Essay on Corporate Strategy

3388 Words14 Pages

28. A taxpayer is considering three alternative investments of $10,000. Assume the taxpayer is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains and dividends in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are: Taxable Corporate Bond yielding 6% before tax, and the interest can be reinvested at 6% before tax. The taxable bond and reinvested earnings will accumulate at an after-tax rate of 4.32% [(1 – .28) × .06] to equal $12,355 at the end of 5 years [$10,000 × (1.0432)5 = $10,000 × 1.2355 = $12,355]. A series EE bond that will have a maturity value of $13,070 (a 5.5% before-tax rate of return.) 10000*5.5%^5 = 13,070
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c. Amos and his neighbor got into an argument over Amos’s dog. The neighbor built a fence to keep the dog out of his year. The fence added $1,500 to the value of Amos’s property. c. The neighbor’s actions that increased the value of Amos’s property by $1,500 do not result in the realization of income by him. Amos’s wealth has increased, but the realization requirement is not satisfied, since he did not receive any additional property nor were any improvements made to his property. Amos will not realize this increase in wealth for tax purposes until he sells the property. pp. 4-8 and 4-9

31. Al is an attorney who conducts his practice as a sole proprietor. During 2009, he received cash of $150,000 for legal services. Of the amount collected, $25,000 was for services provided in 2008, at the end of 2009, Al had accounts receivable of $60,000, all for services rendered in 2009. At the end of the year Al received $8,000 as a deposit on property a client was in the process of selling. Compute Al’s gross income for 2009. a. Using the cash basis of accounting Gross income using cash method: Cash collections from customers $150,000 Under the cash method, income is recognized when cash or its equivalent is actually or constructively received, regardless of when it was actually earned. Neither gross income
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