Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Hansen, Kotter, and Zales is a law firm that contains one service department (Research & Document) and two production departments (Litigation and Consulting). The firm

Hansen, Kotter, and Zales is a law firm that contains one service department (Research & Document) and two production departments (Litigation and Consulting). The firm employs a job-order costing system to accumulate costs chargeable to each client. The firm uses actual costing to assign overhead. General overhead costs can be allocated based on either direct attorney hours or the number of employees, depending on managers choice. At the end of the year, the records revealed the actual general overhead costs are $720,000. At the end of the year, the records revealed the following costs and operating data for all cases handled during the year:

Research & Document

Litigation

Consulting

# of Employees

10

8

6

Direct Attorney Hours(# of hrs)

3,000

8,000

5,000

Direct Attorney Costs ($)

$150,000

$400,000

$250,000

Direct Material Costs ($)

$16,000

$15,500

$13,500

*** 50% of Research & Department's service is provided to litigation department and the other 50% to consulting department.

d. (2 points) Suppose the firms annual revenue is 2 million dollars. The corporate tax rate is 35%. How much taxes shall the company pay? Does the choice of cost driver affect the total taxes due?

Part II Tax Strategy (Bonus points: 3 points)

Now the company spins off its R&D department and sets up a subsidiary in Bahamas. The subsidiary will conduct the research and document work and the parent will pay a property fees to acquire the service. The R&D department in Bahamas will use the same overhead allocation rate as in the parent company. The property fees paid will be recognized as part of costs of service of the parent company. The corporate tax rate in Bahamas is 5%.

e. (2 points) Assume the corporate revenue is still 2 million dollars. Assume that general overhead is assigned by direct attorney hours. Compare the tax implications when the property fee is equal to 120% and 150% of the costs of R&D service, respectively.

f. (1 point) Compared to the total taxes you calculated for part d, why do we have different tax liabilities in this case?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing

Authors: Thomas D. Hubbard, J. R. Johnson, Steve Johnson, Joel D. Hubbard

6th Edition

0873932609, 9780873932608

More Books

Students also viewed these Accounting questions

Question

4 Problems concerning the organization as a whole.

Answered: 1 week ago

Question

Please help me evaluate this integral. 8 2 2 v - v

Answered: 1 week ago