ACC 497 Week 3 Knowledge Check NEW

The estate of Monique Chablis earned $450 of income this year. Is the estate required to file an income tax return?

2.
Congress would like to increase tax revenues by 5 percent. Assume that the average taxpayer in the United States earns $40,000 and pays an average tax rate of 20 percent.

a. If the income effect is in effect for all taxpayers, what average tax rate will result in a 5 percent increase in tax revenues? (Round your answer to 2 decimal places.)

b.  This is an example of what type of forecasting?

3.
Molto Stancha Corporation had zero earnings this fiscal year; in fact, they lost money. Must they file a tax return?

4.
Scot and Vidia, married taxpayers, earn $187,500 in taxable income and $5,000 in interest from an investment in City of Tampa bonds. (Use the U.S. tax rate schedule for married filing jointly). (Do not round intermediate calculations. Round your answer to 2 decimal places.)

a. If Scot and Vidia earn an additional $82,750 of taxable income, what is their marginal tax rate on this income?

b. How would your answer differ if they, instead, had $82,750 of additional deductions?

5.
Juanita, a Texas resident (5th Circuit), is researching a tax question and finds a 5th Circuit case ruling that is favorable and a 9th Circuit case that is unfavorable. Which circuit case has more “authoritative weight”?

6.
Hyundai is considering opening a plant in two neighboring states.

Option 1: One state has a corporate tax rate of 10 percent. If operated in this state, the plant is expected to generate $1,435,000 pretax profit.

Option 2: The other state has a corporate tax rate of 2 percent. If operated in this state, the plant is expected to generate $1,360,000 of pretax profit.

a. What is the after state taxes profit in the state with the 10% tax rate?

b. What is the after state taxes profit in the state with the 2% tax rate?

Which state should Hyundai choose?

7.
Song earns $130,000 taxable income as an interior designer and is taxed at an average rate of 25 percent (i.e., $32,500 of tax).

a. If Congress increases the income tax rate such that Song’s average tax rate increases from 25 percent to 35 percent, how much more income tax will she pay assuming that the income effect is descriptive?

b. If the income effect is descriptive, the tax base and the tax collected will increase.

8.
Dennis is currently considering investing in municipal bonds that earn 4.05 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 5.4 percent.

a. If Dennis’s tax rate is 20 percent, which bond should he choose?

b. Which bond should he choose if his tax rate is 30 percent?

c. At what tax rate would he be indifferent between the bonds?

d. What strategy is this decision based upon?

9.
Jonah has the choice of paying Rita $15,000 today or $75,000 in 10 years. Assume Jonah can earn a 4 percent after-tax rate of return. Which should he choose? Use Exhibit 3.1.

10.
Melinda invests $200,000 in a City of Heflin bond that pays 6 percent interest. Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Inc., that pays 8 percent interest with similar risk and other nontax characteristics to the City of Heflin bond. Assume Melinda’s marginal tax rate is 25 percent. (Leave no cells blank – be sure to enter “0” wherever required.)