Sal, a Calendar-Year Taxpayer, Uses the Cash-Basis Method of Accounting

question 32

Essay

Sal, a calendar-year taxpayer, uses the cash-basis method of accounting for his sole proprietorship. In late December, he performed $40,000 of consulting services for a client. Sal typically requires his clients to pay his bills immediately upon receipt. Assume that Sal's marginal tax rate is 32 percent this year and 37 percent next year and that he can earn an after-tax rate of return of 12 percent on his investments. Should Sal send his client the bill in December or January? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

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Definitions:

Depreciation Expense

This represents the systematic allocation of the cost of an asset over its useful life, reflecting its consumption, wear and tear, or obsolescence.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded for an asset since it was acquired.

End-Of-Period Spreadsheet

A document summarizing a company's financial activities and balances at the close of an accounting period, aiding in the preparation of financial statements.

Double Rule

A method used in accounting to underline a summary amount twice to indicate a total, final, or especially significant figure.