Question

Assume that Western Exploration Corp. is considering the acquisition of Ogden Drilling Company. The latter has a $510,000 tax loss carryforward. Projected earnings for the Western Exploration Corp. are as follows: Before-tax income Taxes (35%) Income available to stockholders 2011 $215,000 75,250 $139,750 2012 $200,000 70,000 $130,000 2013 $320,000 112,000 $208,000 Total Values $ 735,000 257,250 $477,750 a. How much will the total taxes of Western Exploration Corp.be reduced as a result of the tax loss carryforward? (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Reduction in taxes b. How much will the total income available to stockholders be for the three years if the acquisition occurs? (Do not round intermediate calculations and round your answers to the nearest whole dollar.) 2011 2012 2013 Total Income available to stockholders

Answer 1

Ans :

a. Reduction in taxes due to tax loss carry - forward = Loss * tax rate

= $ 510,000 * 35 %

= $ 178,500

b.

	2011	2012	2013	Total Value
Before-tax income	215000	200000	320000	735000
Tax loss carry forward (note 1 )	215000	200000	95000	510000
Net Taxable Income	0	0	225000	225000
Taxes(35%)	0	0	78750	78750
Income available to Stockholders after taxes	0	0	146250	146250

Note :1 Balance of losses after set-off in 2011 = 510,000 - 215,000 = $ 295,000

Balance of losses after set-off in 2012 = $ 295,000 - $ 200,000 = $ 95,000

Balance of losses after set-off in 2013 = $ 95,000- $ 95,000 = 0