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agarcia255
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Regular

Joined: 19 Mar 2009
Location: United States
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Posts: 99

Posted: 01 Apr 2009 at 16:03 \| IP Logged

Info 12/31/07:

Assets Historical Cost = $500

Liab Historical Cost = 100

Asset Estimated Current Values = 900

Liab Estimated Current Amt = 80

Income Tax rate = 30%

Compute: Amt s/b reported as net worth 12/31/07?

Wiley's ans:

$900-80-126 (820-400*30%) = $694

Question:

Why did the net of Historical Costs (500-100) was used to deduct from the Estimated CV to get the tax deduction?

Why not consider only (820*30%) as a tax deduction?

Thanks for your help...

taxwoman
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Joined: 19 Nov 2008
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Posts: 40

Posted: 01 Apr 2009 at 17:12 \| IP Logged

From Gleim:

"Estimated income taxes are calculated as if the assets had been realized and the liabilities liquidated. Estimated taxes are based on the differences between assets and liabilities and their tax basis"

Say the $900 asset represents a house. The person realizes/sells the asset. The gain is $900 selling price minus $500 basis = $400 gain x 30% tax = $120 estimated tax.

I don't know for sure, but my best guess is Wiley is doing the same thing for the liabilities. If the liablity were liquidated, there would be a $20 gain and an additional $6 estimated taxes. If the debtor said, ok you have this $100 liability, but I am willing to settle it today for $80. There would be $20 forgiveness of debt income taxed at 30% for $6.

It's tricky, but it's the only way I can make it work!

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divyagovil1
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Joined: 30 Jan 2009
Location: India
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Posts: 1456

Posted: 01 Apr 2009 at 19:43 \| IP Logged

wow, taxwoman ! that's a perfect explanation :)

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taxwoman
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Joined: 19 Nov 2008
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Posted: 01 Apr 2009 at 20:13 \| IP Logged

Thanks!

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neott
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Joined: 02 Jan 2009
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Posts: 43

Posted: 01 Apr 2009 at 21:17 \| IP Logged

Thanks. I'll mark it down.
I thought personal financial statement wasn't important so I didn't study for that but since a few of you are talking about this, I'd better start reading.

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