Question & Answer

Kobestrongly dislikes SUVs and is appalled that so many are on the road.  He proposes to eliminate the federal income tax and replace it with a $50,000 annual tax per SUV.  Based on the number of SUVs currently owned in the United States, he estimates the tax will generate exactly the amount of tax revenue currently collected from the income tax.  What is wrong with Kobe’s proposal?  What type of forecasting is Kobelikely using?

The transactions listed below relate to Wainwright Inc. You are to assume that on the date on which each of the transactions occurred, the corporation’s accounts showed only common stock ($100 par) outstanding, a current ratio of 2.7:1, and a substantial net income for the year to date (before giving effect to the transaction concerned). On that date, the book value per share of stock was $151.53. Each numbered transaction is to be considered completely independent of the others, and its related answer should be based on the effect(s) of that transaction alone. Assume that all numbered transactions occurred during 2015 and that the amount involved in each case is sufficiently material to distort reported net income if improperly included in the determination of net income. Assume further that each transaction was recorded in accordance with generally accepted accounting principles and, where applicable, in conformity with the all-inclusive concept of the income statement. For each of the numbered transactions you are to decide whether it: (a) Increased the corporation’s 2015 net income. (b) Decreased the corporation’s 2015 net income. (c) Increased the corporation’s total retained earnings directly (i.e., not via net income). (d) Decreased the corporation’s total retained earnings directly. (e) Increased the corporation’s current ratio. (f) Decreased the corporation’s current ratio. (g) Increased each stockholder’s proportionate share of total stockholders’ equity. (h) Decreased each stockholder’s proportionate share of total stockholders’ equity. (i) Increased each stockholder’s equity per share of stock (book value). (j) Decreased each stockholder’s equity per share of stock (book value). (k) Had none of the foregoing effects. Instructions List the numbers 1 through 9. Select as many letters as you deem appropriate to reflect the effect(s) of each transaction as of the date of the transaction by printing beside the transaction number the letter(s) that identifies that transaction’s effect(s). Transactions _____ 1. In January, the board directed the write-off of certain patent rights that had suddenly and unexpectedly become worthless. _____ 2. The corporation sold at a profit land and a building that had been idle for some time. Under the terms of the sale, the corporation received a portion of the sales price in cash immediately, the balance maturing at 6-month intervals. _____ 3. Treasury stock originally repurchased and carried at $127 per share was sold for cash at $153 per share. _____ 4. The corporation wrote off all of the unamortized discount and issue expense applicable to bonds that it refinanced in 2015. _____ 5. The corporation called in all its outstanding shares of stock and exchanged them for new shares on a 2-for-1 basis, reducing the par value at the same time to $50 per share. _____ 6. The corporation paid a cash dividend that had been recorded in the accounts at time of declaration. _____ 7. Litigation involving Wainwright Inc. as defendant was settled in the corporation’s favor, with the plaintiff paying all court costs and legal fees. In 2012, the corporation had appropriately established a special contingency for this court action. (Indicate the effect of reversing the contingency only.) _____ 8. The corporation received a check for the proceeds of an insurance policy from the company with which it is insured against theft of trucks. No entries concerning the theft had been made previously, and the proceeds reduce but do not cover completely the loss. _____ 9. Treasury stock, which had been repurchased at and carried at $127 per share, was issued as a stock dividend. In connection with this distribution, the board of directors of Wainwright Inc. had authorized a transfer from retained earnings to permanent capital of an amount equal to the aggregate market value ($153 per share) of the shares issued. No entries relating to this dividend had been made previously.

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?

Montel argues that a flat income tax rate system is vertically equitable.  Oprah argues that a progressive tax rate structure is vertically equitable.  How do their arguments differ?  Who is correct?

Discuss why evaluating vertical equity simply based on tax rate structure may be less than optimal.

Compare the federal income tax to sales taxes using the “certainty” criterion.

Many years ago a famous member of Congress proposed eliminating federal income tax withholding.  What criterion for evaluating tax systems did this proposal violate?  What would likely have been the result of eliminating withholding?

“The federal income tax scores very high on the economy criterion because the current IRS budget is relatively low compared to the costs of a typical collection agency.”  Explain why this statement may be considered wrong.

Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds.  Using the U.S. tax rate schedule, how much federal tax will he owe?  What is his average tax rate?  What is his effective tax rate?  What is his current marginal tax rate?

Using the facts in problem 34, if Chuck earns an additional $40,000 of taxable income, what is his marginal tax rate on this income?  What is his marginal rate if, instead, he had $40,000 of additional deductions?

In reviewing the tax rate schedule for a single taxpayer, Chuck notes that the tax on $75,000 is $5,226.25 plus 25 percent of the taxable income over $37,950.  What does the $5,226.25 represent?

Campbell, a single taxpayer, earns $400,000 in taxable income and $2,000 in interest from an investment in State of New York bonds.  Using the U.S. tax rate schedule, how much federal tax will she owe?  What is her average tax rate?  What is her effective tax rate?  What is her current marginal tax rate?

Jorge and Anita, married taxpayers, earn $150,000 in taxable income and $40,000 in interest from an investment in City of Heflin bonds.  Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe?  What is their average tax rate?  What is their effective tax rate?  What is their current marginal tax rate?

Using the facts in problem 39, if Jorge and Anita earn an additional $100,000 of taxable income, what is their marginal tax rate on this income?  What is their marginal rate if, instead, they reported an additional $100,000 in deductions?

Scot and Vidia, married taxpayers, earn $240,000 in taxable income and $5,000 in interest from an investment in City of Tampa bonds.  Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe?  What is their average tax rate?  What is their effective tax rate?  What is their current marginal tax rate?

Using the facts in problem 41, if Scot and Vidia earn an additional $70,000 of taxable income, what is their marginal tax rate on this income?  How would your answer differ if they, instead, had $70,000 of additional deductions?

Hugh has the choice between investing in a City of Heflin bond at 6 percent or a Surething bond at 9 percent.  Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, in which bond should he invest?

Using the facts in problem 44, what interest rate does Surething Inc. need to offer to make Hugh indifferent between investing in the two bonds?

: Explain the processes of team cohesiveness, team norms, and the general stages of team development.

Fergiehas the choice between investing in a State of New York bond at 5 percent and a Surething bond at 8 percent.  Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, in which bond should she invest?

Using the facts in problem 46, what interest rate does the State of New York need to offer to make Fergie indifferent between investing in the two bonds?

Given the following tax structure, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to average tax rates?

Using the facts in problem 48, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to effective tax rates?

Song earns $100,000 taxable income as an interior designer and is taxed at an average rate of 20 percent (i.e., $20,000 of tax).  If Congress increases the income tax rate such that Song’s average tax rate increases from 20 percent to 25 percent, how much more income tax will she pay assuming that the income effect is descriptive?  What effect will this tax rate change have on the tax base and tax collected