Jerry and Matt Decide to Form a Business

question 11

Multiple Choice

Jerry and Matt decide to form a business. Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest. The business will take out a $25,000 loan to cover the balance of their working capital needs. They expect that the business will have a loss of $38,000 for the first year. In the second year, the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry. Jerry is in the 32% marginal tax bracket and Matt is in the 24% marginal tax bracket. Their marginal tax brackets will not change as a result of profit or loss from this business. How much tax will Matt pay in the second year (rounded to the nearest dollar) due to this business if they organize the business as a partnership?

• A) $10,920
• B) $9,464
• C) $7,956
• D) $8,814
• E) $4,732

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Definitions:

Theory Perseverance

The persistence of one's initial beliefs, even in the face of contradicting evidence or after the evidence for their foundation has been discredited.

Availability Heuristic

The availability heuristic is a mental shortcut that relies on immediate examples that come to mind when evaluating a specific topic, concept, method, or decision, often leading to bias.

False Consensus Effect

The tendency to overestimate the number of other people who share one’s opinions, attitudes, values, and beliefs.

Illusion Of Control

The false belief that one can influence certain events, especially random or chance ones.