The statutory federal tax rate of Yolanda Company has been 35 percent for a number of years.Late in the third quarter of 2014,a new rate of 40 percent was approved as the new statutory tax rate,effective as of January 1,2014.The CEO of the Yolanda is concerned about what effect,if any,the new tax rate will have on 2014 earnings.
At the beginning of the year,Yolanda had a deferred tax asset of $10 million and a deferred tax liability of $6 million.A valuation allowance was not needed and it is not expected that a valuation allowance will be needed this year.Pretax accounting income is estimated to be approximately $5 million for 2014 and taxable income will be about $7 million.Yolanda is a publicly traded company with 500,000 shares outstanding throughout the entire year.
Required:
1.Explain the effect of the tax rate increase on the balance sheet and income statement of the company for 2014,with particular attention to the effect the change will have on earnings per share.
2.If the effect is expected to be negative,provide recommendations regarding actions the company might consider during the last few days of 2014 to minimize the impact.
3.Explain the effect the tax rate change might have on the company's stock price.

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The Answer of The statutory federal tax rate of Yolanda Company has been 35 percent for a number of years.Late in the third quarter of 2014,a new rate of 40 percent was approved as the new statutory tax rate,effective as of January 1,2014.The CEO of the Yolanda is concerned about what effect,if any,the new tax rate will have on 2014 earnings.
At the beginning of the year,Yolanda had a deferred tax asset of $10 million and a deferred tax liability of $6 million.A valuation allowance was not needed and it is not expected that a valuation allowance will be needed this year.Pretax accounting income is estimated to be approximately $5 million for 2014 and taxable income will be about $7 million.Yolanda is a publicly traded company with 500,000 shares outstanding throughout the entire year.
Required:
1.Explain the effect of the tax rate increase on the balance sheet and income statement of the company for 2014,with particular attention to the effect the change will have on earnings per share.
2.If the effect is expected to be negative,provide recommendations regarding actions the company might consider during the last few days of 2014 to minimize the impact.
3.Explain the effect the tax rate change might have on the company's stock price.

The Statutory Federal Tax Rate of Yolanda Company Has Been