Part A
Ace Company has a 30 percent 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, $22,000; year 1, $60,000; year 2, $80,000; year 3, $90,000.
a. If the before tax cash flows represent taxable income in the year received, compute the NPV of the cash flows.
b. Compute 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. Compute the NPV if Firm Q can defer paying tax on years 0 and 1 cash flows until year 2. ( It would receive $80,000 cash in year 2 but would pay tax on $162,000 of income)
Part B
Kline Company, an accrual basis calendar year corporation, reported $560,000 net income before tax on its financial statements prepared in accordance with GAAP for 2011. Kline's records reveal the following information: (Kline's MTR is 35%. and all items have been properly reported under GAAP).
- The allowance for bad debts as of January 1, 2011 was $80,000. Write-offs for the year totaled $40,000, and the addition to the allowance for the year was $35,000. The allowance as of December 31 was $75,000.
- Kline paid a $65,000 fine to the state of Delaware for a violation of state pollution control laws.
- 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 received $85,000 in Municipal Bond interest that is not taxable.
Kline had tax depreciation of $89,000 and book depreciation of $74,000
Compute Kline's taxable income, and prepare the required journal entry to record the tax expense, tax payable and deferred account, if any.
Part C
Good Health Company Inc. began business in 2007 and has operating results as listed below. In 2009 & 2010 it generated net operating losses of $75,000 and $120,000 respectively. These losses were determined after the company had filed its 2011 return. The following table shows Good Health Company's taxable income and tax before consideration of any NOLD. The tax rate for all years is 35%.
Year 2007 2008 2009 2010 2011
Taxable Income 80,000 95,000 (75,000) (120,000) 19,000
Tax 28,000 33,250 -0- -0- 6,650
Recompute Good Health Company's taxable income and tax as well as any refunds due. Also determine any net operating loss carryover to years subsequent to 2011. Assume that the company elects to carry any losses back (two years) then forward.
Part D
The books of Seal Company, a calendar year taxpayer, had assets and related information (as detailed below) as of December 31, 2011. 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.
Asset Basis Year Purchased
Manufacturing Tools 120,000 2011
Trucks 300,000 2010
Water Trans, Equip 150,000 2009
Fencing-Plant 90,000 2008
Part E
This year, the Coral Company Inc. generated $650,000 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 $72,000 in total which were never recaptured under the throwback rule. Compute Coral's taxable income for 2012 and the characterization of its section 1231 gains if any.
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ASSET
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BASIS
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ACCUM. DEPR.
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SALES PRICE
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EQUIP-P
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$90,000
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$25,000
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$120,0000
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EQUIP-C
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450,000
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100,000
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450,000
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FURN.
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184,000
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22,000
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148,000
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TRANS. EQUIP
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800,000
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640,000
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240,000
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LAND-BUS 280,000 -0- 390,000
BLDG* 700,000 500,000 370,000
*BLDG has $100,000 of accelerated depreciation, which is part of the $500,000 reflected above.