KRU Company Engaged in a Current-Year Transaction That Required a $20,000

question 67

Multiple Choice

KRU Company engaged in a current-year transaction that required a $20,000 cash outflow. Which of the following statements is true?

• A) If the cash outflow is deductible and BMX's marginal tax rate is 20%, the tax savings from the transaction is $4,000.
• B) If the cash outflow is deductible and BMX's marginal tax rate is 30%, the tax cost of the transaction is $6,000.
• C) If the cash outflow is not deductible, the current-year tax savings of the transaction is zero.
• D) All of the above are true.

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Definitions:

Direct Financing Lease

A leasing arrangement in which the lessor finances the leased asset, and the lessee's payments are structured to cover the asset's costs and provide a return to the lessor.

Implicit Interest Rate

Refers to the interest rate in a financial transaction that is not explicitly stated but rather implied by the terms of the arrangement.

Present Value

The present worth of a future amount of money or a series of cash flows, discounted at a certain rate of return.

Annual Lease Payment

The total amount payable over a year under the terms of a lease agreement.