Question 1

Taxable income is:

Accepted Answer

Taxable income is the total income earned by an individual or entity minus all allowable deductions and exemptions, excluding any income that is exempt from taxation. In other words, it is the income upon which taxes are actually assessed and paid.

Question 2

The following items are components of a firm's balance sheet. How much is the firm's working capital (net working capital)? $\begin{array}{lr}
\text {Cash }&\$ 2,000 \
\text {Long-term debt }&10,000\
\text {Inventory }&12,000\
\text {Owners' equity }&62,000\
\text {Accounts payable }&8,000\
\text {Accruals }&1,500\
\text {Accumulated depreciation }&6,000\
\text {Accounts receivable }&14,000\
\end{array}$

Accepted Answer

Working capital is calculated as current assets minus current liabilities. Current assets include cash ($2,000), inventory ($12,000), and accounts receivable ($14,000), totaling $28,000. Current liabilities include accounts payable ($8,000) and accruals ($1,500), totaling $9,500. Thus, working capital is $28,000 - $9,500 = $18,500.

Question 3

Three years ago a piece of equipment was purchased for $10,000. Assuming an eight-year life and straight-line depreciation, financial statements for the third year will show:

Accepted Answer

Straight-line depreciation divides the cost of the equipment by its useful life to find annual depreciation. $10,000 / 8 years = $1,250 per year. After three years, accumulated depreciation is $1,250 * 3 = $3,750.

Question 4

Albert Corp. bought a machine for $10,000 thirteen years ago. It has been depreciated on a straight line basis over a 20 year life with no salvage value. The firm just sold the machine for $6,000. How much gain/loss should be reported on the sale?

Accepted Answer

The machine was depreciated over 20 years with no salvage value, meaning it depreciated $500 per year ($10,000 / 20 years). After 13 years, the total depreciation is $6,500 ($500 * 13 years), making the book value $3,500 ($10,000 - $6,500). Selling it for $6,000 results in a $2,500 gain ($6,000 - $3,500).

Question 5

The relevant tax rate for investment decisions is the:

Accepted Answer

The relevant tax rate for investment decisions is the marginal rate, which is the tax rate on the next dollar of income earned. Investment decisions are based on the potential return after taxes, so it is important to consider the highest tax rate that will apply to any additional income generated by the investment.

Question 6

Which of the following best describes how corporations are taxed on dividend income?

Accepted Answer

Corporations are taxed on dividend income based on the percentage of the paying corporation they own, with different levels of tax exemption applied to prevent double taxation. This system is designed to mitigate the effects of double taxation on inter-corporate dividends.

Question 7

The following items are components of a traditional balance sheet. How much is the total equity of the firm? $\begin{array}{lc}
\text { Long-term debt } & \$ 12,000 \
\text { Common stock } & 15,000 \
\text { Accounts payable } & 8,000 \
\text { Paid in excess } & 6,000 \
\text { Accrued interest payable } & 1,500 \
\text { Plant and equipment } & 60,000 \
\text { Retained earnings } & 28,000 \
\text { Accountsreceivable } & 22,000
\end{array}$

Accepted Answer

Total equity is calculated by adding Common Stock, Paid in Excess, and Retained Earnings: $15,000 + $6,000 + $28,000 = $49,000.

Question 8

The marriage penalty refers to the fact that:

Accepted Answer

Two-income married couples generally pay more taxes than they would if they were single and had the same two incomes. This is because the tax brackets for married couples are not twice as much as the tax brackets for single individuals, which results in a higher tax rate for married couples with two incomes. This is known as the marriage penalty.

Question 9

Selected accounts are listed below. How much is the firm's operating income? $\begin{array}{ll}
\text { Accrued payroll } & \$ 2,000 \
\text { Sales } & 45,000 \
\text { Cost of goods sold } & 26,000 \
\text { Interest expense } & 1,000 \
\text { Expenses (other than interest) } & 8,000
\end{array}$

Accepted Answer

The answer of Selected accounts are listed below. How much...

Question 10

Three years ago a machine was purchased for $5,000. Assuming a ten-year life and straight line depreciation with a no salvage value, which of the following will appear on the income statement and balance sheet respectively after four years?

Accepted Answer

Straight line depreciation means that the same amount of depreciation is taken each year. Divide the purchase price by the estimated life of the asset in years to find the annual depreciation expense. In this case, it is $5,000 / 10 = $500. After four years, the total accumulated depreciation will be 4 x $500 = $2,000. Therefore, the correct answer is B: Depreciation expense of $500, accumulated depreciation of $2,000. This amount will appear on the income statement as depreciation expense and on the balance sheet as accumulated depreciation.

Question 11

In addition to raising money, the government uses the tax system to:

Accepted Answer

The tax system is often used to incentivize certain behaviors or actions that are seen as desirable for society or the economy. For example, tax deductions for charitable donations can encourage people to give to non-profit organizations, while tax credits for energy-efficient home improvements can incentivize homeowners to invest in environmentally friendly upgrades.

Question 12

Gowen, Inc. began the year with equity of $1,000,000 and 100,000 shares of stock outstanding. During the year the firm paid a dividend of $1.50 per share. Year-end equity was $1,100,000. Assuming no other factors impacted equity, what was Gowen, Inc.'s net income for the year?

Accepted Answer

The answer of Gowen, Inc. began the year with equity...

Question 13

Investors pay federal income taxes on the interest earned on bonds issued by:

Accepted Answer

Investors pay federal income taxes on the interest earned on bonds issued by the federal government. Bonds issued by cities, counties, and states may be exempt from federal income taxes, depending on the state and the purpose of the bonds.

Question 14

Wessel Corp. plans to sell 1,000 units in 2005 at an average sale price of $45 each. Cost of goods sold will be 40% of the sale price. Depreciation expense will be $3,000, interest expense $2,500, and other expenses will be $4,000. Wessel's tax rate is 20%. What will Wessel Corp's net income be for 2005?

Accepted Answer

Revenue from sales: 1,000 units x $45 per unit = $45,000
Cost of goods sold: 40% x $45,000 = $18,000
Gross profit: $45,000 - $18,000 = $27,000
Operating expenses: $3,000 + $2,500 + $4,000 = $9,500
Operating income: $27,000 - $9,500 = $17,500
Taxes: 20% x $17,500 = $3,500
Net income: $17,500 - $3,500 = $14,000.

Therefore, the net income for Wessel Corp. in 2005 would be $14,000. Option C is the correct answer.

Question 15

Deductions are expenditures that can be subtracted in calculating taxable income. Which of the following is a deduction?

Accepted Answer

Donations to charities are a deduction that can be subtracted in calculating taxable income.

Question 16

The following items are components of a traditional balance sheet. How much are the total assets of the firm? $\begin{array}{lc}
\text { Plant and equipment } & \$ 42,000 \
\text { Common stock } & 15,000 \
\text { Cash } & 8,000 \
\text { Inventory } & 21,000 \
\text { Bad debt reserve } & 6,000 \
\text { Paid in excess } & 6,000 \
\text { Accumulated depreciation } & 28,000 \
\text { Accountsreceivable } & 22,000
\end{array}$

Accepted Answer

The answer of The following items are components of a...

Question 17

If a firm that's doing very well pays the same return to equity and debt shareholders, and needs to raise more money, it may be wise to use debt because:

Accepted Answer

Paying the same return to equity and debt shareholders means the firm has a low cost of equity, which is desirable. Using debt for raising more money would be wise because interest payments are tax-deductible, resulting in a lower cost to the firm.

Question 18

Belvedere, Inc. has an annual payroll of $250,000. The firm pays employees every two weeks on Friday afternoon. Last month, the books were closed on the Thursday after payday. How much is the payroll accrual at the end of the month? (Round to nearest $)

Accepted Answer

To calculate the payroll accrual at the end of the month, we first need to determine the daily payroll expense. With an annual payroll of $250,000 and assuming a year has 52 weeks, the weekly payroll is $250,000 / 52 = $4,807.69. Since employees are paid every two weeks, we divide this weekly amount by 5 (assuming a 5-day work week) to get the daily payroll expense: $4,807.69 / 5 = $961.54. The books were closed on Thursday after payday, meaning there's one day (Friday) of payroll that needs to be accrued for at the end of the month. Therefore, the payroll accrual is $961.54, which when rounded to the nearest dollar, does not match any of the provided options directly. However, the correct approach involves calculating the payroll for the entire period that needs to be accrued for, not just a single day. Since the question specifies the accrual is for the end of the month and payroll is bi-weekly, we need to calculate how much of the payroll period falls into the next month. Assuming a typical 2-week (14 days) payroll cycle and that the books were closed right after a payday, we need to accrue for the days worked that will be paid in the next payroll cycle. Without specific dates, a precise calculation can't be made, but the intent seems to be to find the accrual for a period not covered by the question's details. The correct calculation for a monthly accrual based on the annual payroll would involve dividing the annual payroll by 12, but this doesn't match the scenario described. Given the misunderstanding in the initial explanation, the correct answer is based on the need to accrue payroll for a period not explicitly covered in the question, which seems to have been misinterpreted. The correct approach would involve calculating the payroll expense for the period from the last payday to the end of the month, which cannot be precisely determined without more specific dates.

Question 19

The corporate tax schedule seems not to be progressive. Which statement is correct?

Accepted Answer

The answer of The corporate tax schedule seems not to...

Question 20

The federal tax system allows firms that have a tax loss in a year to apply the loss against past and future earnings. The process is referred to as loss carrybacks and carryforwards and permits the loss to be:

Accepted Answer

The federal tax system allows firms to carry back their loss for two years and carry forward for as many as 20 years.

Quiz 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes