Question

number 3

(Corporate income tax) Last year Sanderson, Inc, had sales of $3.4 million. The firm's cost of goods sold came to $2.1 million, its operating expenses excluding depreciation of $104,000 were $401,000, and the firm paid $150,000 in Interest on its bank loans. Also, the corporation received $47,000 in dividend income (from a company in which it owned less than 20 percent of its shares) but paid $30,000 in the form of dividends to its own common stockholders. Use the corporate tax rates shown in the popup window, to calculate the corporation's tax liability What are the firm's average and marginal tax rates? The firm's tax liability for the year is $ . (Round to the nearest dollar.)

Answer 1

Ans: Sales= 3,400,000

Cost of goods sold= 2,100,000

Operating expenses(excluding depreciation)= 401,000

Depreciation= 104,000

Interest= 150,000

Dividend income= 47,000

Dividend paid= 30,000

Since the firm owes less than 20% from which it earns dividend of $47,000. Therefore only 70% is exempted from tax , thus 30% is taxable income which is 47000*30% = 14,100

Taxable income

Particulars	Amount($)
Sales	3,400,000
Less: Cost of goods sold	(2,100,000)
Gross profit	1,300,000
Total operating expenses(401,000+104,000)	(505,000)
Net operating income	795,000
Interest	(150,000)
Earnings before taxes	645,000

Total taxable income= Earnings before taxes+ taxable dividend income

= 645,000+ 14,100

= 659,100

Tax liability

Taxable income	Marginal tax rates	Marginal tax calculation	tax liability	Cummulative tax liability
$50,000	15%	50,000*15%	7,500	7500
$75,000	25%	25000*25%	6,250	13,750
$100,000	34%	25,000*34%	8,500	22,250
$335,000	39%	235,000*39%	91,650	113,900
$659,100	34%	324,100*34%	110,194	224,094

Average tax rates

Taxable income	Average tax calculation	Average tax rates
50,000	7500/50,000	15%
75,000	13,750/75,000	18.33%
100,000	22,250/100,000	22.25%
335,000	113,900/335,000	34%
659,100	224,094/659,100	34%

Therefore taxable liability= 224,094

Average tax= 34%

Marginal tax= 34% (if a firm earns more than 659,100 ,the marginal tax rate remain the same i.e. 34% as the next slab will only be changed when the income will exceed $10,000,000