Problem $2$: Tax Dilemma

You want to start your own business and you have to decide on the legal form of

the entity; a sole proprietorship or a corporation. You expect a pre$-$tax income of

$$200,000$ from the business and all after$-$tax income will be distributed as dividends

if you choose to form a corporation. You are a single filer $($tax schedule provided in

Problem $1),$ the corporate tax rate is $21\%$ and dividends are subject to a $20\%$ tax rate

at the shareholder level.

What would be the average tax rate and your after$-$tax income, if you form a sole

proprietorship?

What would be the effective tax rate and your after$-$tax income if you form a

corporation?

Just from a tax perspective, which legal form provides a tax advantage?

What will happen to the tax advantage you documented in Question $3,$ if you

expect higher pre$-$tax income $($e$.$g$.,$ $$1,000,000?$

Problem $3$: Last Call

You receive an order from a customer just before the fiscal year ends $($late December$).$

The sale is for $$50,000$ and you will fulfill it from your inventories $($that will reduce by

$$25,000).$ The customer pays $$20,000$ in cash and the rest with a post$-$dated check to

the end of next month $($i$.$e$.,$ due in the next year$).$ Assume that the company has zero

interest$-$bearing debt and a zero tax rate.

What will be the change in net income $($Income Statement$)?$

What will be the change in cash $($Cash Flow Statement$)?$

What will be the change in assets $($Balance Sheet$)?$