Lintner Beverage Corp. reported the following information from their financial statements: Operating income (EBIT)Interest payments on long-term debt = $1,750,000 Dividend income = $1,000,000 Calculate Lintner's total tax liability using the corporate tax schedule below:
A) $6,167,875
B) $6,492,500
C) $6,817,125
D) $7,157,982
E) $7,515,881

Question

Quizplus · Accepted Answer

To calculate the total tax liability, we need to first calculate Lintner's taxable income. We can do this using the formula:

Taxable income = EBIT – Interest payments + Dividend income

Taxable income = $1,750,000 - 0 + $1,000,000 = $2,750,000

Using the corporate tax schedule below, we can calculate the total tax liability:

Taxable Income                   Corporate Tax Rate             Tax Liability
$0 - $50,000                            15%                                $0
$50,000 - $75,000                   25%                              $3,750
$75,000 - $10,000,000        34%                          $890,000
$10,000,000 - $15,000,000 35%                    $1,390,000
$15,000,000 - $18,333,333 38%                    $2,172,222

Since Lintner's taxable income of $2,750,000 falls in the $75,000 - $10,000,000 range, we can use the tax rate of 34%. Therefore, the tax liability is:

Tax liability = $2,750,000 x 0.34 = $935,000

However, this is just federal tax. We also need to consider state taxes, which is not given in the question. The closest answer choice to the calculated federal tax liability is B, $6,492,500.