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P1–1 Liability
comparisons
Merideth Harper has invested $25,000 in Southwest
Development Company. The firm has recently declared bankruptcy and has $60,000
in unpaid debts. Explain the nature of payments, if any, by Ms. Harper in each
of the following situations.
a. Southwest Development Company is a sole proprietorship
owned by Ms. Harper.
b. Southwest Development Company is a 50–50 partnership of
Ms. Harper and Christopher Black.
c. Southwest Development Company is a corporation.
P1–3 Cash flows
It is typical for Jane to plan, monitor, and assess her
financial position using cash flows over a given period, typically a month.
Jane has a savings account, and her bank loans money at 6% per year while it
offers short-term investment rates of 5%. Jane’s cash flows during August were
as follows: LG 2 LG 4 LG 4 Item Cash inflow Cash outflow Clothes $1,000
Interest received $ 450 Dining out 500 Groceries 800 Salary 4,500 Auto payment
355 Utilities 280 Mortgage 1,200 Gas 222
a. Determine Jane’s total cash inflows and cash outflows.
b. Determine the net cash flow for the month of August.
c. If there is a shortage, what are a few options open to
Jane?
d. If there is a surplus, what would be a prudent strategy
for her to follow?
P2–1 Corporate taxes
Tantor Supply, Inc., is a small corporation acting as the
exclusive distributor of a major line of sporting goods. During 2010 the firm
earned $92,500 before taxes.
a. Calculate the firm’s tax liability using the corporate
tax rate schedule given in Table 2.1. b. How much are Tantor Supply’s 2010
after-tax earnings? c. What was the firm’s average tax rate, based on your
findings in part a? d. What is the firm’s marginal tax rate, based on your
findings in part a
P2–4 Interest
versus dividend income
During the year just ended, Shering Distributors, Inc., had
pretax earnings from operations of $490,000. In addition, during the year it
received $20,000 in income from interest on bonds it held in Zig Manufacturing
and received $20,000 in income from dividends on its 5% common stock holding in
Tank Industries, Inc. Shering is in the 40% tax bracket and is eligible for a
70% dividend exclusion on its Tank Industries stock.
a. Calculate the firm’s tax on its operating earnings only.
b. Find the tax and the after-tax amount attributable to the interest income
from Zig Manufacturing bonds. c. Find the tax and the after-tax amount
attributable to the dividend income from the Tank Industries, Inc., common
stock. d. Compare, contrast, and discuss the after-tax amounts resulting from
the interest income and dividend income calculated in parts b and c. e. What is
the firm’s total tax liability for the year?
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