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Jamal purchased equipment and used materials to develop a patent. The development costs were deducted on prior returns. The bases and fair market values of the assets are presented below. Assets Fair Market Value Basis Equipment $350,000 Cost $350,000 Less: depreciation (250,000) Patent 250,000 $600,000 $100,000 Sarah has made an offer to purchase the assets. Under one plan, she would pay $200,000 now and $400,000 plus interest at 5% (the Federal rate) in one year. Alternatively, Jamal would incorporate the assets and then sell the stock to Sarah. Incorporating the assets would not be a taxable event to Jamal, and his basis in the stock would equal his basis in the assets of $100,000. The corporation's basis in the assets would also be $100,000, the same as Jamal's basis for the stock. Because the corporation would have a basis in the assets of less than the fair market value (and therefore, there would be less depreciation and amortization than with an asset sale by Jamal), Sarah would pay $200,000 in the current year but only $350,000, plus interest at 5%, in one year. Assume that Jamal's combined Federal and state marginal tax rate is 35% and his combined capital gain tax rate is 20%. In your computations, round the gross profit to four decimal places before converting to the percentage. (For example: .754788 would be rounded to .7548 and used as 75.48%.) Use rounded gross profit in subsequent computations. If required, round your final answers to the nearest dollar. a. Jamal's recognized gain in the vear of sale from the installment sale of his assets is $ 450.000

Jamal purchased equipment and used materials to develop a patent. The development costs were deducted on prior returns. The bases and fair market values of the assets are presented below. Assets Fair Market Value Basis Equipment $350,000 Cost $350,000 Less: depreciation (250,000) Patent 250,000 $600,000 $100,000 Sarah has made an offer to purchase the assets. Under one plan, she would pay $200,000 now and $400,000 plus interest at 5% (the Federal rate) in one year. Alternatively, Jamal would incorporate the assets and then sell the stock to Sarah. Incorporating the assets would not be a taxable event to Jamal, and his basis in the stock would equal his basis in the assets of $100,000. The corporation's basis in the assets would also be $100,000, the same as Jamal's basis for the stock. Because the corporation would have a basis in the assets of less than the fair market value (and therefore, there would be less depreciation and amortization than with an asset sale by Jamal), Sarah would pay $200,000 in the current year but only $350,000, plus interest at 5%, in one year. Assume that Jamal's combined Federal and state marginal tax rate is 35% and his combined capital gain tax rate is 20%. In your computations, round the gross profit to four decimal places before converting to the percentage. (For example: .754788 would be rounded to .7548 and used as 75.48%.) Use rounded gross profit in subsequent computations. If required, round your final answers to the nearest dollar. a. Jamal's recognized gain in the vear of sale from the installment sale of his assets is $ 450.000

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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### Transaction Analysis for Jamal **b. Calculation of After-Tax Net Proceeds** - **Asset Sale:** - **Question:** What are Jamal's after-tax net proceeds if he sells the assets? - **Answer:** $[Blank] - **Stock Sale:** - **Question:** What are Jamal's after-tax net proceeds if he sells the stock? - **Answer:** $1,800 (Incorrect Response) **Time Value of Money Consideration** - **Preference:** Assuming that Jamal's time value of money is 5%, he would prefer the **sale of the assets**. ### Notes - The exercise involves determining the preferable financial option based on after-tax proceeds and the time value of money. - The stock sale response appears incorrect, suggesting the calculated net proceeds differ from $1,800. - A dropdown selection indicates that, given the assumptions, the asset sale is optimal for Jamal.
Transcribed Image Text:### Transaction Analysis for Jamal **b. Calculation of After-Tax Net Proceeds** - **Asset Sale:** - **Question:** What are Jamal's after-tax net proceeds if he sells the assets? - **Answer:** $[Blank] - **Stock Sale:** - **Question:** What are Jamal's after-tax net proceeds if he sells the stock? - **Answer:** $1,800 (Incorrect Response) **Time Value of Money Consideration** - **Preference:** Assuming that Jamal's time value of money is 5%, he would prefer the **sale of the assets**. ### Notes - The exercise involves determining the preferable financial option based on after-tax proceeds and the time value of money. - The stock sale response appears incorrect, suggesting the calculated net proceeds differ from $1,800. - A dropdown selection indicates that, given the assumptions, the asset sale is optimal for Jamal.
**Transcription for Educational Use:** Jamal purchased equipment and used materials to develop a patent. The development costs were deducted on prior returns. The bases and fair market values of the assets are presented below. --- **Assets Table:** | Assets | Fair Market Value | Basis | |------------|-------------------|--------------------| | Equipment | $350,000 | Cost: $350,000 | | | | Less: depreciation | | | | ($250,000) | | Patent | $250,000 | 0 | | **Total** | **$600,000** | **$100,000** | --- Sarah has made an offer to purchase the assets. Under one plan, she would pay $200,000 now and $400,000 plus interest at 5% (the Federal rate) in one year. Alternatively, Jamal would incorporate the assets and then sell the stock to Sarah. Incorporating the assets would not be a taxable event to Jamal, and his basis in the stock would equal his basis in the assets of $100,000. The corporation's basis in the assets would also be $100,000, the same as Jamal's basis for the stock. Because the corporation would have a basis in the assets of less than the fair market value (and therefore, there would be less depreciation and amortization than with an asset sale by Jamal), Sarah would pay $200,000 in the current year but only $350,000, plus interest at 5%, in one year. Assume that Jamal's combined Federal and state marginal tax rate is 35% and his combined capital gain tax rate is 20%. --- **Computational Guidelines:** - Round the gross profit to four decimal places before converting to the percentage. (For example: .754788 would be rounded to .7548 and used as 75.48%.) - Use rounded gross profit in subsequent computations. If required, round your final answers to the nearest dollar. **a. Jamal's recognized gain in the year of sale from the installment sale of his assets is $_______________.** *Note: A box is shown with the incorrect amount $450,000.* --- This educational content provides a scenario for financial analysis, showcasing asset evaluation, potential transactions, and tax implications.
Transcribed Image Text:**Transcription for Educational Use:** Jamal purchased equipment and used materials to develop a patent. The development costs were deducted on prior returns. The bases and fair market values of the assets are presented below. --- **Assets Table:** | Assets | Fair Market Value | Basis | |------------|-------------------|--------------------| | Equipment | $350,000 | Cost: $350,000 | | | | Less: depreciation | | | | ($250,000) | | Patent | $250,000 | 0 | | **Total** | **$600,000** | **$100,000** | --- Sarah has made an offer to purchase the assets. Under one plan, she would pay $200,000 now and $400,000 plus interest at 5% (the Federal rate) in one year. Alternatively, Jamal would incorporate the assets and then sell the stock to Sarah. Incorporating the assets would not be a taxable event to Jamal, and his basis in the stock would equal his basis in the assets of $100,000. The corporation's basis in the assets would also be $100,000, the same as Jamal's basis for the stock. Because the corporation would have a basis in the assets of less than the fair market value (and therefore, there would be less depreciation and amortization than with an asset sale by Jamal), Sarah would pay $200,000 in the current year but only $350,000, plus interest at 5%, in one year. Assume that Jamal's combined Federal and state marginal tax rate is 35% and his combined capital gain tax rate is 20%. --- **Computational Guidelines:** - Round the gross profit to four decimal places before converting to the percentage. (For example: .754788 would be rounded to .7548 and used as 75.48%.) - Use rounded gross profit in subsequent computations. If required, round your final answers to the nearest dollar. **a. Jamal's recognized gain in the year of sale from the installment sale of his assets is $_______________.** *Note: A box is shown with the incorrect amount $450,000.* --- This educational content provides a scenario for financial analysis, showcasing asset evaluation, potential transactions, and tax implications.
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