Mingming and Xavier, Unrelated Single Taxpayers, Have Each Incurred a $1,000

question 780

Multiple Choice

Mingming and Xavier, unrelated single taxpayers, have each incurred a $1,000 expenditure. Before considering this expenditure, Mingming has taxable income of $500,000 and Xavier has taxable income of $32,000. Assume the expenditure qualifies as either a tax deduction or a 25% credit. Which of the following statements is correct?

• A) Mingming will prefer the credit, but Xavier will prefer the deduction.
• B) Both taxpayers will prefer the deduction.
• C) Mingming will prefer the deduction, but Xavier will prefer the credit.
• D) Both taxpayers will prefer the credit.

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Definitions:

Interest Accrued

Interest that has been incurred but not yet paid, recorded as a liability on the balance sheet.

Cash Dividends

Payments made by a company out of its earnings to its shareholders in the form of cash.

Long-Term Investments

Assets that a company intends to hold for more than one year, such as stocks, bonds, real estate, or machinery.

Unrealized Gain-Equity

The increase in the value of investments that a company holds in other companies' stocks, which have not been sold and thus the gain has not been realized.