Question

Builtrite had sales of $700,000 and COGS of $280,000. In addition, operating expenses were calculated at 25% of sales. Builtrite also received dividends of $50,000 and paid out common stock dividends of $25,000 to its stockholders. A long-term capital gain of $70,000 was realized during the year along with a capital loss of $50,000
Based on the above information, answer the following 4 questions:

1.What is Builtrite’s taxable income?

2. Based on their taxable income, what is Builtrite’s tax liability?

3.

If we add to our problem that Builtrite also had $10,000 in interest expense, which of the following statements is correct (assuming the same marginal tax rate of 39%)?3.

		Taxable income would increase by $10,000
		Taxable income would decrease by $10,000.
		Taxable income would decrease by $6,100.
		Taxable income would increase by $6,100 4. If Builtrite had experienced a long-term capital loss of $80,000 (instead of the $50,000 long-term capital loss stated in the problem), and still had the $70,000 long-term capital gain stated in the problem, which of the following is correct: taxable income would decrease by $30,000 taxable income would not change taxable income would decrease by $10,000 taxable income would decrease by $20,000

Answer 1

Question 1:

Sales = $700,000

COGS = $280,000

Operating Expense = $700,000 × 25%= $175,000

EBIT = $700,000 - $280,000 - $175,000

= $245,000

EBIT of company is $245,000.

In case of corporate dividend,

70% of corporate dividend income is exempted from tax.

Taxable dividend payment = $50,000 × 30%

= $15,000.

Net Capital gain = $70,000 - $50,000 = $20,000.

Total Taxable income = $245,000 + $15,000 - $20,000

= $280,000

Total Taxable income is $280,000.

Question 2:

Taxable Income = $280,000

Tax Liability of company as follows

Tax liability = 22,250 + (280000-100000)*39%  

= $92,450

Tax Liability = $92,450

Question 3:

Interest payment on debt is an allowable expense for a company. Company can deduct interest payment on debt from taxable income. Therefore, because of interest payment on debt total taxable income will reduce.

Builtrite have $10,000 in interest expense as it is a allowable expense total taxable income will decrease by $10,000.

Therefore, Option (B) is correct answer

Question 4:

If Builtrite have long term capital loss of $80,000 then he can setoff $70000 loss against such long term capital gain of $70,000 and remaining loss of $10,000 can be carried forward to following years.

Therefore, earlier Builrite could setoff only $50,000 as long term capital loss was $50,000. Now he can setoff loss of $70000 against long term capital gain of $70,000.

Therefore taxable income would decrease by = $70,000 - $50,000 = $20,000

Hence 4th option is correct.