Submitted by: Submitted by xdepbbygirlx
Views: 346
Words: 1724
Pages: 7
Category: Business and Industry
Date Submitted: 04/02/2012 08:15 PM
PROBLEM SET 3 SOLUTIONS
Problem 1
Taxable income = operating income + interest received - interest paid + 30% of dividends received
= 300,000 + 15,000 - 35,000 + .30(30,000)
= 289,000
Tax liability = Tax on base + (tax rate)(excess over base)
= 22,250 + .39(289,000 - 100,000)
= 95,960
Problem 2
Note: Solution assumes the 3 year carry-back/15 year carry-forward rule
(a) Firm has no tax liability in 2010 since taxable income is negative
(b) Apply loss in current year to 3 prior years (starting with earliest
year which is 2007) until loss is eliminated
Note that 2006 is beyond the 3 year carry-back limit
And note the tax rate can be determined from the information given:
Tax rate = Tax paid/Taxable income in years 2006-2009 = 20%
Year 2006
Taxable income was 2000
Tax paid was 400
Adjusted taxable income is 2000
Adjusted tax due is 400
Year 2007
Taxable income was 6250
Tax paid was 1250
Adjusted taxable income is 0
Adjusted tax due is 0
Year 2008
Taxable income was 12500
Tax paid was 2500
Adjusted taxable income is 0
Adjusted tax due is 0
Year 2009
Taxable income was 6250
Tax paid was 1250
Adjusted taxable income is 3750
Adjusted tax due is 750
Year 2010
Taxable income was (21250)
Tax paid was 0
Adjusted taxable income is 0
Adjusted tax due is 0
(c) Tax paid (2006-2009) = 400 + 1250 + 2500 + 1250 + 0 = 5400
Tax due (2006-2009) = 400 + 0 + 0 + 750 + 0 = 1150
Tax refund = Tax paid – tax due = 5400 – 1150
= 4250
Problem 3 (Prob. 3-1)
Given: NI = 3,000,000
EBIT = 6,000,000
T = 40%
Need to set up an income statement and work from the bottom up:
EBIT 6,000,000
INT (1,000,000)
EBT 5,000,000
T (2,000,000)
NI 3,000,000
EBT = NI / (1 – T)
= 3,000,000 / 0.6
= 5,000,000
Interest = EBIT – EBT
= 6,000,000...