CHAPTER 4

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
The deposit is not Al’s money. Rather, Al is the agent holding the money on behalf of the client. b. Using the Accrual basis of Accounting Gross income using accrual method: Cash collections $150,000 Less: Beginning accounts receivable (25,000) Plus: Ending accounts receivable 60,000 $185,000 c. Advise Al on which method of accounting he should use. Al should use the cash method so that he will not have to pay income taxes on uncollected accounts receivable. pp. 4-8 to 4-10 32. Selma operates a contractor’s supply store. She maintains her books using the cash method. At the end of the year, her accountant computes her accrual basis income that is used on her tax return. For 2009, Selma had cash receipts of $1.5 million, which includes $100,000 collected on accounts receivable from 2008 sales. It also included the proceeds of a $200,000 bank loan. At the end of 2009, she had $400,000 in accounts receivable from customers, all from 2009 sales. a. Compute Selma’s accrual basis gross receipts for 2009. Accrual basis gross receipts Cash received $1,500,000 Less: beginning accounts receivable (200,000) Less: bank loan (100,000) Add: ending accounts receivable 400,000 Gross receipts $1,600,000

b. Selma paid cash for all of the purchases. The total amount paid for merchandise in 2009 was 1.2 million. At the end of 2008, she had merchandise on hand