Question

Corporate Tax Liability The Talley Corporation had taxable operating income of $305,000 (i.e., earnings from operating revenues minus all operating costs). Talley also had (1) interest charges of $60,000, (2) dividends received of $10,000, and (3) dividends paid of $25,000. Its federal tax rate was 21% (ignore any possible state corporate taxes). Recall that 50% of dividends received are tax exempt. What is the firm's taxable income? Round your answer to the nearest dollar. $ What is the tax expense? Round your answers to the nearest dollar. What is the after-tax income? Round your answers to the nearest dollar.

Answer 1

Answer:

firm’s taxable income = taxable operating income - interest charges + dividends received*50%

50% of dividends received are tax exempt. so only 50% of dividends received will be treated as income.

firm’s taxable income = $305,000 - $60,000 + $10,000*50% = $305,000 - $60,000 + $5,000 = $250,000

Dividends are paid from after-tax net income. so it will not be part of firm’s taxable income calculation.

tax expense = firm’s taxable income*federal tax rate = $250,000*21% = $52,500

after-tax income = firm’s taxable income - tax expense = $250,000 - $52,500 = $280,450