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Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $60,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $60,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 7 percent on her investments. Required: What is the after-tax cost if Isabel pays the $60,000 bill in December? What is the after-tax cost if Isabel pays the $60,000 bill in January? Use Exhibit 3.1. Note: Round your answer to the nearest whole dollar amount. Based on requirements a and b, should Isabel pay the $60,000 bill in December or January?

Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $60,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $60,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 7 percent on her investments. Required: What is the after-tax cost if Isabel pays the $60,000 bill in December? What is the after-tax cost if Isabel pays the $60,000 bill in January? Use Exhibit 3.1. Note: Round your answer to the nearest whole dollar amount. Based on requirements a and b, should Isabel pay the $60,000 bill in December or January?

FINANCIAL ACCOUNTING
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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Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $60,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $60,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 7 percent on her investments.

Required:

  1. What is the after-tax cost if Isabel pays the $60,000 bill in December?
  2. What is the after-tax cost if Isabel pays the $60,000 bill in January? Use Exhibit 3.1.

    Note: Round your answer to the nearest whole dollar amount.

  3. Based on requirements a and b, should Isabel pay the $60,000 bill in December or January?

     

EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return 4% 0.962 0.952 5% 6% | 7% | 8% | 9% | 10% | 11% | 12% 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.925 0.907 0.889 0.864 0.855 0.823 0.840 | 0.816 | 0.794 | 0.772 | 0.751 | 0.731 | 0.712| 0.792 0.763 0.735 0.708 | 0.683| 0.659 0.636 0.650 0.621 0.593 0.567 Year 5 0.822 0.784 0.747 0.713 0.681 Year 6 0.790 0.746 | 0.705 | 0.666 | 0.630 | 0.596 | 0.564 0.535 0.507 Year 7 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 Year 8 0.731 0.677 0.627 0.582 0.467 0.434 0.404 Year 9 0.703 0.645 0.592 0.544 0.424 0.391 0.361 Year 10 0.676 0.614 0.558 0.508 0.386 0.352 0.322 Year 11 0.650 0.585 0.527 0.475 0.463 0.422 0.429 0.388 0.350 0.317 0.287 0.397 | 0.356 | 0.319 | 0.286 | 0.257| 0.368 0.326 0.290 0.258 0.229 Year 12 0.625 0.557 0.497 0.444 Year 13 0.601 0.530 0.469 0.415 Year 14 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 Year 15 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 Year 1 Year 2 Year 3 Year 4 0.540 0.502 0.500 0.460
Transcribed Image Text:EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return 4% 0.962 0.952 5% 6% | 7% | 8% | 9% | 10% | 11% | 12% 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.925 0.907 0.889 0.864 0.855 0.823 0.840 | 0.816 | 0.794 | 0.772 | 0.751 | 0.731 | 0.712| 0.792 0.763 0.735 0.708 | 0.683| 0.659 0.636 0.650 0.621 0.593 0.567 Year 5 0.822 0.784 0.747 0.713 0.681 Year 6 0.790 0.746 | 0.705 | 0.666 | 0.630 | 0.596 | 0.564 0.535 0.507 Year 7 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 Year 8 0.731 0.677 0.627 0.582 0.467 0.434 0.404 Year 9 0.703 0.645 0.592 0.544 0.424 0.391 0.361 Year 10 0.676 0.614 0.558 0.508 0.386 0.352 0.322 Year 11 0.650 0.585 0.527 0.475 0.463 0.422 0.429 0.388 0.350 0.317 0.287 0.397 | 0.356 | 0.319 | 0.286 | 0.257| 0.368 0.326 0.290 0.258 0.229 Year 12 0.625 0.557 0.497 0.444 Year 13 0.601 0.530 0.469 0.415 Year 14 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 Year 15 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 Year 1 Year 2 Year 3 Year 4 0.540 0.502 0.500 0.460
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