Maria Martinez is a calendar-year taxpayer. She uses the cash-basis method of accounting for her sole...

   

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Maria Martinez is a calendar-year taxpayer. She uses the cash-basis method of accounting for her sole proprietorship. Maria is a CPA and in late December, she performed $40,000 of consulting services for a client. Maria typically requires her clients to pay her bills immediately upon receipt (assume this happens). Maria's marginal tax rate is 32 percent this year and 37 percent next year and she can earn an after-tax rate of return of 12 percent on her investments. Use Exhibit 3.1 below. (Round discount factor(s) to three decimal places and use the following format for number answers: $1,234) 1. What is Maria's tax liability if she receives the service income in December? 11430.4 2. What is Maria's tax liability if she receives the service income in January (before considering the PV of the liability)? 14800 3. What will Maria's net tax savings be by choosing one month over the other (e.g., comparing receipt of the payment in December versus January and considering PV)? 4. When should Maria bill and collect from her client in order to maximize her after tax return (December or January)? January 5. If Maria's tax rate will be 32 percent next year, when should Maria bill and collect from her client (December or January)? december EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return Year 4% 5% 6% 7% 8% 9% 10% 11% 12% 1 .962 -952 943 -935 .926 .917 909 .901 .893 2 925 .907 .890 .873 857 842 .826 812 -797 3 .889 .864 .840 .816 -794 -772 -751 -731 -712 .855 823 792 763 -735 -708 .683 .659 .636 .822 784 747 713 .681 .650 .621 -593 567 -790 -746 705 .666 .630 -596 -564 535 -507 -760 -711 .665 .623 583 -547 513 482 -731 .627 582 540 -502 467 -434 404 -703 -592 544 500 -460 -424 391 361 .676 -558 508 463 422 386 352 322 .650 -475 -429 388 350 317 287 .625 -497 -444 397 356 319 286 257 601 469 415 368 326 290 258 229 -577 -442 388 340 299 263 205 555 -417 362 315 275 239 209 .183 4 5 6 7 10 11 12 13 14 15 677 .645 .614 -585 557 530 505 481 Maria Martinez is a calendar-year taxpayer. She uses the cash-basis method of accounting for her sole proprietorship. Maria is a CPA and in late December, she performed $40,000 of consulting services for a client. Maria typically requires her clients to pay her bills immediately upon receipt (assume this happens). Maria's marginal tax rate is 32 percent this year and 37 percent next year and she can earn an after-tax rate of return of 12 percent on her investments. Use Exhibit 3.1 below. (Round discount factor(s) to three decimal places and use the following format for number answers: $1,234) 1. What is Maria's tax liability if she receives the service income in December? 11430.4 2. What is Maria's tax liability if she receives the service income in January (before considering the PV of the liability)? 14800 3. What will Maria's net tax savings be by choosing one month over the other (e.g., comparing receipt of the payment in December versus January and considering PV)? 4. When should Maria bill and collect from her client in order to maximize her after tax return (December or January)? January 5. If Maria's tax rate will be 32 percent next year, when should Maria bill and collect from her client (December or January)? december EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return Year 4% 5% 6% 7% 8% 9% 10% 11% 12% 1 .962 -952 943 -935 .926 .917 909 .901 .893 2 925 .907 .890 .873 857 842 .826 812 -797 3 .889 .864 .840 .816 -794 -772 -751 -731 -712 .855 823 792 763 -735 -708 .683 .659 .636 .822 784 747 713 .681 .650 .621 -593 567 -790 -746 705 .666 .630 -596 -564 535 -507 -760 -711 .665 .623 583 -547 513 482 -731 .627 582 540 -502 467 -434 404 -703 -592 544 500 -460 -424 391 361 .676 -558 508 463 422 386 352 322 .650 -475 -429 388 350 317 287 .625 -497 -444 397 356 319 286 257 601 469 415 368 326 290 258 229 -577 -442 388 340 299 263 205 555 -417 362 315 275 239 209 .183 4 5 6 7 10 11 12 13 14 15 677 .645 .614 -585 557 530 505 481

Answer rating: 100% (QA)

Given data Service revenue40000 Tax rate 32 Tax rate next year37 Rate ... View the full answer