Question

Mount Hebron Electrical Company's financial statements indicated that the company had earnings before interest and taxes of $793,000. The interest rate on its $842,000 debt was 8.95 percent. Calculate the taxes the company is likely to owe. What are the marginal and average tax rates for this company? (Round total taxes payable to 2 decimal places, e.g. 15.25 and other answers to 0 decimal places, e.g. 17%.) Total taxes payable $ Marginal tax rate % Average tax rate %

Answer 1

Solution:-

corporation's taxable income	tax rate:tax rate on the excess over the base
$0-$50,000	15%
$50,001-$75,000	25%
$75,001-$100,000	34%
$100,001-$335,000	39%
$335,001-$10,000,000	34%
$10,000,001-$15,000,000	35%
$15,000,001-$18,333,333	38%
more than $18,333,333	35%

EBT = EBIT - Interest

= $793,000 - (842,000 * 8.95%)

= $793,000 - $75,359

= $717,641

a) Total taxes payable = ($50,000 * 15%) + [(75,000-50,000) * 25%] + [(100,000 - 75,000) * 34%] + [(335,000 - 100,000) * 39%] + [(717,641 - 335,000) * 34%]

= $7,500 + $6,250 + $8,500 + $91,650 + $130,097.94

= $243,997.94

b) EBT IS $717,641 which means it lies between $335,001 to $10,000,000 hence the marginal tax rate is 34% from the above table.

c) Average tax rate = Total tax payable / Taxable income

= $243,997.94 / $717,641

= 0.34 or 34%

Hence total taxes payable is $243,997.94

marginal tax rate is 34%

average tax rate is 34%