Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 24% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are: A taxable corporate bond yielding 5.333% before tax and the interest can be reinvested at 5.333% before tax. A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return). Land that will increase in value. The gain on the land is classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income. How much must the land increase in value to yield a greater after-tax return than either of the bonds? Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years: Interest Rate $1 Compounded for Five Years $1 Annuity Compounded for Five Years 4% 1.2167 5.4163 5% 1.2763 5.5256 When required, round your answer to the nearest dollar. a. The taxable bond and reinvested earnings will accumulate at an after-tax rate of 4% The after-tax value of the taxable bond and reinvested earnings will be $. b. The income from the Series EE bond will not be taxed each year. The after-tax value of the Series EE bond will be $____.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 24% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are:

A taxable corporate bond yielding 5.333% before tax and the interest can be reinvested at 5.333% before tax.
A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return).
Land that will increase in value.

The gain on the land is classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income.

How much must the land increase in value to yield a greater after-tax return than either of the bonds?

Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years:

Interest Rate	$1 Compounded for Five Years	$1 Annuity Compounded for Five Years
4%			1.2167	5.4163
5%			1.2763	5.5256

When required, round your answer to the nearest dollar.

a. The taxable bond and reinvested earnings will accumulate at an after-tax rate of 4%

The after-tax value of the taxable bond and reinvested earnings will be $____________.

b. The income from the Series EE bond will not be taxed each year.
The after-tax value of the Series EE bond will be $________________.

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

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