Ahmad Is Considering Making a $10,000 Investment in a Venture

question 16

Multiple Choice

Ahmad is considering making a $10,000 investment in a venture which its promoter promises will generate immediate tax benefits for him. Ahmad, who normally itemizes his deductions, is in the 28% marginal tax bracket. If the investment is of a type where the taxpayer may claim either a tax credit of 25% of the amount of the expenditure or an itemized deduction for the amount of the investment, what treatment normally would be most beneficial to Ahmad and by how much will Ahmad's tax liability decline because of the investment?

• A) $0, take neither the itemized deduction nor the tax credit.
• B) $2,500, take the tax credit.
• C) $2,800, take the itemized deduction.
• D) Both options produce the same benefit.
• E) None of the above.

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Definitions:

Weighted-Average Cost Method

A costing method that assigns the cost of inventory based on the average cost of all similar items in the inventory, regardless of when they were purchased.

Blending Department

A part of a manufacturing process where ingredients are combined according to specific recipes to produce a final product.

Sequential Processes

Steps in manufacturing or service delivery that are performed in a specific order, where the completion of one step is dependent on the completion of the step before it.

Weighted-Average Method

An approach used in cost accounting to assign a cost to inventory on the basis of the average cost of all similar items held, considering their weight.