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Solution Manual for Contemporary Engineering Economics 6th Edition by Chan S. Park
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Solution Manual forContemporary Engineering Economics 6th Edition by Chan S. Park
Sure! I’ll expand on the topics related to "Taxation of Business Entities," providing a more detailed exploration. This overview will cover fundamental concepts, applications, and implications relevant to the study of business taxation.---##
Overview of Business Entities#### 1. Types of Business EntitiesBusiness entities can be categorized based on ownership structure and tax treatment. Understanding these types is crucial for determining tax obligations and benefits.- **Sole
Proprietorships**: - Owned by a single individual, this is the simplest form of business entity. Income is reported on the owner’s personal tax return (Form 1040, Schedule C), which simplifies tax filing but also means personal liability for
debts and obligations.- **Partnerships**: - Consisting of two or more individuals, partnerships do not pay federal income taxes. Instead, they are considered pass-through entities, meaning income is taxed at the partners' individual rates
Form 1065 is used to report partnership income, while partners receive Schedule K-1 to report their share on their returns.- **Corporations**: - Corporations are separate legal entities that provide limited liability protection to their ow
(shareholders). C-Corporations face double taxation: once at the corporate level on profits and again at the individual level when dividends are distributed. S-Corporations, on the other hand, are pass-through entities but have restrictions
ownership and number of shareholders.- **Limited Liability Companies (LLCs)**: - LLCs combine the flexibility of partnerships with the liability protection of corporations. An LLC can choose to be taxed as a sole proprietorship,
partnership, or corporation, allowing for strategic tax planning. ### 2. Tax Implications of Each Entity TypeUnderstanding the tax implications of each entity type is critical for effective business planning.- **Sole Proprietorships**: - Inc
is taxed at the owner’s individual tax rate. All profits and losses are reported on the owner’s tax return. This simplicity, however, can expose owners to significant personal risk.- **Partnerships**: - Each partner reports their share of inc
and losses on their personal returns, allowing for loss deductions. Partners are also subject to self-employment taxes on their share of the income, which can significantly impact tax liability.- **Corporations**: - C-Corporations are taxed
the corporate tax rate (currently 21%). Dividends are taxed again at the shareholder level. S-Corporations avoid double taxation, but there are restrictions on the number and type of shareholders.- **Limited Liability Companies (LLCs)*
By default, single-member LLCs are treated as sole proprietorships for tax purposes, while multi-member LLCs are treated as partnerships. However, they can elect to be taxed as a corporation if beneficial.### Key Tax Concepts#### 1.
Income RecognitionIncome recognition is a fundamental principle in taxation, determining when income must be reported.- **Cash vs. Accrual Accounting**: - Businesses can choose between cash and accrual methods. Cash accounting
recognizes income when received and expenses when paid, making it straightforward. Accrual accounting recognizes income when earned and expenses when incurred, aligning revenue with the period it relates to, but can complicate cash
flow management.#### 2. DeductionsDeductions reduce taxable income, directly impacting tax liability.- **Ordinary and Necessary Expenses**: - The IRS allows deductions for expenses that are ordinary (common in the industry) and
necessary (helpful and appropriate for the business). Common deductions include rent, utilities, salaries, and professional fees.- **Limits on Deductions**: - Certain expenses, such as meals and entertainment, have specific limits (e.g., me
are typically only 50% deductible).
Chapter 2: Accounting and Financial Decision Making
Financial Statement
2.1
(a)
Current assets = $150,000 + $200,000 + $150,000 + $50,000 + $30,000 =
$580,000
Current liabilities = $50,000 + $100,000 + $80,000 = $230,000
Working capital = $580,000 - $230,000 = $350,000
Shareholder’s equity = $100,000 + $150,000 + $150,000 + $70,000 =
$470,000
, (b) EPS = $500,000/10,000 = $50 per share
(c) Par value = $15; capital surplus = $150,000;
Market price = $15 + $15 = $30 per share
Sure! I’ll expand on the topics related to "Taxation of Business Entities," providing a more detailed exploration. This
overview will cover fundamental concepts, applications, and implications relevant to the study of business
taxation.---### Overview of Business Entities#### 1. Types of Business EntitiesBusiness entities can be
categorized based on ownership structure and tax treatment. Understanding these types is crucial for determining
tax obligations and benefits.- **Sole Proprietorships**: - Owned by a single individual, this is the simplest form of
business entity. Income is reported on the owner’s personal tax return (Form 1040, Schedule C), which simplifies
tax filing but also means personal liability for debts and obligations.- **Partnerships**: - Consisting of two or
more individuals, partnerships do not pay federal income taxes. Instead, they are considered pass-through entities,
meaning income is taxed at the partners' individual rates. Form 1065 is used to report partnership income, while
partners receive Schedule K-1 to report their share on their returns.- **Corporations**: - Corporations are separate
legal entities that provide limited liability protection to their owners (shareholders). C-Corporations face double
taxation: once at the corporate level on profits and again at the individual level when dividends are distributed. S-
Corporations, on the other hand, are pass-through entities but have restrictions on ownership and number of
shareholders.- **Limited Liability Companies (LLCs)**: - LLCs combine the flexibility of partnerships with the
liability protection of corporations. An LLC can choose to be taxed as a sole proprietorship, partnership, or
corporation, allowing for strategic tax planning. ### 2. Tax Implications of Each Entity TypeUnderstanding the tax
implications of each entity type is critical for effective business planning.- **Sole Proprietorships**: - Income is
taxed at the owner’s individual tax rate. All profits and losses are reported on the owner’s tax return. This
simplicity, however, can expose owners to significant personal risk.- **Partnerships**: - Each partner reports their
share of income and losses on their personal returns, allowing for loss deductions. Partners are also subject to self-
employment taxes on their share of the income, which can significantly impact tax liability.- **Corporations**: -
C-Corporations are taxed at the corporate tax rate (currently 21%). Dividends are taxed again at the shareholder
level. S-Corporations avoid double taxation, but there are restrictions on the number and type of shareholders.-
**Limited Liability Companies (LLCs)**: - By default, single-member LLCs are treated as sole proprietorships for
tax purposes, while multi-member LLCs are treated as partnerships. However, they can elect to be taxed as a
corporation if beneficial.### Key Tax Concepts#### 1. Income RecognitionIncome recognition is a fundamental
principle in taxation, determining when income must be reported.- **Cash vs. Accrual Accounting**: - Businesses
can choose between cash and accrual methods. Cash accounting recognizes income when received and expenses
when paid, making it straightforward. Accrual accounting recognizes income when earned and expenses when
incurred, aligning revenue with the period it relates to, but can complicate cash flow management.#### 2.
DeductionsDeductions reduce taxable income, directly impacting tax liability.- **Ordinary and Necessary
Expenses**: - The IRS allows deductions for expenses that are ordinary (common in the industry) and necessary
(helpful and appropriate for the business). Common deductions include rent, utilities, salaries, and professional
fees.- **Limits on Deductions**: - Certain expenses, such as meals and entertainment, have specific limits (e.g.,
meals are typically only 50% deductible).
2.2
(a) Working capital = Current assets – Current liabilities;
Working capital requirements = Changes in current assets (except Cash) –
Changes in current liabilities
WC req. = (+$100,000 - $20,000) – (+$30,000 - $40,000) = $90,000
(b) Taxable income = $1,500,000 - $650,000 - $150,000 - $20,000 = $680,000
(c) Net income = $680,000 - $272,000 = $408,000
(d) Net cash flow:
A. Operating activities = net income + depreciation – W.C. required =
$408,000 + $200,000 - $90,000 = $518,000
, B. Investing activities = equipment purchase = ($400,000)
C. Financing activities = borrowed funds = $200,000
D. Net cash flow = $518,000 - $400,000 + $200,000 = $318,000
2.3
(a)
168
ROE A 21%
800
240
ROE B 60%
400
168 20(1 0.4)
ROA A 18%
1,000
ROA B 240 160(1 0.4) 16.8%
2,000
(b) Because company has higher income but less equity than that of company A.
No, it is just one criterion, so we cannot say that. Further investigation must
be conducted.
(c)
ROE merge 408 34%
1200
Merge and Acquisition situation between companies A and B.
2.4
(a) Debt ratio = $83,451,000/$207,000,000 = 40.31%
(b) Time-interest-earned ratio: N/A
(c) Current ratio = $73,286,000/$43,658,000 = 1.68 times
(d) Quick ratio = ($73,286,000 - $1,764,000)/$43,658,000 = 1.64 times
(e) Inventory-turnover ratio = $170,910,000/[($1,764,000 + $791,000)/2]
=133.78 times
(f) DSO = ($24,094,000)/($170,910,000/365) = 51.46 days
(g) Total-assets-turnover ratio = $170,910,000/$207,000,000 = 0.83 times
(h) Profit margin on sales = $37,037,000/$170,910,000 = 21.67%
(i) Return on Total assets $37, 037, 000 $0 19.34%
($207, 000, 000 $176, 064, 000) / 2
, (j) Return on Common equity
$37, 037, 000
30.64%
($123, 549, 000 $118, 210, 000) / 2
(k) Price-earnings ratio = $68.11/ ($37,037,000,000/6,030,000,000) = $11.08
(Note: The average total number of outstanding shares in year 2013:
6.03B)
(l) Book value per share = ($123,549,000 – 0)/6,030,000= $20.49
Sure! I’ll expand on the topics related to "Taxation of Business Entities," providing a more detailed exploration. This overview will cover fundamental concepts, applications, and implications relevant to the study of business taxation.---### Overview of Business Entities#### 1. Types of Business
EntitiesBusiness entities can be categorized based on ownership structure and tax treatment. Understanding these types is crucial for determining tax obligations and benefits.- **Sole Proprietorships**: - Owned by a single individual, this is the simplest form of business entity. Income is repo
on the owner’s personal tax return (Form 1040, Schedule C), which simplifies tax filing but also means personal liability for debts and obligations.- **Partnerships**: - Consisting of two or more individuals, partnerships do not pay federal income taxes. Instead, they are considered pass-throug
entities, meaning income is taxed at the partners' individual rates. Form 1065 is used to report partnership income, while partners receive Schedule K-1 to report their share on their returns.- **Corporations**: - Corporations are separate legal entities that provide limited liability protection t
owners (shareholders). C-Corporations face double taxation: once at the corporate level on profits and again at the individual level when dividends are distributed. S-Corporations, on the other hand, are pass-through entities but have restrictions on ownership and number of shareholders.-
**Limited Liability Companies (LLCs)**: - LLCs combine the flexibility of partnerships with the liability protection of corporations. An LLC can choose to be taxed as a sole proprietorship, partnership, or corporation, allowing for strategic tax planning. ### 2. Tax Implications of Each Entity
TypeUnderstanding the tax implications of each entity type is critical for effective business planning.- **Sole Proprietorships**: - Income is taxed at the owner’s individual tax rate. All profits and losses are reported on the owner’s tax return. This simplicity, however, can expose owners to sign
personal risk.- **Partnerships**: - Each partner reports their share of income and losses on their personal returns, allowing for loss deductions. Partners are also subject to self-employment taxes on their share of the income, which can significantly impact tax liability.- **Corporations**: - C-
Corporations are taxed at the corporate tax rate (currently 21%). Dividends are taxed again at the shareholder level. S-Corporations avoid double taxation, but there are restrictions on the number and type of shareholders.- **Limited Liability Companies (LLCs)**: - By default, single-member L
are treated as sole proprietorships for tax purposes, while multi-member LLCs are treated as partnerships. However, they can elect to be taxed as a corporation if beneficial.### Key Tax Concepts#### 1. Income RecognitionIncome recognition is a fundamental principle in taxation, determining
income must be reported.- **Cash vs. Accrual Accounting**: - Businesses can choose between cash and accrual methods. Cash accounting recognizes income when received and expenses when paid, making it straightforward. Accrual accounting recognizes income when earned and expenses
incurred, aligning revenue with the period it relates to, but can complicate cash flow management.#### 2. DeductionsDeductions reduce taxable income, directly impacting tax liability.- **Ordinary and Necessary Expenses**: - The IRS allows deductions for expenses that are ordinary (commo
the industry) and necessary (helpful and appropriate for the business). Common deductions include rent, utilities, salaries, and professional fees.- **Limits on Deductions**: - Certain expenses, such as meals and entertainment, have specific limits (e.g., meals are typically only 50% deductible
2.5
(a) Debt ratio = $34,102,000/$92,358,000 = 36.92%
(b) Time-interest-earned ratio = $50,155,000/$0 = N/A
(c) Current ratio = $32,084,000/$13,568,000 = 2.36 times
(d) Quick ratio = ($32,084,000 - $4,172,000)/$ 13,568,000= 2.06 times
$170, 910, 000
(e) Inventory-turnover ratio = 38.38 times
($4,172, 000 $4, 734, 000) / 2
(f) DSO = ($6,176,000)/($170,910,000/365) = 13.19 days
(g) Total-assets-turnover ratio = $170,910,000/$92,358,000 = 1.85 times
(h) Profit margin on sales = $37,037,000/$170,910,000 = 21.67%
$37, 037, 000 $0
(i) Return on total assets = 41.92%
($92, 358, 000 $84, 351, 000) / 2
$37, 037, 000
(j) Return on common equity = 67.67%
($58, 256, 000 $51,203,000) / 2
(k) Price-earnings ratio = $25.50/($37,037,000/4,980,000) = $3.43
(Note: The average total outstanding number of shares in year 2013 was
4,980M)
(l) Book value per share = $58,256,000/4,980,000 = $11.70
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