Pearls, Inc. had sales in 2013 of $2.1 million. The common stockholders received $600,000 in cash dividends. Interest totaling $150,000 was paid on outstanding debts. Operating expenses totaled $300,000, and cost of goods sold was $500,000. What is the tax liability of Pearls, Inc.? 2013 U.S. Corporate tax rates are shown below:
Taxable Income | Marginal Tax Rate |
$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% |
Over $18,333,333 | 35% |
Answer: Pearls Taxable Income
Sales $2,100,000
Less:
Cost of goods sold $500,000
Operating expenses 300,000
Earnings before interest & taxes $1,300,000
Interest expense 150,000
Taxable income 1,150,000
Total taxes owed $391,000
Taxes on operating earnings = (.15)(50,000) + (.25)(25,000) + (.34) 25,000) + (.39)(235,000) +.(34)(735,000)= 7,500 + 6,250 + 8500 + 91,650+277,100 = $391,000 or
Because taxable income is over $335,000
taxes can be computed 1,150,000 × .34 =
$391,000
