Goodwin Enterprises had a gross profit of $2,500,000 for the year. Operating expenses and interest expense incurred in that same year were $595,000 and $362,000, respectively. Goodwin had 200,000 shares of common stock and 180,000 shares of preferred stock outstanding. Management declared a $2.50 dividend per share on the common and a $1.50 dividend per share on the preferred. Securities purchased at a cost of $37,500 in a previous year were resold at a price of $50,500. Compute the taxable income and the resulting tax liability for Goodwin Enterprises for the year.
Use the following tax rates:
Income Tax rate
$0-$50,000 15%
$50,001-$75,000 25%
$75,001-$100,000 34%
$100,001-$335,000 39%
over $335,001 34%
Answer:
Gross profit $2,500,000
Operating expenses (595,000)
Interest expense (362,000)
Income before tax $1,543,000
Add: Gain on sales 13,000
Taxable Income $1,556,000
Income Marginal Tax Rate Tax Liability
$50,000 × 15% $7,500
$25,000 × 25% $6,250
$25,000 × 34% $8,500
$235,000 × 39% $91,650
$1,221,000 × 34% $415,140
$1,556,000 $529,040
By design, the marginal and the average tax rates are the same, 34%, for corporate incomes between $335,000 and $10,000,000.
