In: Accounting
Sal, a calendar-year taxpayer, uses the cash-basis method of accounting for his sole proprietorship. In late December he performed $50,000 of consulting services for a client. Sal typically requires his clients to pay his bills immediately upon receipt. Assume that Sal's marginal tax rate is 32 percent this year and 37 percent next year and that he can earn an after-tax rate of return of 7 percent on his investments. Should Sal send his client the bill in December or January? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)
4% | 5% | 6% | 7% | 8% | 9% | 10% | 11% | 12% | |
---|---|---|---|---|---|---|---|---|---|
Year 1 | .962 | .952 | .943 | .935 | .926 | .917 | .909 | .901 | .893 |
Year 2 | .925 | .907 | .890 | .873 | .857 | .842 | .826 | .812 | .797 |
Year 3 | .889 | .864 | .840 | .816 | .794 | .772 | .751 | .731 | .712 |
Year 4 | .855 | .823 | .792 | .763 | .735 | .708 | .683 | .659 | .636 |
Year 5 | .822 | .784 | .747 | .713 | .681 | .650 | .621 | .593 | .567 |
Year 6 | .790 | .746 | .705 | .666 | .630 | .596 | .564 | .535 | .507 |
Year 7 | .760 | .711 | .665 | .623 | .583 | .547 | .513 | .482 | .452 |
Year 8 | .731 | .677 | .627 | .582 | .540 | .502 | .467 | .434 | .404 |
Year 9 | .703 | .645 | .592 | .544 | .500 | .460 | .424 | .391 | .361 |
Year 10 | .676 | .614 | .558 | .508 | .463 | .422 | .386 | .352 | .322 |
Year 11 | .650 | .585 | .527 | .475 | .429 | .388 | .350 | .317 | .287 |
Year 12 | .625 | .557 | .497 | .444 | .397 | .356 | .319 | .286 | .257 |
Year 13 | .601 | .530 | .469 | .415 | .368 | .326 | .290 | .258 | .229 |
Year 14 | .577 | .505 | .442 | .388 | .340 | .299 | .263 | .232 | .205 |
Year 15 | .555 | .481 | .417 | .362 | .315 | .275 | .239 | .209 | .183 |
Alternative 1 : If Bill is send in December
Cash receipts | 50000 |
less:Tax expense {50000*.32} | (16000} |
After tax income if bill is send in December | 34000 |
Alternative 2 :If Bill is send in January
Cash receipts | 50000 |
less:present value of Tax expense | (17297.5) |
After tax income if bill is send in January | 32702.50 (rounded to 32703) |
#Tax expense if bill is send in January :50000*37%= 18500
present value of tax expense at 7% for 1 year = PVF7%,1*Tax expense
= .935 * 18500
= 17297.5
Since after tax income is greater if bill is send in December ,bill must be send in month of December