capital interest only, how much income must she report, and what is her tax basis in the LLC interest? b. If Connie receives a 5 percent profits interest only, how much income must she report, and what is her tax basis in the LLC interest? c. If Connie receives a 5 percent capital and profits interest, how much income must she report, and what is her tax basis in the LLC interest?

Explain the meaning of a temporary difference as it relates to deferred tax computations, and give three examples.

On October 1, 2014, Chung, Inc. assigns $1,000,000 of its accounts receivable to Seneca National Bank as collateral for a $750,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 9%. Prepare the October 1 journal entries for both Chung and Seneca.

At the end of 2013, Lucretia McEvil Company has $180,000 of cumulative temporary differences that will result in reporting future taxable amounts as shown on the next page. 2014 $ 60,000 2015 50,000 2016 40,000 2017 30,000 $180,000 Tax rates enacted as of the beginning of 2012 are: 2012 and 2013 40% 2014 and 2015 30% 2016 and later 25% McEvil’s taxable income for 2013 is $320,000. Taxable income is expected in all future years. Instructions (a) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2013, assuming that there were no deferred taxes at the end of 2012. (b) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2013, assuming that there was a balance of $22,000 in a Deferred Tax Liability account at the end of 2012.

Explain how the current account of the balance of payments is likely to vary with the course of the business cycle.

Jessica’s friend Zachary once stated that he couldn’t understand why someone would take a tax course.  Why is this a rather naïve view?

What are some aspects of business that require knowledge of taxation?  What are some aspects of personal finance that require knowledge of taxation?

Describe some ways in which taxes affect the political process in the United States.

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?

Presented below are two independent situations. 1. On January 1, 2014, Simon Company issued $200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1. 2. On June 1, 2014, Garfunkel Company issued $100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1. Instructions For each of these two independent situations, prepare journal entries to record the following. (a) The issuance of the bonds. (b) The payment of interest on July 1. (c) The accrual of interest on December 31.

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?

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?

Reichenbach Co., organized in 2013, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2014 and 2015. Intangible Assets 7/1/14 8-year franchise; expiration date 6/30/22 $ 48,000 10/1/14 Advance payment on laboratory space (2-year lease) 24,000 12/31/14 Net loss for 2013 including state incorporation fee, $1,000, and related legal fees of organizing, $5,000 (all fees incurred in 2013) 16,000 1/2/15 Patent purchased (10-year life) 84,000 3/1/15 Cost of developing a secret formula (indefinite life) 75,000 4/1/15 Goodwill purchased (indefinite life) 278,400 6/1/15 Legal fee for successful defense of patent purchased above 12,650 9/1/15 Research and development costs 160,000 Instructions Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2015, recording any necessary amortization and reflecting all balances accurately as of that date. (Ignore income tax effects.)

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?