Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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TPC 06-01 (Static) [LO 6-5]
Company Y began business in February 2023. By the end of the calendar year, it had billed its clients for $3.5 million of services and
had incurred $800,000 of operating expenses. As of December 31, it had collected $2.9 million of its billings and had paid $670,000
of its expenses. It expects to collect the remaining outstanding bills and pay the remaining expenses by March 2024. Company Y
adopted a calendar year for federal tax purposes. It may use either the cash method or the accrual method of accounting on its first
tax return, and it has asked you to quantify the value of using the cash method for the first year. In doing so, assume Company Y uses
a 5 percent discount rate to compute NPV. Use Appendix A.
Note: Round discount factor(s) to 3 decimal places, intermediate computations and final answers to the nearest whole dollar
amount. Enter your answers in dollars not in millions of dollars.
Accrual method:
Income from billings
Expenses incurred
Net income in 2023
Cash method
Cash received
Expenses paid
Net income in 2023
Income deferred until 2024 under cash method
Tax on income deferred for one year
NPV of deferred tax
Decrease in tax cost from cash method
Amount](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F850dce20-b1b5-49ca-887c-59db28a9516d%2Ffbd1dd71-3777-4bf3-8004-7ef601cbcf21%2Fm6ko7s_processed.jpeg&w=3840&q=75)
Transcribed Image Text:ces
TPC 06-01 (Static) [LO 6-5]
Company Y began business in February 2023. By the end of the calendar year, it had billed its clients for $3.5 million of services and
had incurred $800,000 of operating expenses. As of December 31, it had collected $2.9 million of its billings and had paid $670,000
of its expenses. It expects to collect the remaining outstanding bills and pay the remaining expenses by March 2024. Company Y
adopted a calendar year for federal tax purposes. It may use either the cash method or the accrual method of accounting on its first
tax return, and it has asked you to quantify the value of using the cash method for the first year. In doing so, assume Company Y uses
a 5 percent discount rate to compute NPV. Use Appendix A.
Note: Round discount factor(s) to 3 decimal places, intermediate computations and final answers to the nearest whole dollar
amount. Enter your answers in dollars not in millions of dollars.
Accrual method:
Income from billings
Expenses incurred
Net income in 2023
Cash method
Cash received
Expenses paid
Net income in 2023
Income deferred until 2024 under cash method
Tax on income deferred for one year
NPV of deferred tax
Decrease in tax cost from cash method
Amount
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