Question

1.XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?

a.If the deposit is taxable income and the payment is deductible, the transaction generated $26,600 after-tax cash flow.

b.If the deposit is taxable income but the payment is nondeductible, the transaction generated $35,000 after-tax cash flow.

c.If the deposit is not taxable income and the payment is nondeductible, the transaction generated $38,000 after-tax cash flow.

d.None of the above is false.

2.Which of the following statements is true?

a.Mary Gilly owns 100% of the stock of Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law.

b.The same rate schedule applies to both individual and corporate taxpayers.

c.The tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income.

d.Mary Gilly owns 100% of the stock to Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law and the tax provisions governing the computation of individual business income are separate and distinct from the tax provisions governing the computation of corporate business income.

Answer 1

Solution:

a. If the deposit is taxable income and the payment is deductible, then net cash flow = ($50,000 - $12000) * (1-0.30) = $26,600

b.If the deposit is taxable income but the payment is nondeductible, then net cash outlflow = $50,000 * (1-0.30) - $12,000 = $23,000

c. .If the deposit is not taxable income and the payment is nondeductible, net cash outflow = $50000 - $12000 = $38,000

From above statement b is false statement.

Hence option b is correct.

Solution 2:

The true statement is "Mary Gilly owns 100% of the stock of Gilly Inc. Both Mary and Gilly Inc. are taxpayers under federal law."

Hence option a is correct.