# 1-1. William B. Waugh Corporation—Corporate Income Tax Sales

```1-1.
William B. Waugh Corporation—Corporate Income Tax
Sales
Cost of Goods Sold + Operating Expenses
Operating Profits
Dividend Income
(\$6,000 * 30% = )
Interest Expense
Short Term Capital Gain
(Selling Price – Cost)
(\$50,000-\$45,000)
Long Term Capital Gain **
(Selling Price – Cost)
(\$100,000-\$80,000)
Taxable Ordinary Income
\$50,000
25,000
451,800
\$526,800
1,800
(400,000)
5,000
20,000
\$526,800
x .15 =
x .25 =
x .34 =
\$7,500
6,250
153,612
167,362
Surtax:
\$235,000 x .05
Total taxes due
\$3,000,000
(2,100,000)
\$900,000
=
=
**Long Term Capital Gain
Selling Price
(#Shares)(Price/Share)
1000 x \$100.00
Cost
(#Shares)(Price/Share)
1000 x \$80.00
11,750
\$179,112
\$100,000
80,000
1-2.
L. B. Menielle, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Operating Expenses
Operating Profits
Interest Income
Dividend Income
(\$25,000 * 30% = )
Interest Expense
\$5,000,000
(2,000,000)
\$3,000,000
(1,000,000)
\$2,000,000
20,000
Taxable Ordinary Income
\$1,927,500
7,500
(100,000)
Capital Gains and Losses
Long-Term Gain (Loss)
Short-Term Gain (Loss)
Net Short-Term Gain (Loss)
\$40,000
(50,000)
(\$10,000) ***
Tax Liability:
\$50,000
25,000
1,852,500
\$1,927,500
Surtax:
235,000
x 0.15
x 0.25
x 0.34
= \$7,500
=
6,250
= 629,850
643,600
x 0.05
=
11,750
\$655,350
***The \$10,000 net short-term capital loss may not be deducted from
ordinary income. However, if net capital gains were realized in the
previous three years, the loss may be carried back to offset those prior
gains, which would reduce the corporation’s tax liability in the present
year. If gains did not exist in prior years, the loss could be carried
forward for five years.
1-3.
Sandersen, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Operating Expenses
Depreciation Expense
Operating Profits
Dividend Income
(\$50,000 * 30% = )
Interest Expense
\$3,000,000
(2,000,000)
\$1,000,000
(400,000)
(100,000)
\$500,000
15,000
(150,000)
Taxable Ordinary Income
\$365,000
Tax Liability
\$50,000
25,000
290,000
\$365,000
Surtax:
235,000
x
x
x
0.15
0.25
0.34
=
=
=
\$ 7,500
6,250
98,600
112,350
x
0.05
=
11,750
\$124,100
1-4.
A. Don Drennan, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold—(\$6,000,000 * 70%)
Gross Profits
Operating Expenses & Depreciation
Taxable Ordinary Income
Short Term Loss
Sales Price
Purchase Price
Short-Term Loss
\$6,000,000
(4,200,000)
\$1,800,000
(800,000)
\$1,000,000
\$75,000
(80,000)
(\$ 5,000) ***
Tax Liability
\$50,000
25,000
925,000
\$1,000,000
Surtax:
235,000
x
x
x
0.15
0.25
0.34
=
=
=
\$ 7,500
6,250
314,500
328,250
x
0.05
=
11,750
\$340,000
***Drennan, Inc. has a \$5,000 capital loss carryback and/or carryforward
to use.
1-5.
Robbins Corporation—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Cash Operating Expenses
Depreciation Expense
Dividend Income
(\$40,000 * 30% = )
Interest Expense
Taxable Ordinary Income
\$1,000,000
(600,000)
\$400,000
(100,000)
(150,000)
12,000
(200,000)
(\$38,000)
***Management will need to file for an operating loss carryback and/or a
carryforward.
1-6.
Fair Corporation—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Operating Expenses
Dividend Income
(\$5,000 * 30% = )
Ordinary Income
\$5,000,000
(4,300,000)
\$700,000
(100,000)
1,500
\$601,500
Plus Capital Gains
Land:
Sales Price
Selling Price
\$150,000
(100,000)
50,000
Stock:
Selling Price (#Shares)x(Price/Share)
1,000 x \$150
\$150,000
Cost (#Shares)x(Price/Share)
1,000 x \$100
(100,000)
Taxable Ordinary Income
50,000
\$701,500
Tax Liability:
\$50,000
25,000
626,500
\$701,500
x
x
x
0.15
0.25
0.34
=
=
=
\$7,500
6,250
213,010
\$226,760
x
0.05
=
11,750
\$238,510
Surtax:
235,000
1-7.
J. P. Hulett, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Operating Expenses
Depreciation Expenses
Operating Profits
Dividend Income
(\$12,000 * 30% = )
Taxable Income
\$4,000,000
(3,000,000)
\$1,000,000
(500,000)
(350,000)
\$150,000
3,600
\$153,600
Tax Liability:
\$50,000
25,000
78,600
\$153,600
x
x
x
0.15
0.25
0.34
=
=
=
\$7,500
6,250
26,724
\$40,474
x
0.05
=
2,680
\$43,154
Surtax:
53,600
(153,600-100,000)
1-8.
Anderson & Dennis, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Operating Expenses
Depreciation Expense
Operating Profits
Interest Expense
Ordinary Income
\$5,000,000
(3,000,000)
\$2,000,000
(175,000)
(125,000)
\$1,700,000
(200,000)
\$1,500,000
Capital Gains and Losses
Long-Term Gain (Loss)
Short-Term Gain (Loss)
Net Short-Term Gain (Loss)
\$40,000
(60,000)
(\$20,000) ***
Tax Liability:
\$50,000
25,000
1,425,000
\$1,500,000
x
x
x
0.15
0.25
0.34
=
=
=
\$7,500
6,250
484,500
\$498,250
x
0.05
=
11,750
\$510,000
Surtax:
235,000
***The \$20,000 net capital loss may not be deducted from ordinary
income. However, if net capital gains were realized in the previous three
years, the loss may be carried back to offset those prior gains, which
would reduce the corporation’s tax liability in the present year. If gains
did not exist in prior years, the loss could be carried forward for five
years.
1-9.
G. R. Edwin, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Operating Expenses
Interest Expense
Taxable Income
\$6,000,000
(3,000,000)
\$3,000,000
(2,600,000)
(30,000)
\$370,000
Tax Liability:
\$50,000
25,000
295,000
\$370,000
x
x
x
0.15
0.25
0.34
=
=
=
\$7,500
6,250
100,300
\$114,050
x
0.05
=
11,750
\$125,800
Surtax:
235,000
1-10. The Analtoly Corporation—Corporate Income Tax
Sales
Cost of Goods Sold and
Operating Expenses
Depreciation Expense
Operating Profit
Interest Expense
\$4,500,000
(3,200,000)
(50,000)
\$1,250,000
(150,000)
Long-Term Gain:
Selling Price
Purchase Price
\$120,000
(40,000)
Taxable Ordinary Income
\$1,180,000
Tax Liability:
\$50,000
25,000
1,105,000
\$1,180,000
Surtax:
235,000
80,000
x
x
x
0.15
0.25
0.34
=
=
=
\$7,500
6,250
375,700
389,450
x
0.05
=
11,750
\$401,200
1-11. Utsumi, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold and
Cash Operating Expenses
Depreciation Expense
Operating Profit
Interest Expense
Dividend Income
Less 70% Exclusion
Long-Term Gain:
Selling price
Purchase Price
Taxable Income
\$6,500,000
(4,550,000)
(75,000)
\$1,875,000
(160,000)
\$ 60,000
(42,000)
\$400,000
(320,000)
Tax Liability:
\$50,000
25,000
25,000
235,000
1,478,000
\$1,813,000
x
x
x
x
x
0.15
0.25
0.34
0.39
0.34
= \$7,500
=
6,250
=
8,500
= 91,650
= 502,520
\$616,420
18,000
80,000
\$1,813,000
1-12. Taxable Income = \$300,000
Tax Liability:
\$50,000
25,000
225,000
\$300,000
Surtax:
200,000
x
x
x
0.15
0.25
0.34
= \$7,500
= 6,250
= 76,500
90,250
x
0.05
= 10,000
\$100,250
1-13. Taxable Income = \$20,000,000.
Tax Liability:
\$50,000
25,000
9,925,000
10,000,000
\$20,000,000
Surtax:
235,000
3,333,333
x
x
x
x
0.15
0.25
0.34
0.35
=
\$7,500
=
6,250
= 3,374,500
= 3,500,000
\$6,888,250
x
x
0.05
0.03
=
=
11,750
100,000
\$111,750
\$7,000,000
Since the taxable income is over \$18 1/3 million, we need only multiply the
taxable income times 35% to come up with federal taxes due or
\$20,000,000 X .35 = \$7,000,000
1-14.
a.
For taxable income above \$335,000 and below \$18,333,333 both the marginal
and average tax rates are the same, 34%; and for taxable income greater than
\$18 1/3 million both the marginal and average tax rates are the same and they
are 35%. Thus, since the taxable income is above \$18 1/3 million, we can
calculate Boisjoly’s federal taxes by multiplying the taxable income (\$19
million) times 35% and we get \$6,650,000 (\$19 million X .35).
b.
Average tax rate: \$6,650,000/\$19,000,000 = 35%
Marginal tax rate: 35%
c.
\$29,000,000 X .35 = \$10,150,000
d.
Average tax rate: \$10,150,000/\$29,000,000 = 35%
Marginal tax rate: 35%
SOLUTION TO COMPREHENSIVE PROBLEM
a.
The goal of profit maximization is too simplistic in that it assumes away the problems
of uncertainty of returns and the timing of returns. Rather than use this goal, we have
chosen maximization of shareholders’ wealth—that is, maximization of the market
value of the firm’s common stock—because the effects of all financial decisions are
included. The shareholders react to poor investment or dividend decisions by causing
the total value of the firm’s stock to fall and react to good decisions by pushing the
price of the stock upward. In this way, all financial decisions are evaluated, and all
financial decisions affect shareholder wealth.
b.
Simply put, investors will not put their money in risky investments unless they are
compensated for taking on that additional risk. In effect, the return investors expect is
composed of two parts. First, they receive a return for delaying consumption, which
must be greater than the anticipated rate of inflation. Second, they receive a return for
taking on added risk. Otherwise, both risky and safe investments would have the same
expected return associated with them, and no one would take on the risky investments.
c.
The firm receives cash flows and is able to reinvest them, which cannot be done with
accounting profits. In effect, accounting profits are shown when they are earned rather
than when the money is actually in hand. Unfortunately, a firm’s accounting profits
and cash flows may not be timed to occur together. For example, capital expenses,
such as the purchase of a new plant or piece of equipment, are depreciated over several
years, with the annual depreciation subtracted from profits. However, the cash flow
associated with these expenses generally occurs immediately. It is the cash inflows that
can be reinvested and cash outflows that involve paying out money. Therefore, cash
flows correctly reflect the true timing of the benefits and costs.
d.
In an efficient market, information is impounded into security prices with such speed
that there are no opportunities for investors to profit from publicly available
information. Actually, what types of information are immediately reflected in security
prices and how quickly that information is reflected determine how efficient the market
actually is. The implications for us are that stock prices reflect all publicly available
information regarding the value of the company. This means we can implement our
goal of maximization of shareholder wealth by focusing on the effect each decision
should have on the stock price, all else held constant. It also means that earnings
manipulations through accounting changes should not result in price changes. In effect,
our preoccupation with cash flows is validated.
e.
The agency problem is the result of the separation of management and the ownership of
the firm. As a result, managers may make decisions that are not in line with the goal of
maximization of shareholder wealth. To control this problem, we monitor managers
and try to align the interests of shareholders and managers. The interests of
shareholders and managers can be aligned by setting up stock options, bonuses, and
perquisites that are directly tied to how closely management decisions coincide with the
interest of shareholders.
f.
Ethical errors are not forgiven in the business world. Business interaction is based
upon trust, and there is no way that trust can be eliminated quicker than through an
ethical violation. The fall of Ivan Boesky and Drexel, Burnham, Lanbert and the near
collapse of Salomon Brothers illustrates this fact. As a result, acting in an ethical
manner is not only morally correct, but it is congruent with our goal of maximization of
shareholder wealth.
g.
(1)
A sole proprietorship is a business owned by a single individual who maintains
complete title to the assets, but who is also personally liable for all indebtedness
incurred.
(2)
A partnership is an association of two or more individuals coming together as
co-owners for the purpose of operating a business for profit. The partnership is
equivalent to the sole proprietorship, except that the partnership has multiple
owners.
(3)
A corporation is a legal entity functioning separate and apart from its owners. It
can individually sue and be sued, purchase, sell, or own property, and be subject
to criminal punishment for crimes.
h.
Sales
Cost of Goods Sold
Gross Profit
Tax-Deductible Expenses:
Operating Expenses
Interest Expenses
Other Income:
Interest Income
Preferred Dividend Income
Less 70% exclusion
Taxable Ordinary Income
Gain on Sale:
Selling Price
Cost
Taxable Income
\$4,000,000
(2,400,000)
\$1,600,000
(\$600,000)
(300,000)
(900,000)
\$700,000
22,000
(\$30,000)
(\$21,000)
9,000
\$731,000
\$100,000
(60,000)
40,000
\$771,000
Tax Liability:
.15
x
\$50,000
.25
x
25,000
.34
x
696,000
5% surtax for
income between
\$100,000 and \$335,000
=
=
=
\$7,500
6,250
236,640
11,750
\$262,140
ALTERNATIVE PROBLEMS AND SOLUTIONS
ALTERNATIVE PROBLEMS
1-1A.
(Corporate Income Tax) The M.M. Roscoe Corporation is a regional truck dealer.
The firm sells new and used trucks and is actively involved in a parts business.
During the most recent year, the company generated sales of \$4 million. The
combined cost of goods sold and the operating expenses were \$3.2 million. Also,
\$300,000 in interest expense was paid during the year. The firm received \$5,000
during the year in dividend income for 1,000 shares of common stock that had been
purchased three years previously. However, the stock was sold toward the end of the
year for \$100 per share; its initial cost was \$80 per share. The company also sold land
that had been recently purchased and had been held for only four months. The selling
price was \$55,000; the cost was \$45,000. Calculate the corporation’s tax liability.
1-2A.
(Corporate Income Tax) Sales for J.P. Enterprises during the past year amounted to
\$5 million. The firm provides parts and supplies for oil field service companies.
Gross profits for the year were \$2.5 million. Operating expenses totaled \$900,000.
The interest and dividend income from securities owned were \$15,000 and \$25,000,
respectively. The firm’s interest expense was \$100,000. The firm sold securities on
two occasions during the year, receiving a gain of \$45,000 on the first sale but losing
\$60,000 on the second. The stock sold first had been owned for five years; the stock
sold second had been purchased three months prior to the sale. Compute the
corporation’s tax liability.
1-3A.
(Corporate Income Tax) Carter B. Daltan, Inc., sells minicomputers. During the past
year, the company’s sales were \$3.5 million. The cost of its merchandise sold came to
\$2 million, and cash operating expenses were \$500,000; depreciation expenses were
\$100,000, and the firm paid \$165,000 in interest on bank loans. Also, the corporation
received \$55,000 in dividend income but paid \$25,000 in the form of dividends to its
common stockholders. Calculate the corporation’s tax liability.
1-4A.
(Corporate Income Tax) Kate Menielle, Inc., had sales of \$8 million during the past
year. The company’s cost of goods sold was 60% of sales; operating expenses,
including depreciation, amounted to \$900,000. The firm sold a capital asset (stock)
for \$75,000, which had been purchased five months earlier at a cost of \$80,000.
Determine the company’s tax liability.
1-5A.
(Corporate Income Tax) The Burgess Corporation is an oil wholesaler. The
company’s sales last year were \$2.5 million, with the cost of goods sold equal to
\$700,000. The firm paid interest of \$200,000, and its cash operating expenses were
\$150,000. Also, the firm received \$50,000 in dividend income while paying only
\$15,000 in dividends to its preferred stockholders. Depreciation expense was
\$150,000. Compute the firm’s tax liability.
1-6A.
(Corporate Income Tax) The A.K.U. Corporation had sales of \$5.5 million this past
year. The cost of goods sold was \$4.6 million and operating expenses were \$125,000.
Dividend income totaled \$5,000. The firm sold land for \$150,000 that had cost
\$100,000 five months ago. The firm received \$140 per share from the sale of 1,000
shares of stock. The stock was purchased for \$100 per share three years prior.
Determine the firm’s tax liability.
1-7A.
(Corporate Income Tax) Sales for Phil Schubert, Inc., during the past year amounted
to \$5 million. The firm supplies statistical information to engineering companies.
Gross profits totaled \$1.2 million, and operating and depreciation expenses were
\$500,000 and \$400,000, respectively. Dividend income for the year was \$15,000.
Compute the corporation’s tax liability.
1-8A.
(Corporate Income Tax) Williams & Crisp, Inc., sells computer software. The
company’s past year’s sales were \$4.5 million. The cost of its merchandise sold came
to \$2.2 million. Operating expenses were \$175,000, plus depreciation expenses
totaling \$130,000. The firm paid \$150,000 interest on loans. The firm sold stock
during the year, receiving a \$50,000 gain on stock owned six years but losing
\$70,000 on stock held four months. Calculate the company’s tax liability.
1-9A.
(Corporate Income Tax) J. Johnson, Inc., had sales of \$7 million during the past year.
The cost of goods sold amounted to \$4 million. Operating expenses totaled \$2.6
million and interest expense was \$40,000. Determine the firm’s tax liability.
1-10A. (Corporate Income Tax) The Kusomoto Corporation is an electronics dealer and
distributor. Sales for the last year were \$6.9 million, and cost of goods sold and
operating expenses totaled \$4.3 million. Kusomoto also paid \$180,000 in interest
expense, and depreciation expense totaled \$40,000. In addition, the company sold
securities for \$117,000 that it had purchased four years earlier at a price of \$37,000.
Compute the tax liability for Kusomoto.
1-11A. (Corporate Income Tax) Martinez, Inc. supplies wholesale industrial chemicals. Last
year the company had sales of \$8.3 million. Cost of goods sold and operating
expenses amounted to 77% of sales, and depreciation and interest expense were
\$79,000 and \$150,000, respectively. Furthermore, the company sold 50,000 shares of
Rose Corporation for \$7.50 a share. These shares were purchased a year ago for
\$5.00 each. In addition, Martinez received \$72,000 in dividend income. Compute the
corporation’s tax liability.
SOLUTIONS FOR ALTERNATIVE PROBLEMS
1-1A.
M.M. Roscoe Corp.—Corporate Income Tax
Sales
Cost of Goods Sold + Operating Expenses
Operating Profits
Dividend Income
\$5,000
Less 70% Exclusion
(3,500)
Interest Expense
S-T Capital Gain
Selling Price
\$55,000
Cost
(45,000)
L-T Capital Gain
Selling Price
(#Shares)(Price/Share)
1,000 x \$100
\$100,000
Cost
(#Shares)(Price/Share)
1,000 x \$80
(80,000)
Taxable Ordinary Income
Tax liability:
\$50,000
25,000
456,500
\$531,500
\$4,000,000
(3,200,000)
\$800,000
1,500
(300,000)
10,000
20,000
\$531,500
x
x
x
x
.15
.25
.34
.34
=
=
=
=
\$7,500
6,250
155,210
\$180,710
Surtax:
\$235,000
x
Total taxes due
.05
=
=
11,750
\$180,710
1-2A.
J.P. Enterprises—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Operating Expenses
Operating Profits
Interest Income
Dividend Income
Less 70% Exclusion
Interest Expense
Taxable Ordinary Income
\$5,000,000
(2,500,000)
\$2,500,000
(900,000)
\$1,600,000
15,000
\$25,000
(17,500)
Capital Gains and Losses
Long-Term Gain (Loss)
Short-Term Gain (Loss)
Net Short-Term Loss
7,500
(100,000)
\$1,522,500
\$45,000
(60,000)
(\$15,000)
Tax Liability:
\$50,000
25,000
25,000
235,000
1,187,500
\$1,522,500
x
x
x
x
x
0.15
0.25
0.34
0.39
0.34
=
=
=
=
=
\$7,500
6,250
8,500
91,650
403,750
\$517,650
The \$15,000 net short-term capital loss may not be deducted from ordinary income.
However, if net capital gains were realized in the previous three years, the loss may
be carried back to offset those prior gains, which would reduce the corporation’s tax
liability in the present year. If gains did not exist in prior years, the loss could be
carried forward for five years.
1-3A.
Carter B. Daltan—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Cash Operating Expenses
Depreciation Expense
Operating Profits
Dividend Income
Less 70% Exclusion
Interest Expense
\$3,500,000
(2,000,000)
\$1,500,000
(500,000)
(100,000)
\$ 900,000
\$55,000
(38,500)
Taxable Ordinary Income
Tax Liability
\$50,000
25,000
25,000
235,000
416,500
\$751,500
1-4A.
x
x
x
x
x
0.15
0.25
0.34
0.39
0.34
16,500
(165,000)
\$751,500
=
=
=
=
=
\$
7,500
6,250
8,500
91,650
141,610
\$255,510
Kate Menielle, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold - (60%)
Gross Profits
Operating Expenses & Depreciation
Taxable Ordinary Income
S-T Gains
Sales Price
Purchase Price
Short-Term Gain (Loss)
Tax Liability on \$2,300,000
\$8,000,000
(4,800,000)
\$3,200,000
(900,000)
\$2,300,000
\$75,000
(80,000)
(\$ 5,000)
\$782,000
Company has a \$5,000 capital loss carryback-carryforward to use.
1-5A. Burgess Corporation—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Cash Operating Expenses
Depreciation Expense
Dividend Income
Less 70% Exclusion
Interest Expense
Taxable Ordinary Income
Tax Liability:
\$50,000
25,000
25,000
235,000
980,000
\$1,315,000
1-6A.
x
x
x
x
x
0.15
0.25
0.34
0.39
0.34
\$2,500,000
(700,000)
\$1,800,000
(150,000)
(150,000)
\$50,000
(35,000)
=
=
=
=
=
15,000
(200,000)
\$1,315,000
\$ 7,500
6,250
8,500
91,650
333,200
\$447,100
A.K.U. Corporation—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Operating Expenses
Dividend Income
\$5,000
Less 70% Exclusion
(3,500)
Ordinary Income
Plus Capital Gains
Land:
Sales Price
\$150,000
Selling Price
(100,000)
Stock:
Selling Price
(#Shares)(Price/Share)
1,000 x \$140
\$140,000
Cost
(#Shares)(Price/Share)
1,000 x \$100
(100,000)
Taxable income
Tax Liability:
\$50,000
x
0.15
=
\$7,500
\$25,000
x
0.25
=
6,250
\$25,000
x
0.34
=
8,500
\$235,000
x
0.39
=
91,650
\$531,500
x
0.34
=
180,710
\$866,500
\$294,610
\$5,500,000
(4,600,000)
\$900,000
(125,000)
1,500
\$776,500
50,000
40,000
\$866,500
1-7A. Phil Schubert, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Cash Operating Expenses
Depreciation Expenses
Operating Profits
Dividend Income
Less 70% Exclusion
\$5,000,000
(3,800,000)
\$1,200,000
(500,000)
(400,000)
\$300,000
\$15,000
(10,500)
Taxable Income
4,500
\$304,500
Tax Liability:
\$50,000
25,000
25,000
204,500
\$304,500
x
x
x
x
0.15
0.25
0.34
0.39
=
=
=
=
\$7,500
6,250
8,500
79,755
\$102,005
1-8A. Williams & Crisp, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Cash Operating Expenses
Depreciation Expense
Operating Profits
\$4,500,000
(2,200,000)
\$2,300,000
(175,000)
(130,000)
\$1,995,000
Interest Expense
(150,000)
Ordinary Income
\$1,845,000
L-T Capital Gain (Loss)
S-T Capital Gain (Loss)
Gain (Loss) on Capital Sales
\$50,000
(70,000)
(\$20,000)
Tax Liability:
\$50,000
\$25,000
\$25,000
\$235,000
\$1,510,000
\$1,845,000
x
x
x
x
x
0.15
0.25
0.34
0.39
0.34
=
=
=
=
=
\$7,500
6,250
8,500
91,650
513,400
\$627,300
The \$20,000 capital loss must be carried back to offset net capital gains in the past
three years or forward for the next five years.
1-9A. J. Johnson, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold
Gross Profits
Operating Expenses
Interest Expense
\$7,000,000
(4,000,000)
\$3,000,000
(2,600,000)
(40,000)
Taxable Income
\$360,000
Tax Liability:
\$50,000
\$25,000
\$25,000
\$235,000
\$25,000
\$360,000
x
x
x
x
x
0.15
0.25
0.34
0.39
0.34
=
=
=
=
=
\$7,500
6,250
8,500
91,650
8,500
\$122,400
1-10A. The Kusomoto Corporation—Corporate Income Tax
Sales
Cost of Goods Sold and
Cash Operating Expenses
Depreciation Expense
Operating Profit
Interest Expense
Long Term Gain:
Selling Price
Purchase Price
Taxable Income
\$6,900,000
(4,300,000)
(40,000)
\$2,560,000
(180,000)
\$117,000
(37,000)
Tax Liability:
\$50,000
25,000
25,000
235,000
2,125,000
\$2,460,000
x
x
x
x
x
0.15
0.25
0.34
0.39
0.34
=
=
=
=
=
\$7,500
6,250
8,500
91,650
722,500
\$836,400
80,000
\$2,460,000
1-11A. Martinez, Inc.—Corporate Income Tax
Sales
Cost of Goods Sold and
Cash Operating Expenses
Depreciation Expense
Operating Profit
Interest Expense
Dividend Income
Less 70% Exclusion
\$8,300,000
(6,391,000)
(79,000)
\$1,830,000
(150,000)
Long term gain:
Selling price
Purchase price
\$72,000
(50,400)
21,600
\$375,000
(250,000)
125,000
Taxable Income
\$1,826,600
Tax Liability:
\$50,000
25,000
25,000
235,000
1,491,600
\$1,826,600
x
x
x
x
x
0.15
0.25
0.34
0.39
0.34
=
=
=
=
=
\$7,500
6,250
8,500
91,650
507,144
\$621,044
```
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