Question

Your corporation has the following cash flows: Operating Income-$250000 Interest Received-12000 Interest Paid-45000 Dividends Received-​40000 Dividends Paid ​ ​60000. If the applicable income tax rate is 40 percent and if 70 percent of dividends received are exempt from taxes what is the corporation's tax liability?

Answer 1

The corporation's tax liability can be calculated by determining the taxable income and applying the income tax rate. In this case, the tax liability is $69,200.

Step-by-step explanation:

To calculate the corporation's tax liability, we need to determine the taxable income and apply the applicable income tax rate. The taxable income can be calculated by subtracting expenses and tax-exempt income from the operating income. In this case, we have:

• Operating Income: $250,000
• Interest Received: $12,000
• Interest Paid: $45,000
• Dividends Received: $40,000 (70% exempt from taxes)
• Dividends Paid: $60,000

Taxable Income = Operating Income - Interest Paid + Dividends Received - Dividends Paid = $250,000 - $45,000 + $28,000 - $60,000 = $173,000

Now, we can calculate the tax liability by multiplying the taxable income by the applicable tax rate:

Tax Liability = Taxable Income * Tax Rate = $173,000 * 0.4 = $69,200

Therefore, the corporation's tax liability is $69,200.