Question

In: Accounting

Problem 1 Part 1 - Corporation On April 1, 2019, a corporation with a December 31...

Problem 1

Part 1 - Corporation

On April 1, 2019, a corporation with a December 31 taxation year purchased a three-year investment certificate for $20,000. The certificate pays interest only at the end of the three-year term but interest is compounded annually at the rate of 10%. Currently, the corporation’s marginal tax rate is 28%. However, in 2020, the marginal tax rate will decrease to 25%.

Part 2 Individual

An individual makes the identical investment on April 1, 2019. The individual’s marginal tax rate in 2019 is also 28% and is expected to decrease to 25% in 2020.

Required:

1) Calculate interest income and tax liability for the individual for years 2019-2022

2) Calculate interest income and tax liability for the corporation for years 2019-2022

Expert Solution

Interest income for corporation must be reported as accrual basis. In case of Individual can show interest income as receipts basis.

Part 1)

So in this case individual can pay liable for tax on entire income in 2022

Year	Investment	Accrual Interest @ 10%	Investment after interest
2019 - 20	20,000	2,000	22,000
2020 - 21	22,000	2,200	24,200
2021 - 22	24,200	2,420	26,620
		6,620

So tax will be 25% on 6,620 is = $1,655

Part 2)

In case of corporation tax will be payable on accural basis on Intererest income:

Year	Investment	Accrual Interest @ 10%	Investment after interest	April to Dec	Interest	Jan to Mar	Interest
2019 - 20	20,000	2,000	22,000	2,019	1,500	2,020	500
2020 - 21	22,000	2,200	24,200	2,020	1,650	2,021	550
2021 - 22	24,200	2,420	26,620	2,021	1,815	2,022	605
		6,620

So Year wise Income and tax is as under:

Year	Interest Income	Tax Rate	Tax
2019	1,500	28%	420
2020	2,150	25%	538
2021	2,365	25%	591
2022	605	25%	151
	6,620		1,700

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