FIN 502 Study Guide - Midterm Guide: Surtax, Tax Rate

Note: This problem is for the 2018 taxyear.

Janice Morgan, age 24, is single and has no dependents. She is afreelance writer. In January 2018, Janice opened her own officelocated at 2751 Waldham Road, Pleasant Hill, NM 88135. She calledher business Writers Anonymous. Janice is a cash basis taxpayer.She lives at 132 Stone Avenue, Pleasant Hill, NM 88135. Her SocialSecurity number is 123-45-6789. Janice's parents continue toprovide health insurance for her under their policy. Janice wantsto contribute to the Presidential Election Campaign Fund.

During 2018, Janice reported the following income and expenseitems connected with her business.

Janice purchased and placed in service the following fixedassets for her business. Janice wants to elect immediate expensingunder § 179, if possible.

• Furniture and fixtures (new) costing $21,000 on January10.
• Computer equipment (new) costing $12,400 on July 28.

Janice’s itemized deductions include:

Janice did not keep a record of the sales tax she paid. Theamount from the sales tax table is $437.
Janice reports interest income of $4,000 on certificates of depositat Second National Bank. She made estimated tax payments of $3,000for 2018.

Required:
Compute Janice Morgan’s 2018 Federal income tax payable (or refunddue) by providing the following information that would be reportedon Form 1040 and Schedules A, B, C, and SE.

• Make realistic assumptions about any missing data.
• If an amount is zero, enter "0".
• Enter all amounts as positive numbers.
• When computing the tax liability, do not round your immediatecalculations.
• If required, round your final answers to the nearestdollar.

• Provide the following that would be reported on Janice's Form1040:

  1. Filing status: The taxpayers' filingstatus:
  

  2. Calculate taxable gross income.
  $

  3. Calculate the total adjustments forAGI.
  $

  4. Calculate adjusted gross income.
  $

  5. Calculate the greater of the standarddeduction or itemized deductions.
  $

  6. Calculate the qualified busies incomededuction.
  $

  7. Calculate total taxable income.
  $

  8. Calculate the income tax liability.
  $

  9 Calculate SE taxes due.
  $

  10. Calculate the total tax creditsavailable.
  $

  11. Calculate total withholding and taxpayments.
  $

  12. Calculate the amount overpaid(refund):
  $

  13. Calculate the amount of taxes owed:
  $

  Provide the following that would be reported on Janice'sSchedule A:

  1. Calculate the deduction allowed for medicaland dental expenses.
  $

  2. Calculate the deduction for taxes.
  $

  3. Calculate the deduction for interest.
  $

  4. Calculate the charitable deductionallowed.
  $

  5. Calculate total itemized deductions.
  $Provide the following that would be reported on Janice's ScheduleB:

  1. Calculate the interest amount:
  $

  2. Calculate the ordinary dividends:
  $

  Provide the following that would be reported on Janice'sSchedule C:

  1. Calculate income from sales:
  $

  2. Calculate total expenses:
  $

  3. Calculate net profit or loss
  $ Provide the following that would be reported on Janice's Form4562.

  Click here to access Exhibit 8.1 and the depreciation tables inthe textbook.

  1. Calculate the total deprecation for thefurniture and fixtures:
  $

  2. Calculate the total depreciation for thecomputer equipment.
  $

  Provide the following that would be reported on Janice'sScheduled SE. When computing the self-employment tax liability, donot round your calculations. Round your final answers to thenearest dollar. Use rounded amount when determining the deductionfor self-employment tax.

  1. Calculate the self-employmentliability:
  $

  2. Calculate the eduction for self-employmenttax:
  $

  2018 Tax Rate Schedules

  Use the 2018 Tax Rate Schedules to compute the tax.

  Note: Because the tax rate schedules are used instead of the taxtables, the amount of tax computed may vary slightly from theamount listed in the tables. This variation occurs because the taxfor a particular income range in the tax table is based on themidpoint amount.

  2018 Tax Rate Schedules
  Single—Schedule X											Head of household—Schedule Z
  If taxable incomeis: Over—		But not over—		The taxis:				of the amount over—			If taxable incomeis: Over—		But not over—		The taxis:				of the amount over—
  $0		$9,525		. . . . . .		10%		$0			$0		$13,600		. . . . . .		10%		$0
  9,525		38,700		$952.50	+	12%		9,525			13,600		51,800		$1,360.00	+	12%		13,600
  38,700		82,500		4,453.50	+	22%		38,700			51,800		82,500		5,944.00	+	22%		51,800
  82,500		157,500		14,089.50	+	24%		82,500			82,500		157,500		12,698.00	+	24%		82,500
  157,500		200,000		32,089.50	+	32%		157,500			157,500		200,000		30,698.00	+	32%		157,500
  200,000		500,000		45,689.50	+	35%		200,000			200,000		500,000		44,298.00	+	35%		200,000
  500,000		. . . . . .		150,689.50	+	37%		500,000			500,000		. . . . . .		149,298.00	+	37%		500,000
  Married filing jointly or Qualifyingwidow(er)—Schedule Y-1											Married filing separately—ScheduleY-2
  If taxable incomeis: Over—		But not over—		The taxis:				of the amount over—			If taxable incomeis: Over—		But not over—		The taxis:				of the amount over—
  $0		$19,050		. . . . . .		10%		$0			$0		$9,525		. . . . . .		10%		$0
  19,050		77,400		$1,905.00	+	12%		19,050			9,525		38,700		$952.50	+	12%		9,525
  77,400		165,000		8,907.00	+	22%		77,400			38,700		82,500		4,453.50	+	22%		38,700
  165,000		315,000		28,179.00	+	24%		165,000			82,500		157,500		14,089.50	+	24%		82,500
  315,000		400,000		64,179.00	+	32%		315,000			157,500		200,000		32,089.50	+	32%		157,500
  400,000		600,000		91,379.00	+	35%		400,000			200,000		300,000		45,689.50	+	35%		200,000
  600,000		. . . . . .		161,379.00	+	37%		600,000			300,000		. . . . . .		80,689.50	+	37%		300,000

1. Which of the following would result in a decrease in cash flow and a use of cash? A. A decrease in notes payable B. An increase in long-term debt C. A decrease in inventory D. A decrease in common stock

2. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded an average rate of A. 15%. C. 39%. B. 35%. D. 34%.

3. A firm has assets of $60,000 and owners’ equity of $33,000. Which of the following is the correct balance of the firm’s liabilities? A. $33,000 C. $93,000 B. $27,000 D. $60,000

4. Which of the following would result in an increase in cash flow and a source of cash? A. A decrease in notes payable B. A decrease in long-term debt C. An increase in inventory D. An increase in common stock

5. A firm has current assets of $10,000 and current liabilities of $7,000. Which of the following is the correct net working capital for the firm? A. $10,000 C. $3,000 B. $7,000 D. $13,000

6. If a firm has an accounts receivable balance of $18,800 at the end of 2007 and $16,500 at the end of 2008, which of the following statements about accounts receivable is correct? A. Accounts receivable decreased by $2,300 and represented a use of cash. B. Accounts receivable increased by $2,300 and represented a source of cash. C. Accounts receivable decreased by $2,300 and represented a source of cash. D. Accounts receivable increased by $2,300 and represented a use of cash.

7. If a firm has revenues of $15,090 and expenses of $8,850, what is the firm’s taxable income? A. $15,090 C. $6,240 B. $8,850 D. $23,940

8. Which of the following statements about the issuance of an initial public offering (IPO) is correct? A. IPOs may be either underpriced or overpriced. B. IPOs are never overpriced. C. IPOs are never underpriced. D. IPOs are always correctly priced.

9. If a firm has revenues of $15,090, operating expenses of $8,850, and a tax expense of $2,120, what is the firm’s net income? A. $8,850 C. $6,240 B. $4,120 D. $8,360

10. When you’re preparing a common-sized balance sheet, which of the following measures is set to equal 100 percent? A. Total liabilities C. Total owners’ equity B. Total assets D. Cash Examination, Lesson 1 35

11. Suppose that a corporation has a taxable income of $200,000. What is the firm’s corporate income tax for the current tax year? (You can use the following table to calculate the firm’s U.S. federal corporate tax.) Taxable Income More Than Taxable Income Less Than Tax Rate $0 $50,000 15% $50,001 $75,000 25% $75,001 $100,000 34% $100,001 $335,000 39% $335,001 $10,000,000 34% $10,000,001 $15,000,000 35% $15,000,001 $183,333,334 38% $18,333,334 35% A. $78,000 C. $39,000 B. $6,250 D. $61,250

12. Using the same table and information provided in Question 11, what is the firm’s average tax rate? A. 39% C. 34% B. 30.625% D. 31.625%

13. Using the same table and information provided in Question 11, what is the firm’s marginal tax rate? A. 39% C. 34% B. 30.625% D. 31.625%

14. Dilution refers to the loss of shareholder value, and may be represented by all of the following except dilution of A. ownership percentage. B. market value. C. the firm’s current ratio. D. book value per share.

15. If a firm has $6,940 in earnings before interest and taxes, $650 in depreciation expense, and $2,120 in taxes, what is the firm’s operating cash flow? A. $4,120 C. $6,240 B. $5,470 D. $9,710

16. The type of financial statement that summarizes the sources and uses of cash over a specified period of time is called the A. statement of cash flows. B. income statement. C. balance sheet. D. inventory ratio statement.

17. The current ratio falls within which of the following classifications of financial ratios? A. Long-term solvency measures B. Asset management or turnover measures C. Short-term solvency or liquidity measures D. Profitability measures

18. If a firm has an accounts payable balance of $34,400 at the end of 2007 and $31,200 at the end of 2008, which of the following statements about accounts payable is correct? A. Accounts payable decreased by $3,200 and represented a use of cash B. Accounts payable increased by $3,200 and represented a source of cash C. Accounts payable decreased by $3,200 and represented a source of cash D. Accounts payable increased by $3,200 and represented a use of cash

19. Which of the following is not one of the six costs of issuing securities? A. Rights offering C. Green Shoe option B. Abnormal returns D. Gross spread 20. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded a marginal rate of A. 15%. C. 39%. B. 35%. D. 34%.

20. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded a marginal rate of A. 15%. C. 39%. B. 35%. D. 34%.

Multiple Choice Quiz
PLS EXPLAIN ALL YOUR ANSWERS
1
If a bond's rating improves:
A) It should cause the bond's price and yield to increase, allother factors constant.
B) It should cause the bond's price and yield to decrease, allother factors constant.
C) It should cause the bond's price to increase and its yield todecrease, all other factors constant.
D) None of the above.



2
An investor earning 6% from a tax-exempt bond, who is in a 25% taxbracket, holding risk constant:
A) Would be indifferent to a taxable bond with a 7.5% yield.
B) Would be indifferent to a taxable bond with a 8.0% yield.
C) Would be indifferent to a taxable bond with a 4.5% yield.
D) None of the above.



3
When the yield curve is downward sloping:
A) People are expecting an economic slowdown.
B) Short term yields are lower than long term yields.
C) This is impossible, since the yield curve always slopesupward.
D) People could be expecting a loosening in monetary policy.



4
Assume the Expectation Hypothesis regarding the term structure ofinterest rates. If the current one-year interest rate is 4% and thecurrent two-year interest rate is 6%, then:
A) Investors are expecting the future one-year rate to be 4%.
B) Investors are expecting the future one-year rate to be 8%.
C) Investors are expecting the future one-year rate to be 6%.
D) None of the above.



5
Which of the following statements is(are) true?
A) Conforming mortgages are mortgages for which the borrowers donot meet standards of creditworthiness.
B) Subprime mortgages are often made to individuals with low creditscores or income levels that are relatively low when compared tothe price of the home.
C) Subprime mortgages are never used in mortgage backed securitiesbecause of their riskiness.
D) All of the above.



6
Assume an investor has a choice of 3 consecutive one-year bonds orone 3-year bond. Assuming the Expectations Hypothesis of the termstructure of interest rates:
A) The average interest rate of the three consecutive one-yearbonds should be less than the 3-year bond to reflect the riskpremium.
B) The interest rate of the 3-year bond should equal the averageinterest rate of the 3 one-year bonds.
C) The three consecutive one-year bonds must have the same interestrate.
D) The current one-year interest rate must equal the current 3-yearinterest rate.



7
We would expect the risk spread between Baa bonds and U.S. Treasurysecurities of the same maturities to:
A) Widen during periods of economic recession.
B) To remain relatively constant over the business cycle.
C) To decrease during economic slowdowns.
D) To increase during economic growth periods.



8
Increased borrowing by the U.S. Treasury to finance growing budgetdeficits will:
A) Result in U.S. Treasury yields being higher than high gradecorporate bonds.
B) Result in the price of U.S. Treasury bonds rising.
C) Cause the yield on U.S. Treasury bonds to increase, but still belower than corporate bonds.
D) Result in lower yields on corporate bonds.



9
Imagine a scandal that finds the officers of bond rating agencieshave been taking bribes to inflate the rating of specific bonds.This should:
A) Have no impact on the bond market since bond markets are highlyefficient.
B) Decrease the demand for all bonds.
C) Increase the demand for U.S. Treasury securities and decreasethe demand for corporate bonds.
D) Decrease the risk spread.



10
A proposed increase in the federal income tax rates may actually beviewed favorably by many mayors of cities because:
A) It will allow them to also raise their tax rates.
B) It will cause the demand for Municipal bonds to increase andtheir yields to increase.
C) People will pay less attention to local taxes.
D) It will cause the price of municipal bonds to increase and theiryields to decrease.



11
Bonds rated as "highly speculative":
A) Are rated so because they guarantee high returns for thebuyer.
B) Are commonly referred to as junk bonds.
C) Are ranked just below investment grade by Standard &Poor's.
D) Are rated so because they do not have any default risk.



12
Ratings problems contributed to the financial crisis of 2007-2009because:
A) Ratings agencies sharply downgraded the ratings of MBS ashousing prices declined, reinforcing the decline in the prices ofMBS.
B) MBS issuers consulted ratings agencies to structure MBS to getthe highest ratings, causing a conflict of interest.
C) Ratings agencies were compensated by the issuers of the MBS,causing the incentive for favorable ratings.
D) All of the above.



13
An investor in a 30% marginal tax bracket, earning $10 in interestannually for a $100 U.S. Treasury bond:
A) Earns a 10% after-tax return because interest on U.S. Treasurybonds is tax exempt at the federal level.
B) Earns a 3% return after-tax.
C) Would be indifferent between this bond and a municipal bondoffering $7 annually per $100 of face value, assuming the samedefault risk.
D) Earns a 1% return after-tax.



14
Commercial paper refers to:
A) The financial publications read by the CEO's of publiccorporations.
B) Any debt security with a maturity exceeding one year.
C) Short-term collateralized securities issued only bycorporations.
D) Unsecured short-term debt issued by corporations andgovernments.



15
The addition of the Liquidity Premium Theory to the ExpectationsHypothesis allows us to explain why:
A) Yield curves usually slope upward.
B) Interest rates on bonds of different maturities movetogether.
C) Long-term interest rates are less volatile than short terminterest rates.
D) Yield curves are flat.