Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December, he performed $24,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 30 percent this year and will be 33 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 2 decimal places.)

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 25 percent next year and sends his client the bill in January? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

e. Should Hank send his client the bill in December or January if he expects his marginal tax rate to be 30 percent this year and 25 percent next year?

• December

• January

12% .898 .797 .712 .907 .772 .731 EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return Year 4% 5% 6% 7% 8% 9% 10% 11% .962 .952 .943 .935 .926 .917 .909 .901 .925 .890 .873 .857 .842 .826 .812 .889 .864 .840 .816 .794 .751 .855 .823 .792 .763 .735 .708 .683 .659 .822 .784 .747 .713 .681 .650 .621 .593 .790 .746 .666 .630 .596 .564 .535 .760 .711 .665 .623 .583 .547 .513 .731 .677 .627 .582 .540 .502 467 .434 .703 .645 .592 .544 .500 460 391 .676 .614 .558 .508 463 422 .352 .650 .585 .527 429 .388 -350 317 .625 .557 497 .444 .397 356 .319 .286 .601 .530 469 .368 326 .290 .258 .577 .505 442 388 340 .299 .263 .232 .555 481 .417 362 .315 .275 .239 .209 .567 .507 .705 .482 .475 .415