Your corporation has thefollowing cash flows: If the applicable income tax rate
ID: 2661399 • Letter: Y
Question
Your corporation has thefollowing cash flows: If the applicable income tax rate is 40%(federal and state combined), and if 70% of dividends received areexempt from taxes, what is the corporation's tax liability?
Operating income
$250,000
Interest received
$10,000
Interest paid
$45,000
Dividends received
$15,000
Dividends paid
$50,000
$71,118
$87,800
$86,044
$102,726
$98,336
Operating income
$250,000
Interest received
$10,000
Interest paid
$45,000
Dividends received
$15,000
Dividends paid
$50,000
Explanation / Answer
Interest payments are tax deductible whereas dividend payments arenot. Similarly, dividends received are only taxed on 30% ofreceived. (Operating Income + Interest Income - Interest Expense) * Tax Rate+ Dividends Received * Non-Tax Exempt Portion * Tax Rate (250,000 + 10,000 - 45,000) * .4 + 15,000 * .3 * .4 = 87,800 The answer is B.
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