Question

1. A corporation possesses the following legal and economic advantages EXCEPT ____.

a.limited liability.

b.avoiding double taxation problem.

c.easy transfer of ownership

.d.easy to raise a large amount of capital

2. Which one of the followings has unlimited liability?

a.General partner in a partnership

b.Limited partner in a partnership

c.Shareholder in a corporation

d.Member in a limited liability company

3. ABC Corporation receives $10,000 dividend income from its equity investment in DEF Corporation. ABC is in the 34% marginal tax bracket. The tax on dividend income wouldamount to:

a.$900

b.$3,000

c.$1,020

d.$3,400

4. ABC Corporation’s revenue from sales is $250,000; its COGS is $100,000; its SG&A is $50,000; its interest expense is $20,000; it pays $20,000 as cash dividends. How much is the firm’s income taxes? (Corporate marginal tax rate is $0-50,000: 15%; $50,000-75,000: 25%; $75,000-100,000: 34%; $100,000-335,000: 39%)

a.$15,450

b.$10,000

c.$27,200

d.$15,000

5. Net working capital decreases when:

a. fixed assets are purchased for cash

b. inventory is sold at cost

c. a credit customer pays for his or her purchase

d. inventory is sold at a loss

Answer 1

1. Option B is correct. A corporation does not avoid double taxation.

2. Option A is correct. General Partner has unlimited liability.

3. Option D is correct. 10000 x 0.34 = 3400

4. The firm's total profit before tax is = 250000 - 100000 - 50000 - 20000 = $80,000. (Dividends are not counted in expenses). The total tax will be = 0.15 x 50000 + 0.25 x 25000 + 0.34 x 5000 = $15,450. Option A.

5. Working Capital is = Current Assets - Current Liabilities. Hence, Options A and D are correct here. When fixed assets are purchased in cash, the cash component decreases, but there is no increase in the components of the current asset. When the inventory is sold for a loss, the cash that comes in is less than the inventory value decreasing the total current assets.