Mr.

Scott sold rental real estate that had a $186,200 adjusted basis ($200,000 million cost -
$13,800 straight-line accumulated depreciation). The sales price was $210,000. This was his only
property disposition for the year. Compute Mr. Scott's income tax on his recognized gain
assuming that: a. His marginal tax rate

Mr. and Mrs. SK are CPAs. Mr. SK is an employee of a national accounting firm, while Mrs. SK
operates her own professional practice. Each year, the couple pays approximately $1,300 to
subscribe to professional publications and research services that they both read and use in their
work. Identify the tax issue or issue

Mr. and Mrs. P own a sole proprietorship that generates approximately $60,000 annual net profit.
This business is the couple's only source of income. In April, June, and September, they paid
their estimated tax payments. In December, they won $250,000 in a state lottery. Identify the tax
issue or issues suggested by t

Mr. and Mrs. H are married with two dependent children living with them. Their AGI is
$360,000. a. Using the worksheets in Appendixes 14-A and 14-B, compute the exemptions and
the below-the-line deduction that they will report in computing taxable income. Assume that
itemized deductions total $44,000 (none of which we

(Three Differences, Classify Deferred Taxes) At December 31, 2010, Cascade Company had a
net deferred tax liability of $450,000. An explanation of the items that compose this balance is as
follows. Indicate the manner in which deferred taxes should be presented on Cascade
Company’s December 31, 2010, balancesheet.

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(Two Differences, No Beginning Deferred Taxes, Tracked through 2 Years) The following
information is available for McKee Corporation for 2010. 1. Excess of tax depreciation over
book depreciation, $40,000. This $40,000 difference will reverse equally over the years
2011–2014. 2. Deferral, for book purposes, of $25,00

(EPS: Simple Capital Structure) A portion of the statement of income and retained earnings of
Pierson Inc. for the current year follows. Note 1 during the year, Pierson Inc. suffered a major
casualty loss of $1,340,000 after applicable income tax reduction of $1,200,000. At the end of
the current year, Pierson Inc. has

(Deferred Tax Asset with and without Valuation Account) Callaway Corp. has a deferred tax
asset account with a balance of $150,000 at the end of 2010 due to a single cumulative temporary
difference of $375,000. At the end of 2011 this same temporary difference has increased to a
cumulative amount of $500,000. Taxable i

Eight years ago, Mr. and Mrs. Lauffer created a family partnership with their son, the son's wife,
their daughter, and the daughter's husband. Each of these six individuals owns an equal interest
in the partnership. This year, the son and his wife decide to divorce. Identify the tax issue or
issues suggested by the fo

(NOL Carry back and Carry forward, Valuation Account Needed) Nielson Inc. reports the
following pretax income (loss) for both book and tax purposes. (Assume the carry back provision
is used where possible for a net operating loss.) The tax rates listed were all enacted by the
beginning of 2009. (a) Prepare the journal

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(EPS with Warrants) Worth Corporation earned $260,000 during a period when it had an average
of 100,000 shares of common stock outstanding. The common stock sold at an average market
price of $15 per share during the period. Also outstanding were 30,000 warrants that could be
exercised to purchase one share of common s

(Accounting for Restricted Stock) Derrick Company issues 4,000 shares of restricted stock to its
CFO, Dane Yapping, on January 1, 2010. The stock has a fair value of $120,000 on this date.
The service period related to this restricted stock is 4 years. Vesting occurs if Yapping stays with
the company for 4 years. The p

(Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc. issued $2,500,000 of
convertible 10-year bonds on July 1, 2010. The bonds provide for 12% interest payable
semiannually on January 1 and July 1. The discount in connection with the issue was $54,000,
which is being amortized monthly on a straight

Explain the difference between pretax financial income and taxable income.

Interest on municipal bonds is referred to as a permanent difference when determining the proper
amount to report for deferred taxes. Explain the meaning of permanent differences, and give two
other examples.

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Clydesdale Corporation has a cumulative temporary difference related to depreciation of

$580,000 at December 31, 2010. This difference will reverse as follows: 2011, $42,000; 2012,
$244,000; and 2013, $294,000. Enacted tax rates are 34% for 2011 and 2012, and 40% for 2013.
Compute the amount Clydesdale should report as

(Two Temporary Differences, Multiple Rates, Future Taxable Income) Flynn Inc. has two
temporary differences at the end of 2010. The first difference stems from installment sales, and
the second one results from the accrual of a loss contingency. Flynn’s accounting department
has developed a schedule of future taxable

(One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Deferred Taxes)
Brennan Corporation began 2010 with a $90,000 balance in the Deferred Tax Liability account.
At the end of 2010, the related cumulative temporary difference amounts to $350,000 and it will
reverse evenly over the next 2 years. Pretax

(Issuance of Bonds with Detachable Warrants) On September 1, 2010, Jacob Company sold at
104 (plus accrued interest) 3,000 of its 8%, 10-year, $1,000 face value, nonconvertible bonds
with detachable stock warrants. Each bond carried two detachable warrants. Each warrant was
for one share of common stock at a specified

(Computation of Basic and Diluted EPS) Charles Austin of the controller’s office of
Thompson Corporation was given the assignment of determining the basic and diluted earnings
per share values for the year ending December 31, 2011. Austin has compiled the information
listed below. 1. The company is authorized to issu

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(EPS with Convertible Bonds, Various Situations) In 2010 Buraka Enterprises issued, at par, 75
$1,000, 8% bonds, each convertible into 100 shares of common stock. Buraka had revenues of
$17,500 and expenses other than interest and taxes of $8,400 for 2011. (Assume that the tax rate
is 40%) Throughout 2011, 2,000 shares

(Three Differences, Compute Taxable Income, Entry for Taxes) Havaci Company reports pretax
financial income of $80,000 for 2010. The following items cause taxable income to be different
than pretax financial income. 1. Depreciation on the tax return is greater than depreciation on the
income statement by $16,000. 2. Re

What controversy relates to the accounting for net operating loss carry forwards?

(Two Temporary Differences, Tracked through 3 Years, Multiple Rates) Taxable income and
pretax financial income would be identical for Jones Co. except for its treatments of gross profit
on installment sales and estimated costs of warranties. The following income computations have
been prepared. The tax rates in effect

(One Temporary Difference, Future Taxable Amounts, One Rate, No Beginning Deferred Taxes)
Starfleet Corporation has one temporary difference at the end of 2010 that will reverse and cause
taxable amounts of $55,000 in 2011, $60,000 in 2012, and $75,000 in 2013. Starfleet’s
pretax financial income for 2010 is $400,000

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(Issuance, Exercise, and Termination of Stock Options) On January 1, 2010, Magilla Inc. granted
stock options to officers and key employees for the purchase of 20,000 shares of the
company’s $10 par common stock at $25 per share. The options were exercisable within a 5-
year period beginning January 1, 2012, by grante
What are some of the reasons that the components of income tax expense should be disclosed
and reconciliation between the effective tax rate and the statutory tax rate be provided?

(Two Temporary Differences, One Rate, 3 Years) Gordon Company has two temporary
differences between its income tax expense and income taxes payable. The information is shown
below. The income tax rate for all years is 40%. (a) Prepare the journal entry to record income
tax expense, deferred income taxes, and income tax

When is a company allowed to initially recognize the financial statement effects of a tax
position?

(EPS with Convertible Bonds and Preferred Stock) On January 1, 2010, Lindsey Company
issued 10-year, $3,000,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15
shares of Lindsey common stock. Lindsey’s net income in 2011 was $240,000, and its tax
rate was 40%. The company had 100,000 shares of c

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(Stock-Appreciation Rights) Derrick Company establishes a stock-appreciation rights program

that entitles its new president Dan Scott to receive cash for the difference between the market
price of the stock and a pre-established price of $30 (also market price) on December 31, 2008,
on 40,000 SARs. The date of grant is

(Two Differences, One Rate, First Year) The differences between the book basis and tax basis of
the assets and liabilities of Morgan Corporation at the end of 2010 are presented below. Book
Basis Tax Basis Accounts receivable $50,000 $–0– Litigation liability 20,000 –0– It is
estimated

Access the glossary (“Master Glossary”) to answer the following. (a) What is a deferred tax
asset? (b) What is taxable income? (c) What is the definition of valuation allowance? (d) What is
a deferred tax liability?

How are deferred tax assets and deferred tax liabilities reported on the balance sheet?

At December 31, 2010, Appaloosa Corporation had a deferred tax liability of $25,000. At
December 31, 2011, the deferred tax liability is $42,000. The corporation’s 2011 current tax
expense is $48,000. What amount should Appaloosa report as total 2011 tax expense?

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(Three Differences, Multiple Rates, Future Taxable Income) During 2010, Graham Co.’s
first year of operations, the company reports pretax financial income of $250,000. Graham’s
enacted tax rate is 40% for 2010 and 35% for all later years. Graham expects to have taxable
income in each of the next 5 years. The effect
The book basis of depreciable assets for Erwin Co. is $900,000, and the tax basis is $700,000 at
the end of 2011. The enacted tax rate is 34% for all periods. Determine the amount of deferred
taxes to be reported on the balance sheet at the end of 2011.

(Deferred Tax Liability, Change in Tax Rate, Prepare Section of Income Statement) Sharer
Inc.’s only temporary difference at the beginning and end of 2010 is caused by a $2 million
deferred gain for tax purposes for an installment sale of a plant asset, and the related receivable
(only one-half of which is classified

A company wishes to conduct business in a foreign country that attracts businesses by granting
“holidays” from income taxes for a certain period of time. Would the company have to
disclose this “holiday” to the SEC? If so, what information must be disclosed?

(Stock-Option Plan) Berg Company adopted a stock-option plan on November 30, 2009, that
provided that 70,000 shares of $5 par value stock be designated as available for the granting of
options to officers of the corporation at a price of $9 a share. The market value was $12 a share
on November 30, 2009. On January 2, 2

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In 2010, Amir ante Corporation had pretax financial income of $168,000 and taxable income of
$120,000. The difference is due to the use of different depreciation methods for tax and
accounting purposes. The effective tax rate is 40%. Compute the amount to be reported as
income taxes payable at December 31, 2010.

Oxford Corporation began operations in 2010 and reported pretax financial income of $225,000
for the year. Oxford’s tax depreciation exceeded its book depreciation by $40,000.
Oxford’s tax rate for 2010 and years thereafter is 30%. In its December 31, 2010 balance
sheet, what amount of deferred tax liability should

(Terminology, Relationships, Computations, Entries) Complete the following statements by

filling in the blanks. (a) In a period in which a taxable temporary difference reverses, the reversal
will cause taxable income to be _______ (less than, greater than) pretax financial income. (b) If a
$68,000 balance in Deferred

Differentiate between an originating temporary difference and a reversing difference.

(Carry back and Carry forward of NOL, No Valuation Account, No Temporary Differences) The
pretax financial income (or loss) figures for Synergetic Company are as follows. 2006 $160,000
2007 250,000 2008 90,000 2009 (160,000) 2010 (350,000) 2011 120,000 2012 100,000 Pretax
financial income (or loss) and t

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Briefly describe some of the similarities and differences between U.S. GAAP and iGAAP with
respect to income tax accounting.

Addison Co. has one temporary difference at the beginning of 2010 of $500,000. The deferred
tax liability established for this amount is $150,000, based on a tax rate of 30%. The temporary
difference will provide the following taxable amounts: $100,000 in 2011; $200,000 in 2012, and
$200,000 in 2013. If a new tax rate

(Two Differences, No Beginning Deferred Taxes, Multiple Rates) Macinski Inc., in its first year
of operations, has the following differences between the book basis and tax basis of its assets and
liabilities at the end of 2010. Book Basis Tax Basis Equipment (net) $400,000 $340,000
Estimated warranty liability

(Two Differences, One Rate, Beginning Deferred Balance, Compute Pretax Financial Income)
Shamess Co. establishes a $90 million liability at the end of 2010 for the estimated litigation
settlement for manufacturing defects. All related costs will be paid and deducted on the tax
return in 2011. Also, at the end of 2010,

(Two Temporary Differences, One Rate, Beginning Deferred Taxes, Compute Pretax Financial
Income) The following facts relate to Mc Kane Corporation. 1. Deferred tax liability, January 1,
2010, $60,000. 2. Deferred tax asset, January 1, 2010, $20,000. 3. Taxable income for 2010,
$115,000. 4. Cumulative temporary differen

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(One Difference, Multiple Rates, Effect of Beginning Balance versus No Beginning Deferred
Taxes) At the end of 2010, Wasicsko Company has $180,000 of cumulative temporary
differences that will result in reporting future taxable amounts as follows. 2011 $ 70,000 2012
50,000 2013 40,000 2014 20,000

(Computation of Basic and Diluted EPS) The information below pertains to Barkley Company
for 2010. Net income for the year $1,200,000 8% convertible bonds issued at par ($1,000 per
bond). Each bond is convertible into 30 shares of common stock. 2,000,000 6% convertible,
cumulative preferred stock, $1

Roth Inc. has a deferred tax liability of $68,000 at the beginning of 2011. At the end of 2011, it
reports accounts receivable on the books at $90,000 and the tax basis at zero (its only temporary
difference). If the enacted tax rate is 34% for all periods, and income tax payable for the period is
$230,000, determine t

(Issuance of Bonds with Warrants) Prior Inc. has decided to raise additional capital by issuing
$175,000 face value of bonds with a coupon rate of 10%. In discussions with investment
bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be
issued at the rate of one warrant for
(Stock-Based Compensation) Assume that Amazon has a stock-option plan for top management.
Each stock option represents the right to purchase a share of Amazon $1 par value common stock
in the future at a price equal to the fair value of the stock at the date of the grant. Amazon has
5,000 stock options outstanding, whi

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(EPS with Convertible Bonds) On June 1, 2009, Bluhm Company and Amanar Company merged
to form Davenport Inc. A total of 800,000 shares were issued to complete the merger. The new
corporation reports on a calendar-year basis. On April 1, 2011, the company issued an additional
600,000 shares of stock for cash. All 1,400,

Youngman Corporation has temporary differences at December 31, 2010, that result in the
following deferred taxes. Deferred tax liability—current $38,000 Deferred tax asset—current
$(62,000) Deferred tax liability—noncurrent $96,000 Deferred tax asset—noncurrent
$(27,000) Indicate how these balances would

What are the two objectives of accounting for income taxes?

(EPS with Contingent Issuance Agreement) Brooks Inc. recently purchased Donovan Corp., a
large mid western home Painting Corporation. One of the terms of the merger was that if
Donovan’s income for 2011 was $110,000 or more, 10,000 additional shares would be issued
to Donovan’s stockholders in 2012. Donovan’s inc

What is the difference between a future taxable amount and a future deductible amount? When is
it appropriate to record a valuation account for a deferred tax asset?

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At December 31, 2010, Fell Corporation had a deferred tax liability of $680,000, resulting from
future taxable amounts of $2,000,000 and an enacted tax rate of 34%. In May 2011, a new
income tax act is signed into law that raises the tax rate to 40% for 2011 and future years.
Prepare the journal entry for Fell to adjus

At December 31, 2010, Hill yard Corporation has a deferred tax asset of $200,000. After a
careful review of all available evidence, it is determined that it is more likely than not that
$60,000 of this deferred tax asset will not be realized, prepare the necessary journal entry.

What is an uncertain tax position, and what are the general guidelines for accounting for
uncertain tax positions?

(EPS with Complex Capital Structure) Amy Dyken, controller at Fitzgerald Pharmaceutical
Industries, a public company, is currently preparing the calculation for basic and diluted earnings
per share and the related disclosure for Fitzgerald’s financial statements. Below is selected
financial information for the fiscal
(Two Temporary Differences, One Rate, Beginning Deferred Taxes) The following facts relate
to Alschuler Corporation. 1. Deferred tax liability, January 1, 2010, $40,000. 2. Deferred tax
asset, January 1, 2010, $0. 3. Taxable income for 2010, $115,000. 4. Pretax financial income for
2010, $200,000. 5. Cumulative tempora

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What are the two basic requirements applied to the measurement of current and deferred income
taxes at the date of the financial statements?

What are the possible treatments for tax purposes of a net operating loss? What are the
circumstances that determine the option to be applied? What is the proper treatment of a net
operating loss for financial reporting purposes?

(NOL Carry back and Carry forward, Valuation Account versus No Valuation Account)
Sondgeroth Inc. reports the following pretax income (loss) for both financial reporting purposes
and tax purposes. (Assume the carry back provision is used for a net operating loss.) The tax
rates listed were all enacted by the beginning

How is it determined whether deferred tax amounts are considered to be “related” to

specific asset or liability amounts?

(EPS with Convertible Bonds and Preferred Stock) The Ottey Corporation issued 10-year,
$4,000,000 par, 7% callable convertible subordinated debentures on January 2, 2010. The bonds
have a par value of $1,000, with interest payable annually. The current conversion ratio is 14 : 1,
and in 2 years it will increase to 18 :

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(Entries for Various Dilutive Securities) The stockholders’ equity section of Martino Inc. at
the beginning of the current year appears below. Common stock, $10 par value, authorized
1,000,000 shares, 300,000 shares issued and outstanding $3,000,000 Paid-in capital in excess of
par 600,000 Retained earning

(EPS: Simple Capital Structure) On January 1, 2010, Chang Corp. had 480,000 shares of
common stock outstanding. During 2010, it had the following transactions that affected the
common stock account. February 1 Issued 120,000 shares March 1 Issued a 20% stock dividend
May 1 Acquired 100,000 shares of treasury stock

Describe the current convergence efforts of the FASB and IASB in the area of accounting for
taxes.

(Basic EPS: Two-Year Presentation) Melton Corporation is preparing the comparative financial
statements for the annual report to its shareholders for fiscal years ended May 31, 2010, and May
31, 2011. The income from operations for each year was $1,800,000 and $2,500,000,
respectively. In both years, the company incurr

(EPS with Options, Various Situations) Zambrano Company’s net income for 2010 is
$40,000. The only potentially dilutive securities outstanding were 1,000 options issued during
2009, each exercisable for one share at $8. None has been exercised, and 10,000 shares of
common were outstanding during 2010. The average mar

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At December 31, 2010, Suffolk Corporation had an estimated warranty liability of $105,000 for
accounting purposes and $0 for tax purposes. (The warranty costs are not deductible until paid.)
The effective tax rate is 40%. Compute the amount Suffolk should report as a deferred tax asset
at December 31, 2010.

Differentiate between “loss carry back” and “loss carry forward.” Which can be
accounted for with the greater certainty when it arises? Why?

At the end of the year, Falabella Co. has pretax financial income of $550,000. Included in the
$550,000 is $70,000 interest income on municipal bonds, $25,000 fine for dumping hazardous
waste, and depreciation of $60,000. Depreciation for tax purposes is $45,000. Compute income
taxes payable, assuming the tax rate is 3

(EPS: Simple Capital Structure) Kendall Inc. presented the following data. Net income
$2,200,000 Preferred stock: 50,000 shares outstanding, $100 par, 8% cumulative, not convertible
5,000,000 Common stock: Shares outstanding 1/1 600,000 Issued for cash, 5/1 300,000 Acquired
treasury stock for

(Two NOLs, No Temporary Differences, No Valuation Account, Entries and Income Statement)
Lanier Corporation has pretax financial income (or loss) equal to taxable income (or loss) from
2003 through 2011 as follows. Pretax financial income (loss) and taxable income (loss) were the
same for all years since Lanier has bee

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(Stock-Appreciation Rights) On December 31, 2007, Flessel Company issues 120,000 stock
appreciation rights to its officers entitling them to receive cash for the difference between the
market price of its stock and a pre-established price of $10. The fair value of the SARs is
estimated to be $4 per SAR on December 31,

(NOL Carry back and Carry forward, Valuation Account Needed) Hayes Co. reported the
following pretax financial income (loss) for the years 2009–2013. 2009 $240,000 2010
350,000 2011 90,000 2012 (550,000) 2013 180,000 Pretax financial income (loss) and taxable
income (loss) were the same for all years
Explain the meaning of a temporary difference as it relates to deferred tax computations, and
give three examples.

(Accounting for Restricted Stock) Tweedie Company issues 10,000 shares of restricted stock to
its CFO, Mary Tokar, on January 1, 2010. The stock has a fair value of $500,000 on this date.
The service period related to this restricted stock is 5 years. Vesting occurs if Tokar stays with
the company for 5 years. The par

Where can authoritative iGAAP related to the accounting for taxes be found?

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(Objectives and Principles for Accounting for Income Taxes) The amount of income taxes due to
the government for a period of time is rarely the amount reported on the income statement for
that period as income tax expense. (a) Explain the objectives of accounting for income taxes in
general purpose financial statements

(Identify Temporary or Permanent Differences) Listed below are items that are commonly
accounted for differently for financial reporting purposes than they are for tax purposes. For each
item below, indicate whether it involves: (1) A temporary difference that will result in future
deductible amounts and, therefore, wi

Use the information for Rode Inc. given in BE19-13. Assume that it is more likely than not that
the entire net operating loss carry forward will not be realized in future years. Prepare all the
journal entries necessary at the end of 2010.

Using the information from BE19-2, assume this is the only difference between Oxford’s
pretax financial income and taxable income. Prepare the journal entry to record the income tax
expense, deferred income taxes, and income tax payable, and show how the deferred tax liability
will be classified on the December 31, 2

(Issuance and Exercise of Stock Options) On November 1, 2009, Olympic Company adopted a
stock-option plan that granted options to key executives to purchase 40,000 shares of the
company’s $10 par value common stock. The options were granted on January 2, 2010, and
were exercisable 2 years after the date of grant if t

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(EPS with Stock Dividend and Extraordinary Items) Agassi Corporation is preparing the
comparative financial statements to be included in the annual report to stockholders. Agassi
employs a fiscal year ending May 31. Income from operations before income taxes for Agassi
was $1,400,000 and $660,000, respectively, for fis

(Issuance of Bonds with Stock Warrants) On May 1, 2010, Barkley Company issued 3,000
$1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after
issuance, the bonds were selling at 98, but the market value of the warrants cannot be
determined. (a) Prepare the entry to record the issuance

Shetland Inc. had pretax financial income of $154,000 in 2010. Included in the computation of
that amount is insurance expense of $4,000 which is not deductible for tax purposes. In addition,
depreciation for tax purposes exceeds accounting depreciation by $10,000. Prepare
Shetland’s journal entry to record 2010 taxe

Describe the procedures involved in segregating various deferred tax amounts into current and
noncurrent categories.

(Weighted-Average Number of Shares) Gogean Inc. uses a calendar year for financial reporting.
The company is authorized to issue 9,000,000 shares of $10 par common stock. At no time has
Gogean issued any potentially dilutive securities. Listed below is a summary of Gogean’s
common stock activities. 1. Number of commo

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At December 31, 2010, Percheron Inc. had a deferred tax asset of $30,000. At December 31,
2011, the deferred tax asset is $59,000. The corporation’s 2011 current tax expense is
$61,000. What amount should Percheron report as total 2011 tax expense?

Mitchell Corporation had income before income taxes of $195,000 in 2010. Mitchell’s
current income tax expense is $48,000, and deferred income tax expense is $30,000. Prepare
Mitchell’s 2010 income statement, beginning with income before income taxes.

Conlin Corporation had the following tax information. In 2011 Conlin suffered a net operating
loss of $480,000, which it elected to carry back. The 2011 enacted tax rate is 29%. Prepare
Conlin’s entry to record the effect of the loss carry back.

(Deferred Tax Asset with Previous Valuation Account) Assume the same information as E19-14,
except that at the end of 2010, Callaway Corp. had a valuation account related to its deferred tax
asset of $40,000. (a) Record income tax expense, deferred income taxes, and income taxes
payable for 2011, assuming that it is mo

Rode Inc. incurred a net operating loss of $500,000 in 2010. Combined income for 2008 and
2009 was $350,000. The tax rate for all years is 40%. Rode elects the carry back option. Prepare
the journal entries to record the benefits of the loss carry back and the loss carry forward.

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Pretax financial income for Lake Inc. is $300,000, and its taxable income is $100,000 for 2011.
Its only temporary difference at the end of the period relates to a $70,000 difference due to
excess depreciation for tax purposes. If the tax rate is 40% for all periods, compute the amount of
income tax expense to report i

John is a dentist. His neighbor Wade is a carpenter. John has agreed to perform dental work for
Wade and his wife in exchange for Wade's installing a new laminate floor in John's dental office.
Identify the tax issue or issues suggested by the following situations and state each issue in the
form of a question.

(EPS: Simple Capital Structure) At January 1, 2010, Cameron Company’s outstanding shares
included the following. 280,000 shares of $50 par value, 7% cumulative preferred stock 800,000
shares of $1 par value common stock Net income for 2010 was $2,830,000. No cash dividends
were declared or paid during 2010. On Februa

(EPS: Simple Capital Structure) On January 1, 2010, Bailey Industries had stock outstanding as
follows. 6% Cumulative preferred stock, $100 par value, issued and outstanding 10,000 shares
$1,000,000 Common stock, $10 par value, issued and outstanding 200,000 shares 2,000,000 To
acquire the net assets of three sma

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2009, Scooby Corporation
granted 10,000 options to key executives. Each option allows the executive to purchase one share
of Scooby’s $5 par value common stock at a price of $20 per share. The options were
exercisable within a 2-year period beginnin

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(EPS: Simple Capital Structure) Ott Company had 210,000 shares of common stock outstanding
on December 31, 2010. During the year 2011 the company issued 8,000 shares on May 1 and
retired 14,000 shares on October 31. For the year 2011 Ott Company reported net income of
$229,690 after a casualty loss of $40,600 (net of t

Company Y began business in February 2017. By the end of the calendar year, it had billed its
clients for $3.5 million of services and had incurred $800,000 of operating expenses. As of
December 31, it had collected $2.9 million of its billings and had paid $670,000 of its expenses.
It expects to collect the remaining

Corporation P owns a controlling stock interest in Subsidiary S and Subsidiary T. Corporation

P's marginal tax rate is 25 percent. It engages in one transaction that shifts $10,000 income to
Subsidiary S and a second transaction that shifts a $15,000 deduction to Subsidiary T. Based on
these facts, what conclusions can

Mrs. K is completely blind, while Mr. L is paralyzed from the waist down. Both individuals have
the same income. The Internal Revenue Code provides a preferential deduction for individuals
who are blind, and as a result, Mrs. K's income tax liability is less than Mr. L's income tax
liability.
ZEJ, a calendar year accrual basis taxpayer, made the following adjustments to its allowance for
bad debts this year: a. Compute ZEJ's bad debt expense for financial statement purposes. b.
Compute ZEJ's tax deduction for bad debts.

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Dr. P is a physician with his own medical practice. For the past several years, his marginal
income tax rate has been 39.6 percent. Dr. P's daughter, who is a college student, has no taxable
income. During the last two months of the year, Dr. P instructs his patients to remit their
payments for his services directly to

The U.S. Congress has occasionally considered enacting a federal tax on the sale of consumer
goods and services. This national sales tax would be in addition to any state and local sales tax.
Would this new source of federal revenue affect the revenues of state and local governments?

Two years ago, a professional theater company paid $300 to an antique dealer for an old oil
painting that the company used as a prop. This year, the company's prop manager was cleaning
the painting and discovered an older painting hidden beneath the top coat of pigment. To the
company's delight, the older painting was

To what extent do cost recovery deductions based on the capitalized cost of a tangible asset
reflect a decline in the economic value of that asset?

Under what circumstances is percentage depletion not a true cost recovery deduction?

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DLT's chief operating officer is negotiating the acquisition of a controlling interest in the stock
of AA Inc. from Mr. and Mrs. A. The director of tax suggested that the acquisition be structured
as a nontaxable transaction to Mr. and Mrs. A. The CEO rejected the suggestion by saying,
"Since DLT is the purchaser, our

Is every business organization a taxable entity for federal income tax purposes? Explain briefly.

MG is an accrual basis corporation. In 2017, it wrote off a $65,000 account receivable as

uncollectible. In 2018, it received a $65,000 check from the creditor in full payment of this
receivable. a. What was the effect of the write-off on MG's 2017 financial statement income and
taxable income? b. What was the effect

GreenUp, a calendar year, accrual basis taxpayer, provides landscaping installation and
maintenance services to its customers. In August 2017, GreenUp contracted with a university to
renovate its lawns and gardens. GreenUp agreed to complete the entire renovation by May 31,
2019, and the university prepaid the entire $
Ms. P is considering investing $20,000 in a new business. She projects that this investment
should generate $3,000 income each year. In estimating her tax on this future income stream,
should Ms. P use her marginal or her average tax rate?

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Discuss the relationship between cost recovery deductions and cash flows.

Describe the difference in tax treatment between start-up costs of a new business and expansion
costs of an existing business.

In 2017, Firm L purchased machinery costing $21,300 and elected to expense the entire cost
under Section 179. How much of the expense can Firm L deduct in each of the following cases?
a. Its taxable income before the deduction was $58,000. b. Its taxable income before the
deduction was $19,200. c. Its net operating

Argonaut Corporation sustained considerable damage to one of its warehouses during a recent
hurricane. It expects to pay $200,000 to replace the roof of the building and repair other damage.
It is unclear at this point whether any of the loss will be compensated by insurance. Identify the
tax issue or issues suggested

HomeSafe, an accrual basis, calendar year corporation, sells and installs home alarm systems.
The contract price of a system includes four free service calls. HomeSafe's cost of each call is
$75. At the end of 2017, HomeSafe accrued a $48,900 expense and a $48,900 liability for future
service calls for systems sold in

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Company N, an accrual basis taxpayer, owes $90,000 to Creditor K. At the end of 2017,
Company N accrued $7,740 interest payable on this debt. It didn't pay this liability until March 3,
2018. Both Company N and Creditor K are calendar year taxpayers. For each of the following
cases, determine the year in which Company

Loni Company paid $527,000 for tangible personalty in 2016 and elected to expense $500,000 of
the cost (the limited dollar amount for 2016). Loni's taxable income before a Section 179
deduction was $394,100. Loni paid $23,700 for tangible personalty in 2017 and elected to
expense the entire cost. Loni's taxable income

ABC Company purchased business property several years ago, paying $25,000 cash and
borrowing $80,000 to fund the acquisition. ABC also incurred $2,000 of freight costs for
shipping the property to its business location. Over time, ABC has incurred $12,000 of repair
costs for the property and made $7,000 of capital impr

Jetex, an accrual basis, calendar year corporation, engages in the business of longdistance freight
hauling. Every year, Jetex is required to purchase several hundred permits and licenses from state
and local governments in order to legally operate its fleet of trucks. During 2017, the cost of
these permits and license

In November of this year, Corporation Q negotiated to sell a tract of land to an unrelated buyer.
The buyer refused to close the sale until the following February. Corporation Q wanted to close
the sale by year-end so that the gain would be taxed at its current 25 percent rate. Corporation
Q's rate for next year will b

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Mrs. Y owns 1,800 shares of Acme common stock, which she purchased for $10 per share in
2002. In October of this year, she decides to sell her Acme stock for the market price of $27 per
share, the highest price at which the stock has traded in the past 22 months. A friend advises her
to hold the Acme stock until next J

Mr. E, a petroleum engineer, earns an $83,000 annual salary, while Mrs. E, a homemaker, has no
earned income. Under current law, the couple pays 20 percent in state and federal income tax.
Because of recent tax law changes, the couple's future tax rate will increase to 28 percent. If Mrs.
E decides to take a part-time

Assuming a 34 percent tax rate, compute the after-tax cost of the following business
expenditures: a. $20,000 cost of equipment subject to Section 179 election. b. $17,500 business
expansion costs. c. $125,000 cost of land held for investment. d. $34,500 intangible drilling
costs.

Firm Y has the opportunity to invest in a new venture. The projected cash flows are as follows:
Year 0: Initial cash investment in the project of $300,000. Years 1, 2, and 3: Generate cash
revenues of $50,000. Years 1, 2, and 3: Incur fully deductible cash expenditures of $30,000.
Year 3: Incur nondeductible cash e

Margo, a calendar year taxpayer, paid $580,000 for new machinery (seven-year recovery
property) placed in service on August 1, 2017. a. Assuming that the machinery was the only
tangible property placed in service during the year, compute Margo's maximum cost recovery
deduction. b. How would your computation change if

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Firm F is a cash basis legal firm. In 2017, it performed services for a client, mailed the client a
bill for $6,150, and recorded a $6,150 receivable. In 2018, Firm F discovered that the client was
under criminal indictment and had fled the country. After learning this news, it wrote off the
receivable. a. What was th

BL and TM are both calendar year corporations. On January 1, 2017, BL purchased TM's entire
business (all TM's balance sheet assets), and TM's shareholders dissolved the corporation under
state law. As of January 1, TM had a $190,000 NOL carryforward. BL's business for 2017
(which includes the business purchased from T

Mr. RJ owns a consulting firm that uses a calendar year and the cash method. In November, Mr.
RJ billed a client $3,500 for services performed in September. After waiting several weeks, he
called the client to remind her of the bill. The embarrassed client promised to telephone Mr. RJ
as soon as she prepared a check fo

Firm HR is about to implement an aggressive long-term strategy consisting of three phases. It is

crucial to the success of the strategy that the IRS accepts Firm HR's interpretation of the tax
consequences of each distinct phase. The firm could implement the first phase in November
2016 and the second phase in August 2

Consider the following opportunities: Opportunity 1 requires a $4,000 cash payment now (year
0) but will result in $14,000 cash received in year 5. Opportunity 2 requires no cash outlay and
results in $3,500 cash received in year 3 and year 5. a. Use a 6 percent discount rate and
determine whether Opportunity 1 or Opp

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Extronic, a calendar year, accrual basis corporation, reported a $41,900 liability for accrued 2016
state income tax on its December 31, 2016, balance sheet. Extronic made the following state
income tax payments during 2017: On December 27, Extronic's tax department calculated that
the corporation's actual 2017 state

Refer to Country A's rate structure described in the preceding problem. Ms. SP's annual taxable
income for years 1 through 5 is $150,000. Ms. OC's taxable income for years 1 through 4 is
$20,000. In year 5, Ms. OC wins a lottery, and her taxable income for this one year jumps to
$670,000. a. How much total income does

KLP, a calendar year corporation, sponsored a contest for its customers with a grand prize of
$100,000 cash. Contestants could enter the contest from June 1 through November 30. KLP
selected the winner and announced her name on December 20. However, it didn't present a
$100,000 check to the winner until January 13. In

At the beginning of its 2017 tax year, Hiram owned the following business assets: On July 8,
Hiram sold its equipment. On August 18, it purchased and placed in service new tools costing
$589,000; these tools are three-year recovery property. These were Hiram's only capital
transactions for the year. Compute Hiram's ma

Ms. BK is a self-employed architect who earns $300,000 annual taxable income. For the past
several years, her tax rate on this income has been 35 percent. Because of recent tax law changes,
Ms. BK's tax rate for next year will decrease to 25 percent. a. Based on a static forecast, how
much less revenue will the govern
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Lardo Inc. plans to build a new manufacturing plant in either Country X or Country Y. It projects
gross revenue in either location of $4 million per year. Operating expenses would be $1.5 million
in Country X and $1.8 million in Country Y. Country X levies income tax at a rate of 20 percent
on net business income. Coun

French Corporation wishes to hire Leslie as a consultant to design a comprehensive staff training
program. The project is expected to take one year, and the parties have agreed to a tentative price
of $60,000. Leslie has requested payment of one-half of the fee now, with the remainder paid in
one year when the project

TRW Inc. began business in 2009 and was profitable for its first three years. In 2012, it
generated a $741,000 net operating loss. The following table shows TRW's taxable income
before consideration of this NOL. Recompute TRW's taxable income for this eight-year period
assuming that it didn't elect to give up the NOL

The city of Clement levies a 5 percent tax on the base price of rooms provided by hotels and
motels located within the city limits. This year, the aggregate room price subject to tax was $25
million, so current year revenue was $1.25 million. Clement's city council recently voted to
increase the hotel tax rate to 6 per

CheapTrade, an accrual basis, calendar year corporation, operates a discount securities brokerage
business. CheapTrade accepts orders to buy or sell marketable securities for its customers and
charges them a commission fee for effecting the transaction in a timely, low-cost manner.
CheapTrade executes an order on the "

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Firm D paid a $500,000 lump-sum price for a commercial office building. A local consulting
company approached Firm D with a proposal. For a $15,000 fee, the company would analyze the
components of the building (shelving, lighting fixtures, floor coverings, plumbing, etc.) to
determine how much of the $500,000 price is

FruAgro Company grows a variety of fruits and nuts for sale to grocery wholesalers. FruAgro
owns and operates orchards in California, Florida, Mexico, and Costa Rica. This year, sales of
produce from the California and Florida orchards generated $23.4 million net income, while
sales of produce from the Mexican and Cost

Visit the website for the Tax Foundation (www.taxfoundation.org). Select the link "About Us" to
read the organization's mission statement. Select the link "Tax Topics" to research the following:
a. What and when was Tax Freedom Day in 2016? b. How many additional days would
Americans have to work to pay off the 2016
Mr. and Mrs. TR own an investment yielding a 4.25 percent after-tax return. Their friend Ms. K
is encouraging them to sell this investment and invest the proceeds in her business, which takes
advantage of several favorable tax preferences. Consequently, Ms. K's after-tax return from this
business is 7 percent. Identif

Which assumption about the tax consequences of a future transaction is more uncertain: an
assumption based on a provision that has been in the Internal Revenue Code for 25 years or an
assumption based on a provision that Congress added to the Code two years ago?

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Find the IRS Revenue Procedure that gives the standard deduction amounts for the 2016 tax
year. Prepare a table reporting the standard deduction amounts and their associated filing
statuses. Also report the full citation for your source, in the form of the following example: Rev.
Proc. 98-1, 1998-1 C.B. 7.

Ms. LG plans to structure a transaction as a legal sale of property, even though the economic
substance of the transaction is a lease of the property. In her current position, the tax
consequences of a sale are much more favorable than those of a lease. Ms. LG believes that if her
position unexpectedly changes so that

Malo Inc. uses a fiscal year ending June 30. On May 29, Malo received a check for $3,900 from
a business that leases parking spaces in Malo's parking garage. This payment was for the three-
month period beginning June 1. On June 15, Malo sent an invoice for $5,500 to a customer for
services rendered during May and June.

Jurisdiction B's tax system consists of a 6.5 percent general sales tax on retail goods and selected
services. Over the past decade, the average annual volume of sales subject to this tax was $500
million. The jurisdiction needs to increase its tax revenues by approximately $5 million each
year to finance its spending

Moleri, an accrual basis corporation with a fiscal taxable year ending on July 31, owns real estate
on which it pays annual property tax to Madison County, Texas. The county assesses the tax for
the upcoming calendar year on January 1, and the tax becomes a lien on the property as of the
assessment date. Property owner

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Ms. S is the sole shareholder and chief executive officer of SMJ Corporation. Ms. S's college
roommate recently lost her job, is in financial difficulty, and has asked Ms. S for a loan. Instead
of a loan, Ms. S offered the roommate a job with SMJ at a $35,000 annual salary. Identify the tax
issue or issues suggested b
Why do the MACRS tables published by the IRS incorporate a depreciation convention for the
first year during an asset's recovery period but not for the year of disposition?

Bontaine Publications, an accrual basis, calendar year corporation, publishes and sells weekly
and monthly magazines to retail bookstores and newsstands. The sales agreement provides that
the retailers may return any unsold magazines during the onemonth period after purchase.
Bontaine will refund one-half of the purcha

Firm O purchased two items of business personalty this year. The first item cost $35,000 and has
a five-year recovery period, and the second item cost $61,500 and has a seven-year recovery
period. Firm O wants to make the Section 179 election for one of its new assets. Which asset
should the firm choose and why?

Every December, Maxo Inc., an accrual basis, calendar year corporation, purchases 3,500
calendars from a publisher and mails them to its customers as a holiday gift. This year, Maxo
received a $14,420 bill from the publisher, which represented a sizeable price increase from prior
years. Maxo scheduled a January meetin

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Firm A and Firm Z are in the same business. Both firms considered spending $10,000 for the
same reason. The expenditure would be deductible for both firms. Firm A decided that the
expenditure was worthwhile and spent the money, but Firm Z rejected the expenditure. Can you
provide a tax explanation for these apparently

Company P must choose between two alternate transactions. The cash generated by Transaction
1 is taxable, and the cash generated by Transaction 2 is nontaxable. Determine the marginal tax
rate at which the after-tax cash flows from the two transactions are equal assuming that: a.
Transaction 1 generates $100,000 of in

In April 2017, Lenape Corporation acquired new business machinery with a total cost of
$775,000. Assuming the machinery qualifies for both the Section 179 deduction and bonus
depreciation, calculate Lenape's total cost recovery on the machinery for 2017.

In its first year of operations, Lima Company manufactured 1,000 widgets, incurring direct
materials and labor costs of $227,000. For book purposes, Lima capitalized $260,000 of indirect
manufacturing costs. For tax purposes, it had to capitalize $315,000 of indirect costs under the
UNICAP rules. At the end of the year

Earlier in the year, Mrs. G, a business manager for Company RW, evaluated a prospective
opportunity that could generate $20,000 additional taxable income. Mrs. G determined that the
company's marginal tax rate on this income would be 25 percent. Later in the year, a different
manager evaluated another opportunity that
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Company QP must decide whether to build a new manufacturing plant in Country B or Country
C. Country B has no income tax. However, its political regime is unstable and its currency has
been devalued four times in three years. Country C has both a 20 percent income tax and a stable
democratic government. Identify the t

Two years ago, the government of State P decided to improve the horizontal equity of its
individual income tax by allowing families to deduct the cost of heating and air conditioning
their homes. This modification necessitated an additional tax form and three additional pages of
instructions. For the past two years, on

Firm F is negotiating to purchase a multimillion-dollar computer system from the manufacturer.

Under applicable state law, Firm F is exempt from sales tax on the purchase. Because the
manufacturer discovered this fact, it increased its selling price for the system by $25,000. Is this
transaction taking place in a priva

For each of the following scenarios, indicate which of the four basic tax planning variables
(entity, character, time period, jurisdiction) impacts after-tax value. Note that more than one
variable may apply to any scenario; identify all that are relevant. a. Aloha Corporation is
considering building a new manufacturi

Firm Z is considering implementing a long-term tax strategy to accelerate the deduction of

certain business expenses. The strategy has an opportunity cost because it decreases before-tax
cash flows, but the tax savings from the strategy should be greater than this opportunity cost. The
strategy is aggressive, and the I

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Parmco, a calendar year corporation, made the following accruals for 2017 financial statement
purposes. In each case, determine how much of the accrued expense is deductible on Parmco's
2017 federal tax return. a. $30,000 expense and $30,000 liability for Henry Parmenter's 2017
performance bonus. Henry is Parmco's pre

Which of the following statements regarding the U.S. Supreme Court is FALSE? a. The Supreme
Court may agree to hear an appeal (grant certiorari) or refuse to hear it (deny certiorari). b. The
Supreme Court generally agrees to hear tax cases only when the case involves a significant
principle of law or because two or

Hansen Company, a cash basis taxpayer, paid $50,000 for an asset in year 0. Assume it can
deduct one-half of the cost in year 0 and the remainder in year 1. Assume a 35 percent tax rate
and 8 percent discount rate. a. Calculate the net present value of Hansen's after-tax cost of the
asset. b. Now assume Hansen borrow
Company WB is evaluating a business opportunity with uncertain tax consequences. If the
company takes a conservative approach by assuming the least beneficial tax consequences, the
tax cost is $95,000. If the company takes an aggressive approach by assuming the most
beneficial tax consequences, the tax cost is only $86

Firm F, a calendar year taxpayer, owes a $200,000 long-term debt to an unrelated creditor. In
December, it paid $14,160 to the creditor as interest for the 12-month period from the prior
September 1 through August 31 of the following year. Compute the deduction for this payment
assuming that: a. Firm F uses the cash m

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BZD, a calendar year corporation, made the following year-end accruals for 2017 financial
statement purposes. In each case, determine how much of the accrued expense is deductible on
BZD's 2017 federal tax return. a. $55,000 expense and $55,000 liability for unpaid December
salaries. BZD paid the entire liability to i

ABC Partnership owns 100 percent of the stock of two corporations, HT (an advertising firm)
and LT (a commercial real estate development firm). HT is in a 35 percent marginal tax bracket.
LT has an NOL carryforward deduction and will pay no tax this year. HT recently developed a
new advertising campaign for LT and char

Mr. and Mrs. K own rental property that generates $4,000 monthly revenue. The couple is in the
highest marginal tax bracket. For Christmas, Mr. and Mrs. K give the uncashed rent checks for
October, November, and December to their 19-year-old grandson as a gift. Identify the tax issue
or issues suggested by the followi

On May 12, 2016, Nelson Inc. purchased eight used passenger automobiles for its business.
Nelson did not make a Section 179 election to expense any portion of the cost of the
automobiles, which are five-year recovery property subject to the half-year convention. Compute
Nelson's depreciation deduction with respect to t

Mr. R lived in a two-bedroom, one-bath residence until August when he moved to a new home
and converted his old residence into residential rent property. He had no trouble finding tenants
who signed a one-year lease and moved in on September 1. As of this date, the market value of
the old residence was $120,000. Mr. R

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In October 2015, Firm G completed a consulting engagement and received a $200,000 cash
payment for its services. In December, the client notified Firm G that it was unsatisfied with the
work and demanded that Firm G refund $50,000 of the payment. Firm G refused and referred the
matter to its attorney. In 2017, Firm G s
Four years ago, the citizens of Country C complained that the national tax system was too
uncertain because the government changed the tax laws so frequently. In response to this
criticism, the government enacted a 10-year moratorium on change: No existing tax law can be
modified and no new tax law can be enacted for a

Warren Company is a calendar year, cash basis firm. On December 6, 2017, Warren paid $7,200
cash to a landscape service business that maintains the lawns and gardens around Warren's
headquarters. How much of this expenditure can Warren deduct in 2017 assuming that: a. The
expenditure is a prepayment for four months of

Mr. and Mrs. J's taxable income from their business has been stable for the past 5 years, and their
average federal income tax rate has ranged between 22 and 24 percent. Because of a boom in the
local economy, the couple estimates that their business will generate an additional $100,000
taxable income next year. In mak

Use the present value table in Appendix A and Appendix B to compute the NPV of each of the
following cash outflows: a. $22,000 paid at the end of 4 years. The discount rate is 5 percent. b.
$2,000 paid at the end of 3 years and $5,000 paid at the end of 5 years. The discount rate is 8
percent. c. $7,000 paid annuall

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Wahoo Inc., a calendar year taxpayer, leases equipment to a customer for $4,500 monthly rent.
On November 27, 2017, Wahoo received a $36,000 rent payment for the eight-month period
beginning on December 1. How much of the payment must Wahoo recognize as 2017 taxable
income assuming that: a. Wahoo uses the cash method

Country A levies an individual income tax with the following rate structure: Percentage Rate
___________________ Bracket 10% ............................... Income from -0- to $20,000
15 ................................. Income from $20,001 to $75,000 25 ................................. Income from
$75,001 to $160

County M imposes a 1 percent tax on the gross receipts earned by firms operating within its
jurisdiction. For the past year, gross receipts subject to tax totaled $400 million. The county
government is considering raising the tax rate to 2 percent because it needs $400,000 additional
revenue to improve its road system.

LSG Company is a calendar year, cash basis taxpayer. On November 1, 2017, LSG paid $9,450
cash to the janitorial service firm that cleans LSG's administrative offices and retail stores. How
much of this expenditure can LSG deduct in 2017 assuming that: a. The expenditure is a
prepayment for six months of cleaning serv

Corporation VB's tax returns for 2014, 2015, and 2016 provide the following information: a. On
the basis of the given data, did VB derive any tax benefit from its 2014 NOL? Explain your
conclusions. b. VB generated a $350,000 net operating loss for 2017. It projects that it will
continue to operate at a loss through

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In March 2016, Jones Company purchased a Mercedes for use in its business at a cost of
$73,000. Assuming no bonus depreciation or Section 179 deductions, calculate the allowable tax
depreciation on this asset for 2016, 2017, and 2018.

In 2016, AS, an accrual basis corporation, contracted with a nationally prominent artist to paint a
mural in the lobby of the new corporate headquarters under construction. The artist's commission
was $180,000, payable on completion of the mural. The artist finished her work and received the
$180,000 commission in 2018

In 2016, Company W elected under Section 179 to expense $19,300 of the cost of qualifying,
property. However, it could deduct only $15,000 of the expense because of the taxable income
limitation. In 2017, Company W's taxable income before any Section 179 deduction was
$812,000. Compute its 2017 Section 179 deduction if

Vern plans to invest $100,000 in a growth stock, in year 0. The stock is not expected to pay
dividends. However, Vern predicts that it will be worth $135,000 when he sells it in year 3. The
$35,000 increase in value will be taxable at the preferential capital gains rate of 15 percent. a.
Using a 4 percent discount rat

Company J must choose between two alternate business expenditures. Expenditure 1 would
require a $80,000 cash outlay, and Expenditure 2 requires a $60,000 cash outlay. Determine the
marginal tax rate at which the after-tax cash flows from the two expenditures are equal assuming
that: a. Expenditure 1 is fully deductib

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Firm Q operates a cash basis consulting business. In October, Firm Q billed a client for $23,400
of consulting services. In November, the client settled the bill by paying $10,000 cash and
transferring marketable securities worth $13,400 to Firm Q. How much taxable income does
Firm Q recognize on settlement of the bill

Disregard the assumptions in part a. What is Shrieves’ depreciable basis? Why is corporate
finance important to all managers? MINI CASE Shrieves Casting Company is considering
adding a new line to its product mix, and the capital budgeting analysis is being conducted by
Sidney Johnson, a recently

Herelt Inc., a calendar year taxpayer, purchased equipment for $383,600 and placed it in service
on April 1, 2017. The equipment was seven-year recovery property, and Herelt used the half-
year convention to compute MACRS depreciation. a. Compute Herelt's MACRS depreciation
with respect to the equipment for 2017 and 20

Company A, a calendar year taxpayer, has always used the cash method of accounting. It
completed an engagement for a major client in November 2017 and submitted a bill for its
$160,000 fee. Because Company A didn't receive payment before year-end, it recognized no
income from the engagement on its 2017 tax return. In

Acme is an accrual basis corporation. Mrs. T, Acme's chief financial officer, is a cash basis
individual. In December 2017, Acme's board of directors decided that Mrs. T should receive a
$20,000 bonus as additional compensation. Acme paid the $20,000 bonus to Mrs. T on January
12, 2018. In which year can Acme deduct th

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Firm UW is about to enter into a venture that will generate taxable income for the next 6 to 8
years. The director of tax has come up with an idea to restructure the venture in a way that will
reduce tax costs by at least 5 percent. Identify the tax issue or issues suggested by the following
situations, and state each

What are the four value drivers? How does each of them affect value? Why is corporate finance
important to all managers? MINI CASE You have been hired as a consultant to Kulpa Fishing
Supplies (KFS), a company that is seeking to increase its value. KFS has asked you to estimate
the value of two pr

Now assume that the plant space could be leased out to another firm at $25,000 a year. Should
this be included in the analysis if so how? Why is corporate finance important to all managers?
MINI CASE Shrieves Casting Company is considering adding a new line to its product mix, and
the capital budge

How is each type of risk used in the capital budgeting process? Why is corporate finance
important to all managers? MINI CASE Shrieves Casting Company is considering adding a new
line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson,
a recently graduated MB

Shrieves typically adds or subtracts 3 percentage points to the overall cost of capital to adjust for
risk. Should the new furniture line be accepted? Why is corporate finance important to all
managers? MINI CASE Shrieves Casting Company is considering adding a new line to its
product mix, and the

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What does the term “risk” mean in the context of capital budgeting, to what extent can risk
be quantified, and when risk is quantified, is the quantification based primarily on statistical
analysis of historical data or on subjective, judgmental estimates? Why is corporate finance
important to all managers? M

How does this gain compare to the gain in the MM model with corporate taxes? Why is
corporate finance important to all managers? MINI CASE David Lyons, CEO of Lyons Solar
Technologies, is concerned about his firm’s level of debt financing. The company uses short-
term debt to finance its temporar

Calculate the annual sales revenues and costs (other than depreciation). Why is it important to
include inflation when estimating cash flows? Why is corporate finance important to all
managers? MINI CASE Shrieves Casting Company is considering adding a new line to its
product mix, and the capital b

Assume that firms U and L are in the same risk class, and that both have EBIT = $500,000. Firm
U uses no debt financing, and its cost of equity is rsU = 14%. Firm L has $1 million of debt
outstanding at a cost of rd = 8%. There are no taxes. Assume that the MM assumptions hold, and
then: Find v, s, rs, and WACC for

The first acquisition target is a privately held company in a mature industry. The company
currently has free cash flow of $20 million. Its WACC is 10% and it is expected to grow at a
constant rate of 5%. The company has marketable securities of $100 million. It is financed with
$200 million of debt, $50 million of

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What does the Miller model imply about the effect of corporate debt on the value of the firm,
that is, how do personal taxes affect the situation? Why is corporate finance important to all
managers? MINI CASE David Lyons, CEO of Lyons Solar Technologies, is concerned about his
firm’s level of deb

Finally, assume that the new product line is expected to decrease sales of the firm’s other
lines by $50,000 per year. Should this be considered in the analysis If so how? Why is corporate
finance important to all managers? MINI CASE Shrieves Casting Company is considering
adding a new line to it

Could the DCF method be applied if the growth rate was not constant? How? Why is corporate
finance important to all managers? MINI CASE During the last few years, Harry Davis
Industries has been too constrained by the high cost of capital to make many capital investments.
Recently, though, capital

What are assets-in-place? How can their value be estimated? Why is corporate finance important
to all managers? Why is corporate finance important to all managers? MINI CASE You have
been hired as a consultant to Kulpa Fishing Supplies (KFS), a company that is seeking to
increase its value. KFS h
What agencies regulate securities markets? Why is corporate finance important to all managers?
MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown to
the point where expansion throughout the entire southeast is feasible. The proposed expansion
would require the fir

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What four common mistakes in estimating the WACC should Harry Davis avoid? Why is
corporate finance important to all managers? MINI CASE During the last few years, Harry Davis
Industries has been too constrained by the high cost of capital to make many capital investments.
Recently, though, capital

Estimate the required net operating working capital for each year, and the cash flow due to
investments in net operating working capital. Why is corporate finance important to all
managers? MINI CASE Shrieves Casting Company is considering adding a new line to its
product mix, and the capital budget

What results have empirical studies of the dividend theories produced? How does all this affect
what we can tell managers about dividend payouts? Why is corporate finance important to all
managers? MINI CASE Southeastern Steel Company (SSC) was formed 5 years ago to exploit a
new continuous-casting

KFS is also interested in applying value-based management to its own divisions. Explain what
value-based management is. Why is corporate finance important to all managers? MINI CASE
You have been hired as a consultant to Kulpa Fishing Supplies (KFS), a company that is seeking
to increase its value.

Would companies going public use a negotiated deal or a competitive bid? Why is corporate
finance important to all managers? MINI CASE Randy’s, a family-owned restaurant chain
operating in Alabama, has grown to the point where expansion throughout the entire southeast is
feasible. The proposed e

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What is Harry Davis’ weighted average cost of capital (WACC)? Why is corporate finance
important to all managers? MINI CASE During the last few years, Harry Davis Industries has
been too constrained by the high cost of capital to make many capital investments. Recently,
though, capital costs have

How start-up firms are usually financed? Why is corporate finance important to all managers?
MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown to
the point where expansion throughout the entire southeast is feasible. The proposed expansion
would require the firm
Explain in words why new common stock that is raised externally has a higher percentage cost
than equity that is raised internally by reinvesting earnings. Why is corporate finance important
to all managers? MINI CASE During the last few years, Harry Davis Industries has been too
constrained by the

What are the steps of an initial public offering? Why is corporate finance important to all
managers? MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has
grown to the point where expansion throughout the entire southeast is feasible. The proposed
expansion would require

What is sensitivity analysis? Why is corporate finance important to all managers? MINI CASE
Shrieves Casting Company is considering adding a new line to its product mix, and the capital
budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The
production line would be s

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What is the ROIC of each division for 5% growth and for 6% growth? How is this related to
MVA? Why is corporate finance important to all managers? MINI CASE You have been hired
as a consultant to Kulpa Fishing Supplies (KFS), a company that is seeking to increase its value.
KFS has asked you to es

Differentiate between a private placement and a public offering. Why is corporate finance
important to all managers? MINI CASE Randy’s, a family-owned restaurant chain operating
in Alabama, has grown to the point where expansion throughout the entire southeast is feasible.
The proposed expansion

Using the data given in part B, but now assuming that firms L and U are both subject to a 40
percent corporate tax rate, repeat the analysis called for in B(1) and B(2) under the MM with-tax
model. Why is corporate finance important to all managers? MINI CASE David Lyons, CEO of
Lyons Solar Technol

Graph (a) the relationships between capital costs and leverage as measured by D/V, and (b) the
relationship between value and D. Why is corporate finance important to all managers? MINI
CASE David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level
of debt financing. The

Without actually doing any calculations, describe how the preliminary offering range for the
price of an IPO would be determined? Why is corporate finance important to all managers?
MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown to
the point where expansion thr

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What are some types of real options? Why is corporate finance important to all managers? MINI
CASE Assume that you have just been hired as a financial analyst by Tropical Sweets Inc., a
mid-sized California company that specializes in creating exotic candies from tropical fruits such
as mangoes, pap

What are stock dividends and stock splits? What are the advantages and disadvantages of stock
dividends and stock splits? Why is corporate finance important to all managers? MINI CASE
Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new continuous-casting
process. SSC’s foun

What is the total value of a corporation? Who has claims on this value? Why is corporate finance
important to all managers? MINI CASE You have been hired as a consultant to Kulpa Fishing
Supplies (KFS), a company that is seeking to increase its value. KFS has asked you to estimate
the value of two

Assume that Shrieves’ average project has a coefficient of variation in the range of 0.2-0.4.
Would the new line be classified as high risk, average risk, or low risk? What type of risk is
being measured here?

Are there any subjective risk factors that should be considered before the final decision is made?
Why is corporate finance important to all managers? MINI CASE Shrieves Casting Company is
considering adding a new line to its product mix, and the capital budgeting analysis is being
conducted by Sidn

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Use decision tree analysis to calculate the NPV of the project with the investment timing option.
Why is corporate finance important to all managers? MINI CASE Assume that you have just
been hired as a financial analyst by Tropical Sweets Inc., a mid-sized California company that
specializes in crea

Tropical Sweets will replicate the original project only if demand is high. Using decision tree
analysis, estimate the value of the project with the growth option. Why is corporate finance
important to all managers? MINI CASE Assume that you have just been hired as a financial
analyst by Tropical S

In general terms, how would a change in investment opportunities affect the payout ratio under
the residual payment policy? Why is corporate finance important to all managers? MINI CASE
Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new continuous-casting
process. SSC’s fou

What criteria are important in choosing an investment banker? Why is corporate finance
important to all managers? MINI CASE Randy’s, a family-owned restaurant chain operating
in Alabama, has grown to the point where expansion throughout the entire southeast is feasible.
The proposed expansion wo

Define “incremental cash flow.” Why is corporate finance important to all managers?
MINI CASE Shrieves Casting Company is considering adding a new line to its product mix, and
the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA.
The production line woul

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Why is entrenched management potentially harmful to shareholders? Why is corporate finance

important to all managers? MINI CASE You have been hired as a consultant to Kulpa Fishing
Supplies (KFS), a company that is seeking to increase its value. KFS has asked you to estimate
the value of two privat

Use a financial option model to estimate the value of the growth option. Why is corporate
finance important to all managers? MINI CASE Assume that you have just been hired as a
financial analyst by Tropical Sweets Inc., a mid-sized California company that specializes in
creating exotic candies from

Explain the difference between insiders and outsiders on the board of directors. What are
interlocking boards? Why is corporate finance important to all managers? MINI CASE You have
been hired as a consultant to Kulpa Fishing Supplies (KFS), a company that is seeking to
increase its value. KFS has

What is its MVA (MVA = total corporate value – total book value)? Why is corporate finance
important to all managers? MINI CASE You have been hired as a consultant to Kulpa Fishing
Supplies (KFS), a company that is seeking to increase its value. KFS has asked you to estimate
the value of two priv

What is a stock option in a compensation plan? Why is corporate finance important to all
managers? MINI CASE You have been hired as a consultant to Kulpa Fishing Supplies (KFS), a
company that is seeking to increase its value. KFS has asked you to estimate the value of two
privately held companies

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What is the cost of equity based on the bond-yield-plus-risk-premium method? Why is corporate
finance important to all managers? MINI CASE During the last few years, Harry Davis
Industries has been too constrained by the high cost of capital to make many capital investments.
Recently, though, capit

Use a financial option pricing model to estimate the value of the investment timing option. Why
is corporate finance important to all managers? MINI CASE Assume that you have just been
hired as a financial analyst by Tropical Sweets Inc., a mid-sized California company that
specializes in creating e

List three provisions in the corporate charter that affect takeovers. Why is corporate finance
important to all managers? MINI CASE You have been hired as a consultant to Kulpa Fishing
Supplies (KFS), a company that is seeking to increase its value. KFS has asked you to estimate
the value of two pr

What is the value of L’s stock for volatilities between 0.20 and 0.95? What in-centives might
the manager of L have if she understands this relationship? What might debt holders do in
response? Why is corporate finance important to all managers? MINI CASE David Lyons, CEO
of Lyons Solar Technol

Discuss (1) the information content, or signaling, hypothesis, (2) the clientele effect, and (3) their
effects on distribution policy. Why is corporate finance important to all managers? MINI CASE
Southeastern Steel Company (SSC) was formed 5 years ago to exploit a new continuous-casting
process.

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What is your final estimate for the cost of equity, rs? Why is corporate finance important to all
managers? MINI CASE During the last few years, Harry Davis Industries has been too
constrained by the high cost of capital to make many capital investments. Recently, though,
capital costs have been de

What do the three theories indicate regarding the actions management should take with respect to
dividend payout? Why is corporate finance important to all managers? MINI CASE Southeastern
Steel Company (SSC) was formed 5 years ago to exploit a new continuous-casting process.
SSC’s founders, Don

What happens to the value of the growth option if the variance of the project’s return is 14.2
percent? What if it is 50 percent? How might this explain the high valuations of many dot.com
companies? Why is corporate finance important to all managers? MINI CASE Assume that you
have just been h

What is a dividend reinvestment plan (drip), and how does it work? Why is corporate finance
important to all managers? MINI CASE Southeastern Steel Company (SSC) was formed 5 years
ago to exploit a new continuous-casting process. SSC’s founders, Donald Brown and Margo
Valencia, had been employed

What is scenario analysis? Why is corporate finance important to all managers? MINI CASE
Shrieves Casting Company is considering adding a new line to its product mix, and the capital
budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The
production line would be set