Question

Perkin Corporation has determined that it qualifies for a tax credit in the amount of $120,000. For the current year, it has tax liability before credits of $75,000. It expects at least that amount of tax liability next year. Use Appendix A.

If the excess credit is not refundable but may be carried forward, calculate the value of the credit. Assume Perkins uses a 4 percent discount rate to calculate present value.

Answer 1

To calculate the value of the tax credit, we need to determine the present value of the excess credit. Using the discount rate of 4 percent, we can discount the future value of the credit to its present value. The value of the credit, considering the discount rate, is $115,384.62.

Step-by-step explanation:

To calculate the value of the tax credit, we need to determine the present value of the credit. Given that Perkin Corporation has tax liability before credits of $75,000 and qualifies for a tax credit of $120,000, we can calculate the present value of the excess credit. Using the discount rate of 4 percent, we can discount the future value of the credit to its present value. The formula to calculate present value is:

Present Value = Future Value / (1 + Discount Rate)^n

Here, the future value is $120,000, the discount rate is 4 percent (or 0.04), and the number of periods (n) is 1, since we are calculating the present value for the current year. Plugging in the values into the formula:

Present Value = $120,000 / (1 + 0.04)^1 = $120,000 / 1.04 = $115,384.62

Therefore, the value of the credit, considering the discount rate, is $115,384.62.