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EIN 4354 Fall 03 Homework 7

Due 11/19/03 (Section 2613) and 11/20/03 (Section 2612)

WRITTEN PROBLEMS

Problem 1

Mary is single and earned $55,000 in 2002. She also received $2,500 in dividend and interest income from investments, and a $5,000 gift from her father. She put away $2,000 into her IRA to try to reduce the amount of taxes that she'll owe for the year. Mary gave $3,000 worth of donations to charity, and she had a deductible theft loss of $2,000 (valuables in her apartment). How much tax should she expect to pay?

Problem 2

Joe and Sally are a married couple who plan to file their taxes jointly for 2002. Joe made $50,000, and Sally worked part-time to earn $15,000 while also raising two young children. Joe was able to put 10% of his salary into the 401k retirement plan at his job. They received $500 in interest income. They own a house and paid $6,000 in mortgage interest and $2,000 in property taxes last year. In addition, they contributed $1,000 to charity. How much tax should they expect to pay?

*Note: Use 2002 Tax Information!!

Personal Exemption: $3000

Standard deduction for single filers: $4,700

Standard deduction for married filing jointly: $7,850

Child Tax Credit: $1000

2002 Tax Tables: Located on the Class Material page)

Problem 3

Consider the following data on an asset:

Cost of the asset, I $100,000

Useful life, N 5 Years

Salvage Value, S $10,000

Compute the annual depreciation allowances and the resulting book value, using

a) Straight line depreciation method

b) Double declining balance method

c) Sum-of-the-years digits method

Problem 4

On April 1st, Leo Smith paid $170,000 for a residential rental property. This purchase price represents $130,000 for the building and $40,000 for the land. Five years later, on November 1, he sold the property for $200,000. Compute the MACRS depreciation for each of the 5 calendar years during which he had the property.

Problem 5

You bought a timber tract for $450,000, and the land was worth as much as $180,000. Four point eight million board feet (4.8 MBF) of standing timber was estimated to be in the timber tract. If you cut 1.5 MBF of timber, determine your depletion allowance.

Problem 6

Valdez Corporation will commence operations on January 1, 2001. The company projects the following financial performance during its first year of operation.

• Sales revenues are estimated at $1,500,000.

• Labor, material and overhead costs are projected at $600,000.

• The company will purchase a warehouse worth $500,000 in February. To finance this warehouse, the company will issue $500,000 of long term bonds on January 1, which will carry an interest rate of 10%. The first interest payment would occur on December 31.

• For depreciation purposes, the purchase cost of the warehouse is divided into $100,000 in land and $400,000 in building. The building will be classified as 39-year MACRS real property class and will be depreciated accordingly.

• On January 5, the company purchases $200,000 of equipment, which has a 5-year MACRS class life.

a) Determine the total depreciation expenses allowed in 2001.

b) Determine Valdez’s tax liability in 2001.

Problem 7

Simon Machine Tools Company is considering the purchase of a new set of machine tools to process special orders. The following financial information is available.

• Without the project: The company expects to have taxable incomes of $300,000 each year from its regular business over the next 3 years.

• With the project: This 3-year project requires the purchase of a new set of machine tools at a cost of $50,000. The equipment falls into the MACRS 3-year class. The tools will be sold at the end of the project life for $10,000. The project will be bringing in additional annual revenue of $80,000, but is expected to incur additional annual operating costs of $20,000.

a) What are the additional taxable incomes (due to undertaking the project) during years 1 through 3, respectively?

b) What are the additional income taxes (due to undertaking the project) during years 1 through 3, respectively?

c) Compute the gain taxes when the asset is disposed of at the end of year 3.

Problem 8

An electrical appliance company purchased an industrial robot costing $300,000 in year 0. The industrial robot to be used for welding operations, classified as a 7-year recovery property, has been depreciated by the MACRS method. If the robot is sold after 5 years, compute the amounts of gains (losses) for the following three salvage values (assume that both capital gains and ordinary incomes are taxed at 34%).

a) $10,000

b) $125,460

c) $200,000

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