Question

Michaels Corp. expects pre-tax profit of $ 40,000. If the ordinary tax rate is 40%, calculate the company's after-tax profit and the profit that can be distributed to ordinary shareholders under the following conditions. The company pays $ 10,000 in interest. The company pays $ 10,000 in dividends on preferred shares. He bought the property for $ 30,000 and sold it for $ 35,000. The company is in a tax-exempt zone of 40% of its assets.

a. Find the gain for each asset.

b. Calculate the sales tax for each asset.

What ethical issues arise when internal participants in a corporation want to buy or sell shares in the company they work for?

Answer 1

Michaels Corp Pre-tax profit = $40,000

Michaels Corp after- tax profit = 40,000 - 40,000*40% = $ 24,000

Profit that can be distributed to ordinary shareholders :

                                                  $

Pre tax profit        40,000

Less: Interest                         10,000

net profit                                 30,000

Less: Tax @ 40%                    12,000

After tax profit                          18,000

Less: Preference dividend          10,000

Profit for ordinary shareholders     8,000

Note : Preference dividend is not tax deductible.

a. Gain for property sold = Sale price - purchase price

                                   = $35000 - $30,000

                                    = $ 5,000

   taxable gain for property sold = $ 5,000 * 60%

                                              = $ 3,000

    Income tax on taxable gain = $ 3,000 * 40%

                                             = $ 1,200

      Note: taxable gain is calculated by taking 60% because 40% gain is tax exempt, as mentioned in the question.

b. Sale tax rate is not given in question, we are assuming here 10% sale tax on asset sold.

   Hence, sale tax on property sold = 35,000 * 10%

                                                      = $ 3,500

Ethical issue that arise when internal participants in a corporation want to buy or sell shares in the company they work for is insider trading. It means that individual working in company can trade shares of company to gain from sensitive internal information not made public. This is unethical and has serious legal consequences. Insider trading is prohibited.