(Corporate income tax) Last year Sanderson, Inc. had sales of $3.2 million. The

ID: 1171014 • Letter: #

Question

(Corporate income tax) Last year Sanderson, Inc. had sales of $3.2 million. The firm's cost of goods sold came to $2.2 million, its operating expenses excluding depreciation of $96,000 were $407,000, and the firm paid $153,000 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 $21,000 in the form of dividends to its own common stockholders. Use the corporate tax rates shown in the popup window,EEB, 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 Data Table Taxable Income $0-$50,000 $50,001 - $75,000 $75,001 -$100,000 $100,001 -$335,000 $335.001-$10,000,000 | $10,000,001-$15,000,000 | $15,000,001-$18,333,333 | Over $18,333,333 Marginal Tax Rate 15% 25% 34% 39% 34% 35% 38% 35% Print Done Enter your answer in the answer box and then click Check Answer

Explanation / Answer

Based on the information given in question, this is how income statement for company would look like:

Sales

3,200,000

COGS

2,200,000

Operating Expenses

407,000

Depreciation

96,000

EBIT

497,000

Interest Expense

153,000

Dividends Received

47,000

Profit before tax

391,000

Taxable income = $391,000

Now, based on the tax brackets provided, the taxable income of company can be divided into brackets like this:

Brackets

Tax rate

Tax $

50,000

15%

7,500

25,000

25%

6,250

25,000

34%

8,500

235,000

39%

91,650

56,000

34%

19,040

Total tax payment = 7500 + 6250 + 8500 + 91650 + 19040 = $132,940. Answer

Now, average tax rate = Total tax/Taxable Income = 34%

Marginal Tax Rate is the tax rate that company will have to pay on additional $1 of income. In this case, it would be 34%