Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December, he performed $28,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 32 percent this year and will be 35 percent next year, and that he can earn an after-tax rate of return of 12 percent on his investments. Use Exhibit 3.1.

a. What is the after-tax income if Hank sends his client the bill in December?

b. What is the after-tax income if Hank sends his client the bill in January? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return 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

c. Should Hank send his client the bill in December or January?

• December

• January

d. What is the after-tax income if Hank expects his marginal tax rate to be 24 percent next year and sends his client the bill in January? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

e. Should Hank send his client the bill in December or January if he expects his marginal tax rate to be 32 percent this year and 24 percent next year?