Finance: Progressive Tax and Assigned Application Problems Essay

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Week 1 Assigned Application Problems

Week 1 Assigned Application Problems Question 1-2. What are the three principal forms of business organization? What are the advantages and disadvantages of each? The three principal forms of business are the proprietorship, the partnership, and the corporation. Each form has a specific purpose and has advantages and disadvantages that need to be considered before deciding which is right for each business. The proprietorship runs with people just performing the business functions. The advantages of this are, “it is easily and inexpensively formed, it is subject to few government regulations, and its income is not subject to corporate taxation but is taxed as part of the proprietor’s personal income” (Bringham & Ehrhardt, 2011, p. 6). There are also disadvantages to a proprietorship, these are, “it may be difficult for a proprietorship to obtain the capital needed for growth, has unlimited personal liability for the business’s debts, and the life of the proprietorship is limited to the life of its founder” (Bringham & Ehrhardt, 2011, p. 6). The partnership organizations are businesses that are started with more than one owner. Two or more people are running a business for profit that is not considered a corporation. The advantages and disadvantages are similar. One difference is that all partners are responsible for the debts of the business. If the business should go under, all partners are responsible to pay for the businesses debts even if the debt is not distributed evenly. Lastly there is a corporation which is separate from its owners. This gives it some great advantages; unlimited life, easy transferability of ownership interest, and limited liability. The corporation will continue after the owner’s death, they can pass their business on through a will or to other owners or managers. They are also limited in their liability to pay for debts if the corporation should go under. There are some disadvantages that come with a corporation as well, “corporate earnings may be subject to double taxation, setting up a corporation involves preparing a charter, writing a set of by-laws, and filing the many required state and federal reports” (Bringham & Ehrhardt, 2011, p. 7). Overall, it depends on how quickly the business is growing and what the intended outcome is going to be. Starting small and growing is a common occurrence in business today. Finishing and continuing as a corporation is great, but can be started small such as a proprietorship.
Question 2-7. The Tally Corporation has a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes. What are the firm’s income tax liability and its after-tax income? What are the company’s marginal and average tax rates on taxable income?

Income after operating costs 365,000
Interest expense -50,000
Taxable dividends received +4,500 Only 30% of the 15,000 in dividends received are taxable
Taxable income= 319,500
Taxes -107,855
Non-taxable dividends +10,500
Net Income = 222,145
22,250+.39(319,500-100,000) = 107,855
107,855/319,500= 33.76%

Tax Liability= $107,855
After tax income =$222,145
Marginal Tax Rate= 39%
Average Tax Rate = 33.76%

Question 3-15 parts e & f. Perform a common size analysis. What has happened to the composition (that is, percentage in each category) of assets and