Tax Practice Problem Kelly Krafts

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Tax Practice Problem Kelly Krafts Powered By Docstoc
					                                                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

DIVIDENDS RECEIVED:
 Total Dividends Received              $34,000
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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posted:6/24/2012
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