Corporate Taxes: An Example To illustrate certain portions of the tax laws for a corporation, assume that the Grigs Corporation had sales during the past year of $5 million; its cost of goods sold was $3 million; and it incurred operating expenses of $1 million. In addition, it received $185,000 in interest income and $100,000 in dividend income from another copora tion. In turn, it paid $40,000 in interest and $75,000 in dividends. Also, it sold old ma chinery, which had originally cost $350,00, for $20,000. The equipment, purchased five years ago, was being depreciated (straight-line) over a 10-year life and had a book value of $175,000. Finally, the company sold a piece of land for $100,800 that had o $50,000 six years ago. Given this information, the firm's taxable income is $1.250.000 as computed in the top part of Table 1-3, Based on the tax rates from Table 1-2, Grigg's tax liability is $425,000, as show at the bottom of Table 1-3. Note that the $75,000 Griggs paid in dividends is not tat deductible. Also, since the firm's taxable income exceeds $335,000, and the 5 percet surtax no longer applies, the marginal tax rate and the average tax rate both equal S percent; that is, we could have computed Grigg's tax liability as 34 percent $1,250,000, or $425,000. 1
Corporate Taxes: An Example To illustrate certain portions of the tax laws for a corporation, assume that the Grigs Corporation had sales during the past year of $5 million; its cost of goods sold was $3 million; and it incurred operating expenses of $1 million. In addition, it received $185,000 in interest income and $100,000 in dividend income from another copora tion. In turn, it paid $40,000 in interest and $75,000 in dividends. Also, it sold old ma chinery, which had originally cost $350,00, for $20,000. The equipment, purchased five years ago, was being depreciated (straight-line) over a 10-year life and had a book value of $175,000. Finally, the company sold a piece of land for $100,800 that had o $50,000 six years ago. Given this information, the firm's taxable income is $1.250.000 as computed in the top part of Table 1-3, Based on the tax rates from Table 1-2, Grigg's tax liability is $425,000, as show at the bottom of Table 1-3. Note that the $75,000 Griggs paid in dividends is not tat deductible. Also, since the firm's taxable income exceeds $335,000, and the 5 percet surtax no longer applies, the marginal tax rate and the average tax rate both equal S percent; that is, we could have computed Grigg's tax liability as 34 percent $1,250,000, or $425,000. 1
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Make an income statement.
Transcribed Image Text:Corporate Taxes: An Example
To illustrate certain portions of the tax laws for a corporation, assume that the Grigs
Corporation had sales during the past year of $5 million; its cost of goods sold was
$3 million; and it incurred operating expenses of $1 million. In addition, it received
$185,000 in interest income and $100,000 in dividend income from another corpora
tion. In turn, it paid $40,000 in interest and $75,000 in dividends. Also, it sold old ma
chinery, which had originally cost $350,00, for $200,000. The equipment, purchased
five years ago, was being depreciated (straight-line) over a 10-year life and had a book
value of $175,000. Finally, the company sold a piece of land for $100,800 that had cie
$50,000 six years ago. Given this information, the firm's taxable income is $1.250,000 4
as computed in the top part of Table 1-3.
Based on the tax rates from Table 1-2, Grigg's tax liability is $425,000, as showt he
at the bottom of Table 1-3. Note that the $75,000 Griggs paid in dividends is not t
deductible. Also, since the firm's taxable income exceeds $335,000, and the 5 percent
surtax no longer applies, the marginal tax rate and the average tax rate both equal S4
percent; that is, we could have computed Grigg's tax liability as 34 percent
$1,250,000, or $425,000,
in
11
1a
be
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