# Tax Practice Problem Kelly Krafts

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```					                                                Practice Tax Problem
Kelly's Krafts, Inc.

Kay Kelley owns a nationwide chain of craft shops, Kelly's Krafts. Last year, the firm's ordinary
income from operations was \$12,132,000.

During the year, the company sold several of its used monogram machines for \$63,000. Kelly
had been depreciating the machines over a seven-year depreciation period using the MACRS
method. When the machines were purchased six years earlier, their cost was \$520,000 and Kelly
had spent another \$4,000 on freight and installation for the machines.

During the year, Kelly's Krafts sold some marketable securities that it had been holding for
several years. The selling price was \$67,000; the securities had been purchased originally for
\$25,000.

The company also received \$34,000 of dividends from a firm that was 22% owned by Kelly's
Krafts.

Calculate the taxes owed for the year.
DEPRECIATION ON THE ASSET BEING SOLD
MACRS TABLE
Year           3-year   5-year    7-year        10-year
1            0.333    0.200      0.143         0.100
2            0.445    0.320      0.245         0.180
3            0.148    0.192      0.175         0.144
4            0.074    0.115      0.125         0.115
5                     0.115      0.089         0.092
6                     0.058      0.089         0.074
7                                0.089         0.066
8                                0.045         0.066
9                                              0.065
10                                              0.065
11                                              0.033
3        5         7             10
DEPRECIATION CLAIMED
MACRS                  Depreciation
Year                    Value                  Claimed
1                     0.143                   \$74,932
2                     0.245                   128,380
3                     0.175                    91,700
4                     0.125                    65,500
5                     0.089                    46,636
6                     0.089                    46,636
7                     0.089                      0
8                     0.045                      0
9                     0.000                      0
10                     0.000                      0
11                     0.000                      0
\$453,784

BOOK VALUE
Depreciable Cost                       \$524,000
- Acc. Depreciation                       453,784
Book Value                               70,216
CALCULATION OF TAXABLE INCOME

INCOME FROM OPERATIONS                                              \$12,132,000

TAX ON SALE OF MACHINE:
Original Cost of Asset              \$524,000
- Accumulated Depreciation             453,784
Book Value                                           70,216

Selling Price of Asset                 63,000
- Book Value                            70,216
Gain (Loss)                                           (7,216)

SALE OF SECURITIES:
Selling Price                         \$67,000
- Cost                                  25,000
Gain on Sale                                          42,000

x Taxable Portion (@ 22% ownership)       0.20
Taxable Dividends                                      6,800

TOTAL TAXABLE INCOME                                                \$12,173,584

CALCULATION OF TAXES

Tax Brackets                     Taxable Income         Tax Rate             Taxes
1st \$50,000 =                          \$50,000     x      0.15        =       \$7,500
\$50,000 to \$75,000 =                    25,000     x      0.25        =        6,250
\$75,000 to \$100,000 =                   25,000     x      0.34        =        8,500
\$100,000 to \$335,000 =                 235,000     x      0.39        =       91,650
\$335,000 to \$10,000,000 =            9,665,000     x      0.34        =    3,286,100
\$10,000,000 to \$15,000,000 =         2,173,584     x      0.35        =      760,754
\$15,000,000 to \$18,333,000 =                 0     x      0.38        =             0
Over \$18,333,000 =                           0     x      0.35        =             0
Total Taxes                                                               \$4,160,754

```
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