Question 1: Will Company has a 20 % marginal tax rate and uses a 12% discount rate to compute NPV. The firm started a venture that will yield the following before-tax cash flows: year 0, $28,000; year 1, $60,000; year 2, $90,000; year 3, $85,000.
a) If the before tax cash flows represent taxable income in the year received, calculate the NPV of the cash flows to Ace..
b) Calculate the NPV if Ace can defer the receipt of years 0, 1 and 2 cash flows/ until year 3. (It would receive no cash in years 0, 1 and 2 and would receive all the cash flows in year 3).
c) Calculate the NPV if ACE can defer paying tax on years 0 and 1 cash flows until year 2. (It would receive $90,000 cash in year 2 but would pay tax on $178,000 of income). It would as well still receive $85,000 of cash in year 3.
Question 2: Kline Company, an accrual basis calendar year corporation, reported $760,000 net income before tax on its financial statements prepared in accordance with GAAP for 2012. Kline’s records reveal the given information: (Kline’s MTR is 35%. and all items have been properly reported under GAAP).
a) The allowance for bad debts as of January 1, 2012 was $180,000. Write-offs for the year totaled $90,000, and the addition to the allowance for the year was $50,000. The allowance as of December 31 was $140,000.
b) Kline paid $95,000 in traffic tickets to the State of New Jersey for various violations.
c) Kline’s lawyers established an estimated fund for a pending lawsuit, which they expect to cost the company $125,000. This liability meets the fixed and determinable standard relating to contingent liabilities under GAAP. Kline actually paid out $125,000 relating to this law suit in 2012.
d) Kline received $45,000 in Municipal Bond interest that is not taxable.
e) Kline had tax depreciation of $189,000 and book depreciation of $94,000
Compute Kline’s taxable income, and prepare the required journal entry to record the tax expense, tax payable and deferred account, if any.
Question 3: Good Health Company Inc. began business in 2008 and has operating results as listed below. In 2010 it generated a net operating loss of $85,000. This loss is determined after the company had filed its 2012 return. The given table shows Good Health Company’s taxable income and tax before consideration of any NOLD. The tax rate for all years is 35%.
Year 2008 2009 2010 2011 2012
Taxable Income 80,000 (95,000) (85,000) 120,000 19,000
Tax 28,000 0- -0- 42,000- 6,650
Re-compute Good Health Company’s taxable income and tax as well as any refunds due. Also find out any net operating loss carryover to years subsequent to 2012. Suppose that the company elects to carry any losses back (two years) then forward.
Question 4: The books of Seal Company, a calendar year taxpayer, had assets and related information (as detailed below) as of December 31, 2012. Seal’s policy is to record depreciation on December 31 by way of a journal entry. Seal also takes advantage of any early write-offs of its purchased assets allowed by law. Based on the information given calculate Seal’s maximum depreciation deduction for 2012. The office equipment purchased is new and Seal’s taxable income for the year is $1,000,000. Bonus depreciation in effect for 2012 is 50%. Seal purchased office equipment of $240,000 on February 1, 2012.The expensing election for 2012 is $500,000 and the threshold is $2,000,000.
Asset Basis Year Purchased
Manufacturing Tools 120,000 2011
Trucks 300,000 2010
Water Trans, Equip 150,000 2009
Fencing—Plant 90,000 2008
Question 5: This year, the Coral Company Inc. generated $450,000 from its routine business operations. In addition, it sold the following assets, all of which were held for more than 12 months. In addition in the five prior years the company recorded section 1231 losses of $254,000 in total of which $31,000 was previously recaptured under the look-back rule. Calculate Coral’s taxable income for 2012 and the characterization of its section 1231 gains if any.
ASSET BASIS ACCUM. DEPR. SALES PRICE
EQUIP-P $90,000 $25,000 $120,0000
EQUIP-C 450,000 100,000 450,000
FURN. 184,000 22,000 148,000
TRANS. EQUIP 800,000 640,000 240,000
LAND-BUS 280,000 -0- 390,000
BLDG* 700,000 500,000 370,000
*BLDG has $200,000 of accelerated depreciation, which is part of the $500,000 reflected above.
Question 6: Jim Student has asked you to determine if he is allowed to deduct as a bad debt a loan of $10,000 he made to John his best friend in 2011. In 2012 John informed Jim that he would not repay the loan. What Internal Revenue Code section(s) and Treasury Regulation(s) would cover this issue?