FIN 502 Chapter Notes - Chapter 7: Cash Flow, Accrued Interest, Discount Window

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raspberryraccoon563

30 Sep 2013

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Canadian income taxation is based on self assessment. Limited corporations, trusts and individuals must complete an income tax return on prescribed forms. Someone else may complete the return, but the person whose report is being prepared is responsbiel for it. The canadian system for individuals is progressive, meaning that the higher income that is made, the more tax that is paid out to the government. The average tax rate is the total tax payable divided by total income. The marginal tax rate refers to the amount of tax that is paid on another dollar of income earned. The marginal after tax rate of return = (1-marginal tax rate) * (interest rate) Surtaxes are taxed based on the tax, they are temporary and apply mainly to higher income earners who are in higher brackets. These have the same impact as an increase in the basic tax rate. Tax payer may have paid instalments or have tax withheld at source.

Related Questions

1.Which of the following statements about conversion of income is correct?

converting ordinary income into capital gain is a beneficial tax planning strategy

converting capital gain income into ordinary income is a beneficial tax planning strategy

converting qualifying dividends into interest income is a beneficial tax planning strategy

holding assets that will generate a capital gain inside a retirement plan is a beneficial tax planning strategy

2. Which of the following statements is NOT a true statement regarding long-term capital assets?

capital assets that are held for more than one year are treated as long-term

no distinction is made between capital losses and ordinary losses

with few exceptions, the maximum capital gains tax rate is 15%

the benefit of holding a capital asset long enough to garner long-term capital gain treatment must be weighed against the financial risk associated with a possible decline in value during the holding period

3. Which of the following statements about the taxation of dividends is correct?

all dividends are taxed at the same rate as applicable to capital gains

dividends paid by credit unions and mutual insurance companies qualify for the lower tax rate

qualifying dividends are taxed at a maximum 15% rate

d. there is no tax benefit to changing some of an individual's funds from a lower-yielding fixed income investment into a dividend-paying stock

4. Which of the following is an advantage of making an IRC Section 83(b) election with respect to restricted stock?

an 83(b) election can be made any time within the tax year of the transfer of shares from the company to the employee

if the stock is forfeited, the compensation recognized and the taxes paid are deductible as losses

any future appreciation would be taxed as capital gain instead of taxable compensation

d. the employee does not receive any cash at the time of the stock award to pay the tax on the compensation recognized under the election

5.The maximum alternative minimum tax rate for individuals is:

less than the maximum regular federal income tax rate for individuals

equal to the maximum regular federal income tax rate for individuals

greater than the maximum regular federal income tax rate for individuals

d. going to decrease each year by 1% until it reaches 20% in 2010

6. How is alternative minimum taxable income (AMTI) for individuals computed?

AMTI = taxable income + adjustments + preferences - exemptions

AMTI = taxable income - adjustments + preferences - exemptions

AMTI = taxable income +/- adjustments + preferences - exemption

d. AMTI = taxable income +/- adjustments - preferences - exemptions

7. Which of the following statements regarding the calculation of alternative minimum taxable income (AMTI) for corporations versus the calculation of AMTI for individuals is accurate?

	a.	AMTI is calculated the same for both corporations and individuals
	b.	an additional step is required for corporations based on their adjusted current earnings
	c.	the exemption amount for corporations is not subject to phaseout to phaseout while the exemption amounts for individuals are
	d.	thethere is no adjustments to taxable income for corporations, only preferences

SingTel Ltd. is an Australian operated company with mainly Singaporean resident shareholders. The company is currently in the process of comparing two mutually exclusive machines for use in a new project with Machine A costing $30,000, having a useful life of five years and machine B costing $45,000 and having a useful life of 10 years. Cash inflows from sales are expected to be $22,000 p.a. from each machine, while total cashbased operating costs are expected to be $10,000 and $8,000 respectively for each machine. All revenues and costs are assumed to occur at the end of the respective years for simplicity of assessment. Machine A is expected to have a salvage value of $4,000 at the end of 5 years, while at the end of 10 years machine B will be worthless. Depreciation for accounting and tax purposes is calculated on a straight-line basis on the original cost of each machine with no consideration in depreciation calculations for any expected salvage value. The company has an aftertax required rate of return of 14% and pays income tax at the rate of 40% in the year following the year of income (that is, taxes levied on year 1 income are paid at the end of year 2). a) Provide some reasons as to why the alternative machines are said to be mutually exclusive for the company. b) Record the relevant cash-flows for each machine on a time (cash-flow) diagram. c) Advise the company which machine (if any), should be purchased and justify all the processes you have used in order to reach your decision. d) (i) Why is NPV considered to be the best method for capital budgeting? What does the NPV tell you? (ii) When evaluating two mutually exclusive projects with unequal lives, is the project with the higher NPV better? Why or why not?

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FIN 502 Chapter Notes - Chapter 7: Cash Flow, Accrued Interest, Discount Window

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