Your corporation has the following cash flows:
Operating income :$250,000
Interest received:10,000
Interest paid:45,000
Dividends received:20,000
Dividends paid:50,000
If the applicable income tax rate is 40 percent,and if 70 percent of dividends received are exempt from taxes,what is the corporation's tax liability?

Question

Quizplus · Accepted Answer

To calculate the corporation's tax liability, first, we need to determine its taxable income. The taxable income is calculated as follows:Operating income: $250,000Interest received: $10,000Interest paid: -$45,000 (deductible)Dividends received: $20,000 * 30% = $6,000 (since 70% is exempt, only 30% is taxable)Dividends paid are not deductible for tax purposes.So, the taxable income is $250,000 + $10,000 - $45,000 + $6,000 = $221,000.The tax liability is then 40% of $221,000 = $88,400.

Your Corporation Has the Following Cash Flows