The majority of forensic accounting practice involves the valuation of some type of damages or value of
Question:
The majority of forensic accounting practice involves the valuation of some type of damages or value of a business. Economic damages are a salient service provided by forensic accountants. Lost wages/income are a person’s expected wages/income, but-for the wrongdoing minus their actual wages/income during the damage period.
Let’s look at the case of Harry, who is a successful dentist in Town X. Harry’s practice has experienced the following net income over the most recent five years:
20X1 $145,000, 20X2 $156,000, 20X3 120,000, 20x4 $117,000, 20X5 $121,000.
On January 1, 20X6, Harry experienced an accident in which he fell and hit his head in the parking lot of a strip mall. Ever since the accident, he has suffered severe headaches and dizziness that he had not experienced in the past. As a result of these symptoms, Harry is unable to work. He expected to grow his income from his practice by about 10 percent a year. He has filed a lawsuit against the strip mall.
Harry’s effective Federal & state tax rate (combined) is 35%.
Personal expenses are paid and deducted through the business. The personal expenses (perks) are 10% of net income.
The average rate of inflation from 20X1 – 20X5 is 3%.
Harry’s attorney has hired you to prepare a measurement of economic damages resulting from the accident.
Based on the information available, identify with a logical argument (Toulmin recommended) which scenario is the best estimate of the damages at the end of year 1 of the loss:
Scenario | S-1 | S-2 | S-3 | S-4 | S-5 | S-6 |
Description | 3% Growth Perq's | 10% Growth Perq's | 3% Growth No Perq's | 10% Growth No Perq's | -3.64% Growth Perq's | -3.64% Growth No Perq's |
20X5 | 121,000 | 121,000 | 121,000 | 121,000 | 121,000 | 121,000 |
10% Perq's | 12,100 | 12,100 | 0 | 0 | 12,100 | 0 |
20X5 | 133,100 | 133,100 | 121,000 | 121,000 | 133,100 | 121,000 |
Projected 20X6 | 137,093 | 146,410 | 124,630 | 133,100 | 128,255 | 116,596 |
Less 35% Taxes | -47,983 | -51,244 | -43,621 | -46,585 | -44,889 | -40,808 |
Net Loss: | 89,110 | 95,167 | 81,010 | 86,515 | 83,366 | 75,787 |
Advanced Financial Accounting
ISBN: 978-0078025624
10th edition
Authors: Theodore E. Christensen, David M. Cottrell, Richard E. Baker