Lonesome Company is required to pay taxes of 25% on income up to $20,000 and 35% on any income in excess of $20,000.The company has pretax income of $80,000.What is the average tax rate for Lonesome Company?

Question

Quizplus · Accepted Answer

To calculate the average tax rate, we need to find the total tax paid and divide it by the total pretax income. For Lonesome Company,

- Income up to $20,000 = $20,000 (tax rate = 25%, so tax paid = 0.25 x $20,000 = $5,000)
- Income between $20,000 and $80,000 = $60,000 (tax rate = 35%, so tax paid = 0.35 x $60,000 = $21,000)

Total tax paid = $5,000 + $21,000 = $26,000

Average tax rate = Total tax paid / Pretax income = $26,000 / $80,000 = 0.325 or 32.5%. Hence, the answer is D.

Lonesome Company Is Required to Pay Taxes of 25% on Income