San Diego State University accounting Questions

Intermediate Managerial and Tax
Accounting ACCTG 325, Fall 2024
Exercise 4
Chapter 4, Maxims of Income Tax Planning
Name _________________________________
RedID# _______________________________
1. In each of the following situations, discuss whether the individual is engaging in tax avoidance or tax evasion.
a. Mr. L performed minor construction work for a number of people who paid him in cash. Because Mr. L
knows that there is almost no chance that the IRS could learn of these payments, he reports only half the
payments as income on his federal income tax return.
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b. Mr. P, who is in the 37 percent tax bracket, recently had the opportunity to invest $50,000 in a new
business that should yield an annual return of at least 17 percent. Rather than invest himself, Mr. P gave
$50,000 to his son, who then made the investment. The sons marginal tax rate is only 12 percent.
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c. Mrs. Q sold an asset during January. Her $12,000 profit on the sale is ordinary income. After preparing
her income tax return for the prior year, Mrs. Q realized that her marginal rate for that year was 24
percent. She also realized that her marginal rate for this year will be 37 percent. Mrs. Q decides to report
the profit on her prior year return to take advantage of the lower tax rate.
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2. Compare the potential tax savings of a $100 income shift from one entity to another if the entities are subject to:
a. A progressive income tax system with marginal rates from 5 percent to 19 percent.
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b. A progressive income tax system with marginal rates from 10 percent to 50 percent.
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c. A 20 percent proportionate (flat) tax system.
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3. French Corporation wishes to hire Leslie as a consultant to design a comprehensive staff training program. The
project is expected to take one year, and the parties have agreed to a price of $60,000. French Corporation has
proposed payment of one-half of the fee now, with the remainder paid in one year when the project is complete.
a. If Leslie expects her marginal rate to be 24 percent this year and 35 percent next year, calculate the aftertax net present value of this contract to Leslie, using a 6 percent discount rate.
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b. French Corporation expects its marginal tax rate to be 21 percent in both years. Calculate the net present
value of French’s after-tax cost to enter into this contract using a 6 percent discount rate.
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c. Given that Leslie expects her tax rate to increase next year, she would prefer to receive more of the
income from the project up front. Consider an alternative proposal under which French pays Leslie
$42,000 this year, and $16,000 in one year when the project is complete. Calculate the after-tax benefit to
Leslie and the after-tax cost to French. Are both parties better off under this proposal?
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Intermediate Managerial and Tax
Accounting ACCTG 325, Fall 2024
Exercise 4
Chapter 4, Maxims of Income Tax Planning
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