Problem 3-38 (LO 3-2, LO 3-3) Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $31,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $31,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 5 percent on her investments. a. What is the after-tax cost if Isabel pays the $31,000 bill in December? b. What is the after-tax cost if Isabel pays the $34,000 bill in January?

Question

Ricardo Carrillo

Business

23 July, 13:32

Problem 3-38 (LO 3-2, LO 3-3) Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $31,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $31,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 5 percent on her investments. a. What is the after-tax cost if Isabel pays the $31,000 bill in December? b. What is the after-tax cost if Isabel pays the $34,000 bill in January?

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Emilie Barker · Answer 1

1) After tax cost = pre-tax cost * (1-t) = 31000 * (1-37%) = $19530

After tax cost = $19530

2)

Tax savings = 31000*37% = 11470

Present Value of Tax Savings = 11470*0.952 (1 Year, 5 percent) = $10919

After cost = 31000-10919 = $20081