CRM2307- Midterm Exam Guide - Comprehensive Notes for the exam ( 39 pages long!)
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Note: This problem is for the 2018 taxyear.
Janice Morgan, age 24, is single and has no dependents. She is afreelance writer. In January 2018, Janice opened her own officelocated at 2751 Waldham Road, Pleasant Hill, NM 88135. She calledher business Writers Anonymous. Janice is a cash basis taxpayer.She lives at 132 Stone Avenue, Pleasant Hill, NM 88135. Her SocialSecurity number is 123-45-6789. Janice's parents continue toprovide health insurance for her under their policy. Janice wantsto contribute to the Presidential Election Campaign Fund.
During 2018, Janice reported the following income and expenseitems connected with her business.
Income from sale of articles | $85,000 |
Rent | 16,500 |
Utilities | 7,900 |
Supplies | 1,800 |
Insurance | 5,000 |
Travel (including meals of $1,200) | 3,500 |
Janice purchased and placed in service the following fixedassets for her business. Janice wants to elect immediate expensingunder § 179, if possible.
- Furniture and fixtures (new) costing $21,000 on January10.
- Computer equipment (new) costing $12,400 on July 28.
Janiceâs itemized deductions include:
State income tax | $2,950 |
Home mortgage interest paid to First National Bank | 6,000 |
Property taxes on home | 2,500 |
Charitable contribution to her alma mater, State College | 1,200 |
Janice did not keep a record of the sales tax she paid. Theamount from the sales tax table is $437.
Janice reports interest income of $4,000 on certificates of depositat Second National Bank. She made estimated tax payments of $3,000for 2018.
Required:
Compute Janice Morganâs 2018 Federal income tax payable (or refunddue) by providing the following information that would be reportedon Form 1040 and Schedules A, B, C, and SE.
- Make realistic assumptions about any missing data.
- If an amount is zero, enter "0".
- Enter all amounts as positive numbers.
- When computing the tax liability, do not round your immediatecalculations.
- If required, round your final answers to the nearestdollar.
-
Provide the following that would be reported on Janice's Form1040:
1. Filing status: The taxpayers' filingstatus:
2. Calculate taxable gross income.
$3. Calculate the total adjustments forAGI.
$4. Calculate adjusted gross income.
$5. Calculate the greater of the standarddeduction or itemized deductions.
$6. Calculate the qualified busies incomededuction.
$7. Calculate total taxable income.
$8. Calculate the income tax liability.
$9 Calculate SE taxes due.
$10. Calculate the total tax creditsavailable.
$11. Calculate total withholding and taxpayments.
$12. Calculate the amount overpaid(refund):
$13. Calculate the amount of taxes owed:
$Provide the following that would be reported on Janice'sSchedule A:
1. Calculate the deduction allowed for medicaland dental expenses.
$2. Calculate the deduction for taxes.
$3. Calculate the deduction for interest.
$4. Calculate the charitable deductionallowed.
$5. Calculate total itemized deductions.
$Provide the following that would be reported on Janice's ScheduleB:1. Calculate the interest amount:
$2. Calculate the ordinary dividends:
$Provide the following that would be reported on Janice'sSchedule C:
1. Calculate income from sales:
$2. Calculate total expenses:
$3. Calculate net profit or loss
$ Provide the following that would be reported on Janice's Form4562.Click here to access Exhibit 8.1 and the depreciation tables inthe textbook.
1. Calculate the total deprecation for thefurniture and fixtures:
$2. Calculate the total depreciation for thecomputer equipment.
$Provide the following that would be reported on Janice'sScheduled SE. When computing the self-employment tax liability, donot round your calculations. Round your final answers to thenearest dollar. Use rounded amount when determining the deductionfor self-employment tax.
1. Calculate the self-employmentliability:
$2. Calculate the eduction for self-employmenttax:
$2018 Tax Rate Schedules
Use the 2018 Tax Rate Schedules to compute the tax.
Note: Because the tax rate schedules are used instead of the taxtables, the amount of tax computed may vary slightly from theamount listed in the tables. This variation occurs because the taxfor a particular income range in the tax table is based on themidpoint amount.
2018 Tax Rate Schedules SingleâSchedule X Head of householdâSchedule Z If taxable incomeis:
OverâBut not
overâThe taxis: of the amount
overâIf taxable incomeis:
OverâBut not
overâThe taxis: of the amount
overâ$0 $9,525 . . . . . . 10% $0 $0 $13,600 . . . . . . 10% $0 9,525 38,700 $952.50 + 12% 9,525 13,600 51,800 $1,360.00 + 12% 13,600 38,700 82,500 4,453.50 + 22% 38,700 51,800 82,500 5,944.00 + 22% 51,800 82,500 157,500 14,089.50 + 24% 82,500 82,500 157,500 12,698.00 + 24% 82,500 157,500 200,000 32,089.50 + 32% 157,500 157,500 200,000 30,698.00 + 32% 157,500 200,000 500,000 45,689.50 + 35% 200,000 200,000 500,000 44,298.00 + 35% 200,000 500,000 . . . . . . 150,689.50 + 37% 500,000 500,000 . . . . . . 149,298.00 + 37% 500,000 Married filing jointly or Qualifyingwidow(er)âSchedule Y-1 Married filing separatelyâScheduleY-2 If taxable incomeis:
OverâBut not
overâThe taxis: of the amount
overâIf taxable incomeis:
OverâBut not
overâThe taxis: of the amount
overâ$0 $19,050 . . . . . . 10% $0 $0 $9,525 . . . . . . 10% $0 19,050 77,400 $1,905.00 + 12% 19,050 9,525 38,700 $952.50 + 12% 9,525 77,400 165,000 8,907.00 + 22% 77,400 38,700 82,500 4,453.50 + 22% 38,700 165,000 315,000 28,179.00 + 24% 165,000 82,500 157,500 14,089.50 + 24% 82,500 315,000 400,000 64,179.00 + 32% 315,000 157,500 200,000 32,089.50 + 32% 157,500 400,000 600,000 91,379.00 + 35% 400,000 200,000 300,000 45,689.50 + 35% 200,000 600,000 . . . . . . 161,379.00 + 37% 600,000 300,000 . . . . . . 80,689.50 + 37% 300,000
ABC CORP BALANCE SHEET
December 31, 2010
Cash $ 50
Marketable Securities 0
Accounts Receivables 2,000
Inventory 70
Fixed Assets ( net ) 2,000
Total Assets =====
Accounts Payable $ 2,340
Notes Payable 0
Retained earnings ?
Common Stock 1,400
Total of Both Liabilities & Equity =====
For the year ended 12/31/10 ABC CORP generated Sales of $12,000 and Net Income of $120. The net profit margin this year is considered normal by ABC CORP. Cost of Goods Sold was $8,400 in 2010. Cost of Goods Sold consistently averages seventy per cent of Sales, and will continue to do so in the future. Depreciation Expense was $500 in 2010. No Depreciation Expense was, or ever will, be included in Cost of Goods Sold.
Fixed Operating Costs, excluding Depreciation Expense, were equal to $1,200 for 2010. These Fixed Operating Costs included all utilities, all insurance, all rent, all property taxes, and all labor charges. Fixed Operating Costs (other than depreciation expense) are paid for immediately, as they are incurred. Fixed Operating Costs were spread evenly throughout the year 2010. With regard to the size and timing of these costs, it is anticipated that the experience of 2010 will be repeated in 2011. Therefore, we anticipate cash payments associated with Fixed Operating Costs to equal $100 per month in 2011. Because of losses in recent years at ABC Corp and the loss carry forward provisions of the tax code there were no income taxes paid in 2010, and it is anticipated in 2011 that no income tax payments will be made.
Interest paid in 2010 was $40 and dividends paid in that same year were $60 Interest payments are made monthly and dividends are paid at the end of every quarter. The next dividend payment is scheduled for March 2011. The dividend payout ratio in 2010 is considered normal for ABC CORP. The annual interest rate for bank borrowing is six percent per year (one-half of one per cent per month). Interest paid in the current month is based on the previous monthâs balance in Notes Payable. The target cash balance for the end of any current month is equal to ten percent of next monthâs sales. Target ending inventory at the end of any current month is equal to twenty percent of estimated cost of goods sold for the next month. All purchases of inventory are paid for in the month following purchase. The entire balance of Accounts Payable, at any given point in time, represents the purchase of inventory which has not yet been paid for. One-half of all sales are collected in the month of sale, the remainder in the following Month.
The sales forecast for the first four months of 2011 is
January $1,000
February 800
March 3,200
April 2,000
Sales for October, November and December of the year 2010 were $2,000 $2,000 and $4,000, respectively. It is the policy of the company to repay bank borrowing as soon as possible; If money is not needed for this purpose, then investments of marketable securities are made. Marketable Securities should be liquidated to satisfy any subsequent need for cash flow before any new bank borrowing is done. The annual yield on marketable securities is three per cent (one-quarter of one percent per month). Interest payments to the firm are based on the previous monthâs balance in Marketable Securities. On the next two pages, you will find a partially completed Cash Budget. Some numbers are filled in for your convenience. For only the month of January 2011, you are to fill in missing amounts in this Cash Budget. When you answer to this requirement remember to write zero if you mean zero because a blank will not be interpreted as zero. â
The Cash Budget | |||
Nov 10 | Dec 10 | Jan 11 | |
Sales | 1,000 | 2,000 | 500 |
Cost of goods sold | 700 | 1400 | 350 |
Beginning Inventory | 140 | 280 | 70 |
Ending Inventory | 280 | 70 | 56 |
Purchases | 840 | 1,190 | 336 |
Cash Collections: | X | X | X |
Collected in month of sale | X | X | |
Collected month after sale | X | X | |
Other Inflow: | X | X | |
Interest Income Payments | X | X | 0 |
TOTAL INFLOWS | X | X | |
Outflows: | X | X | X |
Payment for Purchases | X | X | |
Interest Payments | X | X | 0 |
Overhead Payments | X | X | 100 |
Fixed Asset Additions | X | X | 0 |
Dividend payments | X | X | 0 |
Income Tax Payments | X | X | 0 |
TOTAL OUTFLOWS | X | X | |
Inflow - Outflow | X | X | |
Beginning Cash | X | X | |
Desired (Ending) Cash | X | 50 | 80 |
Cash Produced Over + or Under - Immediate Need | X | X | |
Loan Required | X | X | |
Loan Repaid | X | X | |
Loan balance | X | 0 | |
Securities Purchased | X | X | |
Securities Sold | X | X | |
Securities Balance | X | 0 |