ACC 470/570 Winter 2013 Graded Homework 1: This assignment is due in class on Monday January 28th.

The assignment is to be completed individually. You may consult with classmates to discuss the problems, but each individual student must turn in a solution showing all work. The assignment is worth 15 points. Problem 1 Whirlwind Cycles is owned 100% by Daniel, a single taxpayer. Both Whirlwind Cycles and Daniel use the cash method of accounting for tax purposes. The business incurred the following items of income and expense in the year 2012: Cash Sales $225,000 Interest received from City of Eugene Bonds 3,000 Cost of Goods Sold (assume cash paid in 2012) 45,000 Cash payments for 2012 utilities 3,500 Cash payments for 2012 rent 18,000 Tax depreciation 40,000 Cash contribution to Obamas campaign for President (not deductible for tax purposes) 1,000 On 1/1/2011 (last year) Whirlwind Cycles purchased a 60-month zero coupon bond with a 5% yield and a $20,000 maturity value for $15,670 (compounded annually). Daniels marginal tax rate is 35% before any profits from the business are considered. Calculate Daniels 2012 after-tax cash flows from the business assuming the business is organized as a sole proprietorship and Daniel withdraws all after-tax cash flows from the business.

Problem 2 Elizabeth, an individual taxpayer, has a marginal tax rate on ordinary income of 33% and a tax rate on long-term capital gains of 15%. She has $75,000 that she wants to invest for the next 6 months, at which time she will liquidate the investment. She is considering three investment alternatives: (1) a corporate bond yielding an annual interest rate of 6.5%; (2) a municipal bond that pays and annual interest rate of 4%; (3) stock that will pay a dividend of $500 and is expected to increase in value by 3% per year. Assume that Elizabeth can purchase the stock after the declaration date but before the record date, and that all interest and dividends will be received at the end of the 6 month period. Which investment alternative should Elizabeth choose? Please show your calculations. Problem 3 For each of the following scenarios, determine the taxpayers gross income for 2012: a. Home Office, Inc., an accrual basis taxpayer, leases a copying machine to a new customer on December 27, 2012. The machine was to rent for $500 per month for a period of 36 months beginning January 1, 2013. The customer was required to prepay 6 months rent at the time the lease was signed on December 27, 2012. The customer was also required to pay a $2,000 damage deposit at the time the lease was signed. Determine the amount of gross income Home Office recognizes in 2012. b. Kathy, an accrual basis taxpayer, operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $300 ($300/12 = $25 per month); a two-year membership costs $576 ($576/24 = $24 per month). Cash payment is required at the beginning of the membership. On July 1, 2011, Kathy sold a one-year membership and a two-year membership. Determine the amount of income Kathy recognizes in 2012. Problem 4
On January 1, 2012, Marge made a $60,000 interest-free loan to her son, Steve, who used the money to start a new business. Steves only sources of income were $50,000 from the business and $500 of interest on his checking account. The relevant Federal interest rate was 4%. The full amount of the loan was outstanding at the end of the year. Describe the effect of the

transaction on the 2012 taxable income of both the borrower and lender. Pg 105 The imputed interest that Steve is deemed to have paid to Marge is $2,400 ($60,000* 4%). Marge is deemed to have earned $2,400 in interest on the loan. Steve has $2,400 of imputed interest expense. Marge is then deemed to have given $2,400 back to Steve.

Marge must include the $2,400 in her gross income. Steve has interest expense of $2,400 that may or may not be deductible on how he uses the money. But is limited to his income