Question

The Talley Corporation had taxable operating income of $495,000 (i.e., earnings from operating revenues minus all operating costs). Talley also had (1) interest charges of $40,000, (2) dividends received of $20,000, and (3) dividends paid of $25,000. Its federal tax rate was 21% (ignore any possible state corporate taxes). Recall that 50% of dividends received are tax exempt. What is the firm’s taxable income? Round your answer to the nearest dollar.

Answer 1

Answer: $465,000

Explanation:

To calculate the Taxable income we would have to adjust the figure for dividends received as well as interest.

Now, 50% of dividends received are taxable so let's adjust for that first,

= 20,000 * 0.5

= $10,000

$10,000 of dividends are taxable.

To calculate the Taxable income we have to use the following formula,

Taxable income = Income after operating Costs - Interest Charges + Taxable dividends

= 495,000 - 40,000 + 10,000

= $465,000

That Taxable income is therefore $465,000

Note: The dividends paid are not included here because they are taxable and already included in the Taxable operating income so including it again would amount to Double Counting.

If you need any clarification do react or comment.

Answer 2

Answer: Firm's taxable income = $465,000

Explanation:

GIVEN the following :

Taxable operating income = $495,000

Dividend received = $20,000

Interest charges = $40,000

Firm's taxable income =?

NOTE: 50% of dividend received is tax exempt.

Therefore,

0.5 × $20,000 = $10,000

Taxable portion of dividend received = $20,000 - $10,000

Taxable dividend = $10,000

Taxable income = (Taxable operating income + taxable dividend) - interest charges

Taxable income = ( $495,000 + $10,000) - $40,000

Taxable income = $505,000 - $40,000

Firm's taxable income = $465,000