In 2000, Craig and Kathy Koehler Owned a Small Business

question 27

Multiple Choice

In 2000, Craig and Kathy Koehler owned a small business which was held as a proprietorship in Kathy's name.They were thinking of incorporating if that would lower their total tax liability.The Koehlers expected the company to earn $100,000 before taxes next year.They planned to take out a salary of $45,000, and to reinvest the rest in the business.Their personal deductions total $10,750 and if they choose not to incorporate they will file a joint return.(1) What is their expected total tax liability as a proprietorship? (2) As a corporation? (3) Should they incorporate?

• A)$19,393.50; $22,250.00; No
• B)$19,393.50; $13,887.50; Yes
• C)$6,793.50; $6,637.50; Yes
• D)$22,403.50; $15,753.50; Yes
• E)$20,777.50; $22,250.00; No

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Definitions:

Accrual Basis

An accounting method where revenues and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged.

Cash Basis

An accounting method where revenues and expenses are recognized only when cash is exchanged, as opposed to when they are incurred.

Permanent Account

An account that is not closed at the end of the accounting period and its balances are carried forward into the next period.

Temporary Account

An account used in accounting that is closed at the end of each accounting period, transferring its balance to a permanent account.