Question

Corporate Tax Liability

The Talley Corporation had taxable operating income of $435,000 (i.e., earnings from operating revenues minus all operating costs). Talley also had (1) interest charges of $40,000, (2) dividends received of $25,000, and (3) dividends paid of $35,000. Its federal tax rate was 21% (ignore any possible state corporate taxes). Recall that 50% of dividends received are tax exempt.

What is the firm’s taxable income? Round your answer to the nearest dollar.

$ 407,500

What is the tax expense? Round your answers to the nearest dollar.

$ 85,575

What is the after-tax income? Round your answers to the nearest dollar.

$ ???

Answer 1

Calculation of the Taxable dividends received income :-

Dividends received = $ 25,000

50% of dividends received are tax exempt.

Only 50% of dividends received are taxable.

Taxable dividends received income = 50% of 25,000 = $ 12,500

Calculation of the Firms taxable income :-

Particulars	Amount
operating income	435,000
less-Interest income	40000
Firms income from operations	395,000
Plus-Dividends taxable income	12,500
Total taxable income	$ 407,500

Calculation of the tax expense :-

Tax expense = taxable income * tax rate = $ 407,500 * 21% = $  85,575

Calculation of the After tax income :-

After tax income = total taxable income - tax expense = $ 407,500 - 85,575 = $ 321,925