Sunday, September 16, 2012

Present Value of Bond Practice Problem

A company decides to issue bonds payable to finance the acquisition of a new machine. The total bond issue will be $1,000,000. The bond that will be issued by the company is offering a 10 year term with semi-annual payments of interest at an annual rate of 5%. 

At the time of issuance the market rate for a similar offering with similar risk was 8%.

Solve this bond accounting problem and calculate the issue price of the bonds. Also, note if this is a discount or a premium on the face value of the bond. 

Present value factors are shown below and are needed to solve this bond problem:

PV of a single sum for 10 periods at 5% is : .614
PV of a single sum for 20 periods at 5% is : .377
PV of a single sum for 10 periods at 8% is : .463
PV of a single sum for 20 periods at 8% is : .215
PV of a single sum for 10 periods at 4% is : .676
PV of a single sum for 20 periods at 4% is : .456

PV of an Annuity for 10 periods at 5% is : 7.722
PV of an Annuity for 20 periods at 5% is : 12.462
PV of an Annuity for 10 periods at 8% is : 6.710
PV of an Annuity for 20 periods at 8% is : 9.818
PV of an Annuity for 10 periods at 4% is : 8.111
PV of an Annuity for 20 periods at 4% is : 13.590

Answer and explanation:

Future Value (FV) = 1,000,000
N = 10 yrs x 2 = 20
Interest = 8%/2 = 4%
PMT = .05/2 x 1,000,000 = 25,000
PV = ?

PV of the 1,000,000 Bond
1,000,000 x .456 = 456,000

PV of the Bond Payments....
25,000 x 13.590 = 339,750

Answer= PV of Bond is 456,000 + 339,750 = $795,750. Each individual bond is sold at a discount of 795.75

Wednesday, September 12, 2012

Investment and Passive Activity Interest § 469

Interest is deductible to the extent of the income generated by investments or passive activities. What is passive?

Investment and Passive Activity Interest § 469

A business activity in which the tax payer does not particularly participate. Does not have immediate control. Example: You won property, but aren’t doing anything. If you take out loan to finance passive investing, but only deduct interest to the extent that you are making money. Only to the extent that you have income from the activity

Tuesday, September 4, 2012

Section 21 Child Care Tax Credit

The § 21 Child Care Tax Credit- Percentage of Child Care Expenditures


For a taxpayer with AGI of $15,000 or less, the credit is 35% of the credit eligible expenses. The rate of the Child Care credit is reduced by one percentage point for each $2,000 (or fraction) by which AGI exceeds $15,000 but the credit is never reduced below 20%.The credit rate hits the 20 percent floor at AGI of $43,001. Section 21 (D)(1)(B) – Could equal the income of the lowest taxpayer

§ 21 provides a credit equal to a percentage of a taxpayer’s child care expenses, if the expenses are “incurred to enable the taxpayer to be gainfully employed.” Expenses eligible for the credit are capped at $3,000 for a taxpayer with one “qualifying individual” (generally, a child under the age of 13, or another individual unable to care for himself) POLICY: Allow the person to be gainfully employed. Worried about slippery slope which could lead to tax credits and deductions. Expenses must be incurred so taxpayer can be employed. WELL BEING AND PROTECTION. NO FOOD, LODGING, OR CLOTHING. Cost of nursery school below level of kindergarten are for the child’s care.

There are lots of regulations about this, no for over night camps. Yes for day camps, even if the day camp specializes in something. Treasury Regulations Say: Allocate costs for other household services. This is only going to be a problem if a substantial amount of the services is for something else. Do not need to allocate the expenses if they are de minimis

The child care credit is limited to the income of the lowest earning spouse. If there is no income, there is no credit.

Full time student = Gainfully Employed. Deemed to have $500 a month in income to take the credit. STUDENT EXCEPTION Capped at $6,000 for taxpayer with two or more qualifying individuals. These are refundable.

POLICY: The Child Care Credit in Section 21 has more vertical equity than a deduction. Credits avoid the “upside-down” aspect of subsides designed as deductions (where a $1,000 deduction is worth more to a 28% bracket taxpayer than to a 15% bracket taxpayer).

Information about Child Credit on Tax Return
Information about Qualifying Child for Earned Income Tax Credit
2015 Earned Income Credit Chart

Popular Accounting Problems

The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.