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Salinger Software was founded in 2015. The company lost money each of its first three years,...

Salinger Software was founded in 2015. The company lost money each of its first three years, but was able to turn a profit in 2018. Salinger's operating income (EBIT) for its first four years of operations is reported below.

Year EBIT
2015 -$100,000,000
2016 -$150,000,000
2017 -$100,000,000
2018 $700,000,000

The company has no debt, so operating income equals earnings before taxes. The corporate tax rate has remained constant at 35%. Assume that the company took full advantage of the carry-back, carry-forward provisions in the Tax Code, and assume that the current provisions were applicable in 2015. How much tax did the company pay in 2018?

a $132,300,000

b  $122,500,000

c $121,275,000

d  $135,975,000

e $101,675,000

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Answer #1

Solution

Correct answer- Option B $122,500,000

Since the tax can be carried forward therefore the -ive tax of 2015 to 2017 must be carried forward to 2018 to take full advantage in 2018

Tax calculation for 2015 to 2017

Excel formula

Now The tax carried forward to 2018 is -122500000

Tax for 2018=700000000*.35=245000000

Since we have tax carried forward from 2015-2017 therefore the tax payable in 2018=Tax due for 2018+Tax carried forward=245000000-122500000

=122500000

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