Question

Income Taxes

If Congress voted to eliminate corporate taxes, what would be the effect on Target Corporation's income statement and balance sheet? Defend your response.

Calculate the income tax rate for Target Corporation. What effect will an increase in income of $2,000,000 have on Target Corporation?

What are the effects on the balance sheet and income statement? Justify your response.

How much did Target Corporation pay in foreign taxes last year? What percentage of its income is United States vs. foreign?

Income statements

	Period Ending	1/28/2017	1/30/2016
Total Revenue		$69,495,000	$73,785,000
Cost of Revenue		$48,872,000	$51,997,000
Gross Profit		$20,623,000	$21,788,000
Research and Development		$0	$0
Sales, General and Admin.		$13,356,000	$14,665,000
Non-Recurring Items		$0	$0
Other Operating Items		$2,298,000	$2,213,000
Operating Income		$4,969,000	$4,910,000
Additional income/expense items		$0	$620,000
Earnings Before Interest and Tax		$4,969,000	$5,530,000
Interest Expense		$1,004,000	$607,000
Earnings Before Tax		$3,965,000	$4,923,000
Income Tax		$1,296,000	$1,602,000
Minority Interest		$0	$0
Equity Earnings/Loss Unconsolidated Subsidiary		$0	$0
Net Income-Cont. Operations		$2,669,000	$3,321,000
Net Income		$2,737,000	$3,363,000
Net Income Applicable to Common Shareholders		$2,737,000	$3,363,000
Balance Sheet
Current Assets
Cash and Cash Equivalents		$2,512,000	$4,046,000
Short-Term Investments		$0	$0
Net Receivables		$0	$0
Inventory		$8,309,000	$8,601,000
Other Current Assets		$1,169,000	$1,483,000
Total Current Assets		$11,990,000	$14,130,000
Long-Term Assets
Long-Term Investments		$0	$0
Fixed Assets		$24,658,000	$25,217,000
Goodwill		$0	$0
Intangible Assets		$0	$0
Other Assets		$783,000	$915,000
Deferred Asset Charges		$0	$0
Total Assets		$37,431,000	$40,262,000
Current Liabilities
Accounts Payable		$10,989,000	$11,654,000
Short-Term Debt / Current Portion of Long-Term Debt		$1,718,000	$815,000
Other Current Liabilities		$1,000	$153,000
Total Current Liabilities		$12,708,000	$12,622,000
Long-Term Debt		$11,031,000	$11,945,000
Other Liabilities		$1,878,000	$1,915,000
Deferred Liability Charges		$861,000	$823,000
Misc. Stocks		$0	$0
Minority Interest		$0	$0
Total Liabilities		$26,478,000	$27,305,000
Stock-Holders Equity
Common Stocks		$46,000	$50,000
Capital Surplus		$5,661,000	$5,348,000
Retained Earnings		$5,884,000	$8,188,000
Treasury Stock		$0	$0
Other Equity		($638,000)	($629,000)
Total Equity		$10,953,000	$12,957,000
Total Liabilities & Equity		$37,431,000	$40,262,000
Cash Flow
Net Income		$2,737,000	$3,363,000
Cash Flow-Operating Activities
Depreciation		$2,298,000	$2,213,000
Net Income Adjustments		$508,000	($812,000)
Changes in Operating Activities
Accounts Receivable		$0	$0
Changes in Inventories		$293,000	($316,000)
Other Operating Activities		$36,000	$227,000
Liabilities		($543,000)	$579,000
Net Cash Flow-Operating		$5,436,000	$5,958,000
Cash flows-Investing Activities
Capital Expenditures		($1,547,000)	($1,438,000)
Investments		$28,000	$24,000
Other Investing Activities		$46,000	$1,922,000
Net Cash Flows-Investing		($1,473,000)	$508,000
Cash Flows-Financing Activities
Sale and Purchase of Stock		($3,485,000)	($3,183,000)
Net Borrowings		($664,000)	($85,000)
Other Financing Activities		$0	$0
Net Cash Flows-Financing		($5,497,000)	($4,630,000)
Effect of Exchange Rate		$0	$0
Net Cash Flow		($1,534,000)	$1,836,000
Financial Ratios
Liquidity Ratios
Current Ratio		94%	112%
Quick Ratio		29%	44%
Cash Ratio		20%	32%
Profitability Ratio
Gross Margin		30%	30%
Operating Margin		7%	7%
Pre-Tax Margin		6%	7%
Profit Margin		4%	5%

(www.nasdaq.com)

Answer 1

1. If congress voted to eliminate the corporate taxes then the income statement of the company will show a higher profit available for distribution to shareholders. The EPS of the company increases and the expenses which produce the tax benefits will be cut down. The leveerage theory will stand null and the company will be showing profits in their income statement higher than what is earned to attract the investors.

In the balance sheet the provision for tax liability will reduce and the retained earning will increase. However there will be more chances of manipulation of the profit and increasing it to a higher level to show higher profitability and better financial position.

1. The income tax rate for a company can be calculated by subtracting the Earnigs after taxes from Earnings before taxes which will give us the tax expense and dividing it by Earnings before taxes.

If the income is increased by $2000000 the tax rate will change accordingly and the earnings for shareholders will increase.

To calculate income tax rate for the company, The following formula is applied:-

= Income Tax Expense / Earnings before Taxes

For example, If earnings before tax of the company is $ 50000 and income tax expense is $ 20000, then the income tax rate = 20000 / 50000 = 0.40 i.e., 40 %

Question C) Answer:- Income Tax expense is recorded on the debit side of income statement. The earnings of the company are decreased / reduced in the presence of income tax.

Deferred Tax Liability:- is recognized for timing differences that will result in taxable amount in future years.

Deferred Tax Asset:- is recognized for timing differences that will result in deductible amounts in future years and for carry forward.

Examples of timing differences are difference in accounting and tax profit due to rate of depreciation, method of depreciation, expenses debited in the income statement for accounting purpose but not allowed for tax purpose or allowed for tax purpose in subsequent year etc.

Deferred Tax asset and Deferred Tax liability are the balance sheet items. Deferred Tax asset is shown on the asset side of balance sheet (separately from current assets) and Deferred Tax liability is shown on the liability side of balance sheet (separately from current liabilities).