question archive Charles and Cathy are employed by different companies
Charles and Cathy are employed by different companies
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Charles and Cathy are employed by different companies. They earn the same amount of income and share a similar lifestyle. However, each receives a different
type of remuneration.
Charles earns a total of $50,000, which is paid in the form of a monthly salary. His
annual personal expenses (excluding income tax) are shown in Table A, below.
Cathy also earns $50,000 annually. Her remuneration is as shown in Table B. Her
personal expenses (excluding income tax) are shown in Table C.
Both Charles and Cathy pay income tax at a rate of 40%. Both invest any savings in
an effort to build up a substantial investment portfolio.
Required:
(a) For the current year, compare Cathy's after-tax cash flow with that of Charles, and
determine the amount each has available to add to an investment portfolio.
(b) What amount of salary would Charles have to receive in order to have the same
amount of cash available for his investment portfolio as Cathy has?
A. Life insurance ($100,000) $ 1,000
Lease payments on automobile 6,000
Interest on house mortgage (10% on $70,000) 7,000
Family private medical insurance 1,000
Golf club dues 2,000
Automobile operating expenses 3,000
Other personal living expenses 9,000
$29,000
B. Salary $39,000
Private medical insurance 1,000
Group term life insurance ($100,000) 1,000
Lease payments on company automobile used
personally by Cathy
6,000
Low-interest (5%) loan of $20,000:
Prescribed interest rate (10%) $2,000
Actual interest charged (5%) (1,000) 1,000
Paid golf club dues (benefits employer) 2,000
$50,000
C. Interest on house mortgage:
10% of $50,000 $ 5,000
Interest on employee loan used to acquire
house: 5% of $20,000 1,000
Automobile operating costs 3,000
Other personal living expenses 9,000
$18,000
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