Question

Problem 7-1
Accounting Periods (LO 7.1)

The Au Natural Clothing Factory has changed its year-end from a calendar year-end to March 31, with permission from the IRS. The income for its short period from January 1 to March 31 is $24,000.

Tax Rate Schedule for Corporations

Taxable Income Over		But Not Over	The Tax Is	Of the Amount Over
0		$50,000	15%	0
$50,000		75,000	$7,500 + 25%	$50,000
75,000		100,000	13,750 + 34%	75,000
100,000		335,000	22,250 + 39%	100,000
335,000		10,000,000	113,900 + 34%	335,000
10,000,000		15,000,000	3,400,000 + 35%	10,000,000
15,000,000		18,333,333	5,150,000 + 38%	15,000,000
18,333,333		—	6,416,667 + 35%	18,333,333

Calculate the tax for this short period.

Round your final answer to the nearest dollar.

Answer 1

THE TAX FOR THIS SHORT PERIOD = $5,223

Firstly, convert the 3 months income to 12 income for the 12 months

= $24,000 x (12 Months / 3 Months)

= $96,000

Tax Payable for the first $50,000

= $50,000 x 15%

= $7,500

Tax Payable over $50,000 but up to $75,000

= ($75,000 – 50,000) x 25%

= $6,250

Tax Payable over $75,000 but up to $96,000

= ($96,000 – 75,000) x 34%

= $7,140

The Amount of Total Tax Payable =

= $7,500 + 6,250 + 7,140

= $20,890

Therefore, the tax for this short period

= $20,890 x (3 Months / 12 Months)

= $5,223