Finance week 1 Disc 1 - (1,000,000 ) Operating Profits...

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Problem 1.2. (Corporate Income Tax). Sales for L. B. Menielle Inc. during the past year amounted to $5 million. The firm provides parts and supplies for oil field services companies. Gross profit for the year was $3 million. Operating expenses totaled $1 million. The interest and dividend income from the securities it owned were $20,000.00 and $25,000.00, respectively. The firm’s interest expenses were $100,000.00. The firm sold securities on two occasions during the year, receiving a gain of $40,000.00 on the first sale but loosing $50,000.00 on the second. The stock sold first had been owned for 4 years, the stock sold second had been purchased 3 months before the sale. Compute the corporation’s tax liability. L. B. Menielle, Inc.—Corporate Income Tax Sales $5,000,000 Cost of Goods Sold (2,000,000 ) Gross Profits $3,000,000 Operating Expenses
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Unformatted text preview: (1,000,000 ) Operating Profits $2,000,000 Interest Income 20,000 Dividend Income $25,000 Less 70% Exclusion (17,500 ) 7,500 Interest Expense (100,000 ) Taxable Ordinary Income $1,927,500 Capital Gains and Losses Long-Term Gain (Loss) $40,000 Short-Term Gain (Loss) (50,000 ) Net Short-Term Gain (Loss) ($10,000 ) Tax Liability: $50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 25,000 x 0.34 = 8,500 235,000 x 0.39 = 91,650 1,592,500 x 0.34 = 541,450 $1,927,500 $655,350 The $10,000 net short-term capital loss may not be deducted from ordinary income. However, if net capital gains were realized in the previous three years, the loss may be carried back to offset those prior gains, which would reduce the corporation’s tax liability in the present year. If gains did not exist in prior years, the loss could be carried forward for five years....
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This note was uploaded on 11/12/2010 for the course FINANCE bus401 taught by Professor Smith during the Spring '10 term at Ashford University.

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