Problem 1

Whirlwind Cycles is owned 100% by Daniel, a single taxpayer. Both Whirlwind Cycles and Daniel use the cash method of accounting for tax purposes. The business incurred the following items of income and expense in the year 2019:

Cash Sales

$350,000

Interest received from City of San Diego Bonds

2,000

Cost of Goods Sold (assume cash paid in 2019)

85,000

Cash payments for 2019 utilities

5,500

Cash payments for 2019 rent ($1,500 per month)

18,000

Tax depreciation

40,000

Cash contribution to a Political Action Committee (PAC)

(not deductible for tax purposes)

1,500

On 1/1/2018 (last year) Whirlwind Cycles purchased a 60-month zero coupon bond with a 5% yield and a $40,000 maturity value for $31,670 (compounded annually).

Daniels marginal tax rate is 37% before any profits from the business are considered.

Calculate Daniels 2019 after-tax cash flows from the business assuming the business is organized as a sole proprietorship and Daniel withdraws all after-tax cash flows from the business.

Problem 2

Elizabeth, an individual taxpayer, has a marginal tax rate on ordinary income of 24% and a tax rate on long-term capital gains of 15%. She has $150,000 that she wants to invest for the next 6 months, at which time she will liquidate the investment. She is considering three investment alternatives: (1) a corporate bond yielding an annual interest rate of 5%; (2) a municipal bond that pays an annual interest rate of 3%; or (3) stock that will pay a dividend of $2,000 and is expected to increase in value by 2% per year. Assume that Elizabeth can purchase the stock after the declaration date but before the record date, and that all interest and dividends will be received at the end of the 6 month period. Which investment alternative should Elizabeth choose? Please show your calculations.

Problem 3

For each of the following scenarios, determine the amount included in the taxpayers gross income for 2019:

Office Supplies, Inc., an accrual basis taxpayer, leases a copying machine to a new customer on December 23, 2019. The machine was to rent for $250 per month for a period of 24 months beginning January 1, 2020. The customer was required to prepay 2 months rent at the time the lease was signed on December 23, 2019. The customer was also required to pay a $1,500 damage deposit at the time the lease was signed. Determine the amount of gross income Office Supplies, Inc. recognizes in 2019.

Kathy, an accrual basis taxpayer, operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $360 ($360/12 = $30 per month); a two-year membership costs $648 ($648/24 = $27 per month). Cash payment is required at the beginning of the membership. On July 1, 2017, Kathy sold a one-year membership and a two-year membership. Determine the amount of income Kathy recognizes in 2019.

Ted won a car worth $27,000 on The Price is Right on November 30, 2019. He plans to sell the car next year. How much income does Ted recognize in 2019?

On March 13, 2019, Jason, a cash basis taxpayer, was one of 3 winners of a $1.2 billion Powerball jackpot (Lucky!). Jason had the option to receive a one-time cash payment of $307.5 million or 30 annual payments of $13.3 million. Jason elected to receive 30 annual payments and received the first payment of $13.3 million on July 1, 2019. How much gross income does Jason have in 2019 as a result of the Powerball winnings?

On July 1, 2019, Stephanies grandmother gave her 1,000 shares of Starbucks stock worth $75,000 as a graduation present. Starbucks declared a dividend of 17 cents per share on October 19, 2019, to be paid on November 30, 2019 to shareholders of record as of November 15, 2019. Stephanie still owned all of the stock on December 31, 2019. How much gross income does Stephanie have as a result of the gift and the dividend in 2019?

Problem 4

On January 1, 2019, Mary made a $55,000 interest-free loan to her son, Steve, who used the money to start a new business. Marys sources of income in 2019 were salary of $100,000 and interest income of $5,000 from bonds she owns. Steves only sources of income in 2019 were $45,000 from the business and $600 of interest on his checking account. The relevant Federal interest rate was 3%. The full amount of the loan was outstanding at the end of the year. Describe the effect of the loan on the 2019 taxable income of both the borrower and lender.

How would your answer to part a change if the amount of the loan is $155,000 instead of $55,000?