Question

the talley corporation had taxable operation income $400000(i.e earnings from operating minus all operating cost ). talley also had (1) interest charges of $50000 , 2. dividend received of $25000,and 3) dividends paid of $ 40000.its federal tax was 21% ( ignore any possible state corporate taxes) recall that 50% of dividends received are tax exempt. what is the firms taxable income what is the tax expense. what is the after- tax income

Answer 1

Taxable income = Operating income – Interest charges + Dividend income of 50%

                           = 400,000 – 50,000 + 25,000 × 0.50

                           = 350,000 + 12,500

                           = 362,500 (Answer)

Tax expense = Taxable income × Tax rate

                        = 362,500 × 21%

                        = 76,125 (Answer)

After-tax income = Taxable income – Tax expense

                             = 362,500 – 76,125

                             = 286,375 (Answer)

Note: the payment of dividends should not be considered here, since dividend is paid out of retained earnings but not through income statement.