Chapter 11 Investments

1. [LO 1] Anne’s marginal income tax rate is 30 percent. She purchases a corporate bond for $10,000 and the maturity, or face value, of the bond is $10,000. If the bond pays 5 percent per year before taxes, what is Anne’s annual after-tax rate of return from the bond if the bond matures in one year? What is her annual after-tax rate of return if the bond matures in 10 years?

2. [LO 1] Matt recently deposited $20,000 in a savings account paying a guaranteed interest rate of 4 percent for the next 10 years. If Matt expects his marginal tax rate to be 20 percent for the next 10 years, how much interest will he earn after-tax for the first year of his investment? How much interest will he earn after-tax for the second year of his investment if he withdraws enough cash every year to pay the tax on the interest he earns? How much will he have in the account after four years? How much will he have in the account after seven years?

3. [LO 1] Dana intends to invest $30,000 in either a Treasury bond or a corporate bond. The Treasury bond yields 5 percent before tax and the corporate bond yields 6 percent before tax. Assuming Dana’s federal marginal rate is 25 percent and her marginal state rate is 5 percent which of the two options should she choose? If she were to move to another state where her marginal state rate would be 10 percent, would her choice be any different? Assume that Dana itemizes deductions.

4. [LO 1] At the beginning of his current tax year David invests $12,000 in original issue U.S. Treasury bonds with a $10,000 face value that mature in exactly 10 years. David receives $700 in interest ($350 every six months) from the Treasury bonds during the current year and the yield to maturity on the bonds is 5 percent.

a. How much interest income will he report this year if he elects to amortize the bond premium?

b. How much interest will he report this year if he does not elect to amortize the bond premium?

5. [LO 1] Seth invested $20,000 in Series EE savings bonds on April 1. By December 31, the published redemption value of the bonds had increased to $20,700. How much interest income will Seth report from the savings bonds in the current year absent any special election?

6. [LO 1] At the beginning of her current tax year, Angela purchased a zero-coupon corporate bond at original issue for $30,000 with a yield to maturity of 6 percent. Given that she will not actually receive any interest payments until the bond matures in 10 years, how much interest income will she report this year assuming semiannual compounding of interest?

7. [LO 1] At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $50,000 from the secondary market for $45,000. The bond has a stated annual interest rate of 5 percent payable on June 30 and December 31, and it matures in five years on December 31. Absent any special tax elections, how much interest income will Eric report from the bond this year and in the year the bond matures?

8. [LO 1] Hayley recently invested $50,000 in a public utility stock paying a 3 percent annual dividend. If Hayley reinvests the annual dividend she receives net of any taxes owed on the dividend, how much will her investment be worth in four years if the dividends paid are qualified dividends? (Hayley’s marginal income tax rate is 28 percent.) What will her investment be worth in four years if the dividends are nonqualified?

9. [LO1] {Planning} Five years ago, Kate purchased a dividend-paying stock for $10,000. For all five years, the stock paid an annual dividend of 4 percent before tax and Kate’s marginal tax rate was 25 percent. Every year Kate reinvested her after-tax dividends in the same stock. For the first two years of her investment, the dividends qualified for the 15 percent capital gains rate; however, for the last three years the 15 percent dividend rate was repealed and dividends were taxed at ordinary rates.

a. What is the current value (at the beginning of year 6) of Kate’s investment assuming the stock has not appreciated in value?

b. What will Kate’s investment be worth three years from now (at the beginning of year 9) assuming her marginal tax rate increases to 35 percent for the next three years?

10. [LO 2] John bought 1,000 shares of Intel stock on October 18, 2011 for $30 per share plus a $750 commission he paid to his broker. On December 12, 2014, he sells the shares for $42.50 per share. He also incurs a $1,000 fee for this transaction.

a. What is John’s adjusted basis in the 1,000 shares of Intel stock?

b. What amount does John realize when he sells the 1,000 shares?

c. What is the gain/loss for John on the sale of his Intel stock? What is the character of the gain/loss?

11. [LO 2] Dahlia is in the 28 percent tax rate bracket and has purchased the following shares of Microsoft common stock over the years:

Microsoft common stock
Date Purchased	Shares	Basis
7/10/2003	400	$12,000
4/20/2004	300	$10,750
1/29/2005	500	$12,230
11/02/2007	250	$7,300

If Dahlia sells 800 shares of Microsoft for $40,000 on December 20, 2014, what is her capital gain or loss in each of the following assumptions?

a. She uses the FIFO method.

b. She uses the specific identification method and she wants to minimize her current year capital gain.

12. [LO 2] {Research} Karyn loaned $20,000 to her co-worker to begin a new business several years ago. If her co-worker declares bankruptcy on June 22^nd of the current year, is Karyn allowed to deduct the bad debt loss this year? If she can deduct the loss, what is the character of the loss?

13. [LO 2] Sue has 5,000 shares of Sony stock that has an adjusted basis of $27,500. She sold the 5,000 shares of stock for cash of $10,000, and she also received a piece of land as part of the proceeds. The land was valued at $20,000 and had an adjusted basis to the buyer of $12,000. What is Sue’s gain or loss on the sale of 5,000 shares of Sony stock?

14. [LO 2] Matt and Meg Comer are married. They do not have any children. Matt works as a history professor at a local university and earns a salary of $54,000. Meg works part-time at the same university. She earns $21,000 a year. The couple does not itemize deductions. Other than salary, the Comers’ only other source of income is from the disposition of various capital assets (mostly stocks).

a. What is the Comers’ tax liability for 2014 if they report the following capital gains and losses for the year?

Short-term capital gains $9,000

Short-term capital losses ($2,000)

Long-term capital gains $15,000

Long-term capital losses ($6,000)

b. What is the Comers’ tax liability for 2014 if they report the following capital gains and losses for the year?

Short-term capital gains $1,500

Short-term capital losses $0

Long-term capital gains $15,000

Long-term capital losses ($10,000)

15. [LO 2] Grayson is in the 25 percent tax rate bracket and has the sold the following stocks in 2014:

	Date Purchased	Basis	Date Sold	Amount Realized
Stock A	1/23/1990	$7,250	7/22/2014	$4,500
Stock B	4/10/2014	14,000	9/13/2014	17,500
Stock C	8/23/2012	10,750	10/12/2014	15,300
Stock D	5/19/2004	5,230	10/12/2014	12,400
Stock E	8/20/2014	7,300	11/14/2014	3,500

a. What is Grayson’s net short-term capital gain or loss from these transactions?

b. What is Grayson’s net long-term gain or loss from these transactions?

c. What is Grayson’s overall net gain or loss from these transactions?

d. What amount of the gain, if any, is subject to the preferential rate for certain capital gains?

16. [LO 2] George bought the following amounts of Stock A over the years:

	Date Purchased	Number of Shares	Adjusted Basis
Stock A	11/21/1988	1,000	$24,000
Stock A	3/18/1994	500	9,000
Stock A	5/22/2003	750	27,000

On October 12, 2014, he sold 1,200 of his shares of Stock A for $38 per share.

a. How much gain/loss will George have to recognize if he uses the FIFO method of accounting for the shares sold?

b. How much gain/loss will George have to recognize if he specifically identifies the shares to be sold by telling his broker to sell all 750 shares from the 5/22/2003 purchase and 450 shares from the 11/21/1988 purchase?

17. [LO 2] During the current year, Ron and Anne sold the following assets:

Capital Asset	Market Value	Tax Basis	Holding Period
L stock	$50,000	$41,000	> 1 year
M stock	28,000	39,000	> 1 year
N stock	30,000	22,000	< 1 year
O stock	26,000	33,000	< 1 year
Antiques	7,000	4,000	> 1 year
Rental home	300,000*	90,000	> 1 year
*$30,000 of the gain is 25 percent gain (from accumulated depreciation on the property).

a. Given that Ron and Anne have taxable income of only $20,000 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2014 assuming they file a joint return?

b. Given that Ron and Anne have taxable income of $400,000 (all ordinary) before considering the tax effect of their asset sales, what is their gross tax liability for 2014 assuming they file a joint return?

18. [LO 2] In 2014, Tom and Amanda Jackson (married filing jointly) have $200,000 of taxable income before considering the following events:

a) On May 12, 2014, they sold a painting (art) for $110,000 that was inherited from Grandma on July 23, 2012. The fair market value on the date of Grandma's death was $90,000 and Grandma's adjusted basis of the painting was $25,000.

b) Applied a long-term capital loss carryover from 2013 of $10,000.

c) Recognized a $12,000 loss on 11/1/14 sale of bonds (acquired on 5/12/04).

d) Recognized a $4,000 gain on 12/12/14 sale of IBM stock (acquired on 2/5/14).

e) Recognized a $17,000 gain on the 10/17/14 sale of rental property (the only §1231 transaction) of which $8,000 is reportable as gain subject to the 25 percent maximum rate and the remaining $9,000 is subject to the 15 percent maximum rate (the property was acquired on 8/2/08).

f) Recognized a $12,000 loss on 12/20/14 sale of bonds (acquired on 1/18/14).

g) Recognized a $7,000 gain on 6/27/14 sale of BH stock (acquired on 7/30/05).

h) Recognized an $11,000 loss on 6/13/14 sale of QuikCo stock (acquired on 3/20/07).

i) Received $500 of qualified dividends on 7/15/14.

Complete the required capital gains netting procedures and calculate the Jacksons’ 2014 tax liability.

19. [LO 2] For 2014, Sherri has a short-term loss of $2,500 and a long-term loss of $4,750.

a. How much loss can Sherri deduct in 2014?

b. How much loss will Sherri carryover to 2015 and what is the character of the loss carryover?