Question

Assume that Western Exploration Corp. is considering the acquisition of Ogden Drilling Company. The latter has a $550,000 tax loss carryforward. Projected earnings for the Western Exploration Corp. are as follows:

		2011			2012			2013			Total Values
	Before-tax income	$	205,000		$	290,000		$	410,000		$	905,000
	Taxes (35%)		71,750			101,500			143,500			316,750
	Income available to stockholders	$	133,250		$	188,500		$	266,500		$	588,250

a. How much will the total taxes of Western Exploration Corp. be reduced as a result of the tax loss carryforward? (Do not round intermediate calculations and round your answer to the nearest whole dollar.)

Reduction in taxes:_____?

b. How much will the total income available to stockholders be for the three years if the acquisition occurs? (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

	2011 2012 2013 Total Income available to stockholders

Answer 1

Solution: a.) Calculation of Reduction in Taxes:

Given:

Tax Loss Carryforward = $ 550,000

Tax Rate = 35 %

To Calculate:

Total taxes reduced as a result of the Tax Loss Carryforward:

Formula:

Reduction in Taxes due to Tax Loss Carryforward = Tax Loss Carryforward × Tax Rate

On putting the values in the formula, we get,

Reduction in Taxes due to Tax Loss Carryforward = $ 550,000 × 35 % = $ 192,500

Ans a.) Reduction in Taxes due to Tax Loss Carryforward = $ 192,500

Solution: b.) Calculation of Total Income available to Stockholders be for the three years if the Acquisition occurs:

Particulars	2011	2012	2013	Total Values
Before -tax income	$ 205,000	$ 290,000	$ 410,000	$ 905,000
Less: Amount of Tax Loss Carryforward	$ 205,000	$ 290,000	$ 55,000	$ 550,000
Net Taxable Income	0	0	$ 355,000	$ 355,000
Taxes (35 %)	0	0	$ 124,250	$ 124,250
Income available to stockholders (Before Tax Income - Taxes)	$ 205,000 – 0 = $ 205,000	$ 290,000 – 0 = $ 290,000	$ 410,000 - $ 124,250 = $ 285,750	$ 905,000 - $ 124,250 = $ 780,750

Ans: b.) Total Income available to Stockholders be for the three years if the Acquisition occurs:

Particulars	2011	2012	2013	Total
Income available to stockholders	$ 205,000	$ 290,000	$ 285,750	$ 780,750