Question

IMTU Corporation (it stand for " Made This Up") had sales last year of $5,500,000. They sell heat shields to place on your lap for stupid McD's customers who insist on placing a cup of hot coffee between their legs. The materials cost $100,000 (that's good) but the labor to put them together costs $1,850,000 (yes they are union and yes the company is looking to move this operation "off-shore" next year but that's beyond the scope of this course). Advertising was just $80,000, as they mostly use word-of-mouth. They did need to raise some money this year. The bank loaned them $250,000 at 6% (that interest is due this year). The interest didn't worry them too much as it was partly off-set by the dividend check they received from McDonalds for $12,000 (hmmmmm - I wonder if there is a conflict of interest here?) Anyway, all things considered, "it was a very good year" so much so they paid their loyal shareholders $65,000 in common stock dividends. OK, given all that, what was their Federal tax bill?

Group of answer choices

Sales = $5,500,000

COGS = 100,000+1,850,000 = 1,950,000

Gross Profit = $3,550,000

Advertising = $80,000

Interest on the loan = $18,000

Income reported on dividends is only 20% due to exclusion. So reported is $1,600.

$3,550,000-80,000-15,000 = $4,455,000

$4,455,000+$3,600 = $4,458,600.

Federal taxable income is $4,458,600.

The actual taxes paid are $2,175,924

Sales = $5,500,000

COGS = 80,000+750,000 = 830,000

Gross Profit = $170,000

Advertising = $80,000

Interest on the loan = $12,000

170,000-50,000-12,000 = 108,000

Federal taxable income is $108,000

The actual taxes paid are $23,306.

Sales = $5,500,000

COGS = 100,000+1,850,000 = 1,950,000

Gross Profit = $3,550,000

Advertising = $80,000

Interest on the loan = $15,000

Income reported on dividends is only 30% due to exclusion. So reported is $3,600.

$3,550,000-80,000-15,000 = $3,455,000

$3,455,000+$3,600 = $3,458,600.

Federal taxable income is $3,458,600.

The actual taxes paid are $1,175,924

Sales = $5,500,000

COGS = 100,000+1,750,000 = 1,750,000

Gross Profit = $3,550,000

Advertising = $80,000

Interest on the loan = $17,000

Income reported on dividends is only 30% due to exclusion. So reported is $2,600.

$3,550,000-80,000-15,000 = $3,455,000

$3,455,000+$2,600 = $1,458,600.

Federal taxable income is $3,458,600.

The actual taxes paid are $1,175,924

Answer 1

Working notes:

1. Interest expense = $150,000 x 8% = $12,000

2. Since the tax rate is not mentioned, it has been calculated as the balancing figure (Total comprehensive income - Net income)

3. In computing so, it has been assumed (in absence to any information to the contrary) that dividend payout ratio is 100%, that is, entire net income was distributed as dividends.

	$
Sales	55,00,000
Less: Cost of Goods Sold
Materials	1,00,000
Labor	18,50,000
Total COGS	19,50,000
Gross Profit	35,50,000
Less:
Advertising Expense	80,000
Interest Expense	15,000
Operating Income	34,55,000
Other Income (Dividend)	3,600
Total Comprehensive Income	34,58,600
Less: Tax Paid (as per the given table above)	11,75,924
Net Income	22,82,676

:) Hope You Liked the answer