Question

Builtrite had sales of $900,000 and COGS of $280,000. In addition, operating expenses were calculated at 25% of sales. Builtrite also received dividends of $50,000 and paid out common stock dividends of $25,000 to its stockholders. A long-term capital gain of $70,000 was realized during the year along with a capital loss of $50,000

a). What is Builtrite’s taxable income?

b). Based on their taxable income, what is Builtrite’s tax liability?

c). If we add to our problem that Builtrite also had $30,000 in interest expense, how much would this interest expense cost Builtrite after taxes?

d). If Builtrite had experienced a long-term capital loss of $40,000 (instead of the $50,000 long-term capital loss stated in the problem), and still had the $70,000 long-term capital gain stated in the problem, which of the following is correct (compared to the original answer):

e). (This problem is not related to the above problem) Last year Builtrite had retained earnings of $140,000. This year, Builtrite had true net profits after taxes of $75,000 which includes common stock dividends received of $10,000.   Builtrite also paid a preferred dividend of $35,000. What is Builtrite’s new level of retained earnings?   

Answer 1

1.

Sales = $900,000

COGS = $280,000

Operating Expense = $900,000 × 25%

= $225,000

EBIT = $900,000 - $280,000 - $225,000

= $395,000

EBIT of the company is $395,000.

In corporate dividend income, 70% of dividend income is exempted from tax.

Taxable dividend payment = $50,000 × 30%

= $15,000.

Net Capital gain = $70,000 - $50,000

= $20,000.

Total Taxable income = $395,000 + $15,000 - $20,000

= $430,000

Total Taxable income is 430,000.

.

2. The tax rate is not given

3. Taxable income will decrease by $30,000. Tax rate is not given

.

4. Taxable income will increase by $10,000

.

5.

Retained earnings last year = $ 140,000

Net Profit after taxes = $ 75,000

Preferred dividend paid = $ 35,000

New level of retained earnings = 140,000 + 75,000 - 35,000 = $ 180,000