Western Corporation, a calendar year, accrual basis corporation, reported $500,0

Question

Western Corporation, a calendar year, accrual basis corporation, reported $500,000 of net income after tax on its 2018 financial statements prepared in accordance with GAAP. Use Corporate tax rate schedule. (Enter your answers in whole dollars not in millions.)

The corporation’s books and records reveal the following information:

Western’s book income included $15,000 of dividends, received from a domestic corporation in which Western owns less than 1 percent of the outstanding stock.

Western’s depreciation expense per books was $55,000, and its MACRS depreciation was $70,000.

Western earned $5,000 of interest from municipal bonds and $6,000 of interest from corporate bonds.

Western’s capital losses exceeded its capital gains by $2,000.

Western’s federal income tax expense per books was $103,000.

Compute Western’s federal taxable income and regular tax liability.

Page 11-9 If taxable income is: Not over $50,000 Over $50,000 but not over $75,000 Over $75,000 but not over $100,000 Over $100,000 but not over $335,000 Over $335,000 but not over $10,000,000 Over $10,000,000 but not over $15,000,000 Over $15,000,000 but not over $18,333,333 Over $18,333,333 The tax is: 15% of taxable income $7,500 + 25% of the excess over $50,000 $13,750 + 34% of the excess over $75,000 $22,250 + 39% of the excess over $100,000 $113,900 + 34% of the excess over $335,000 $3,400,000 + 35% of the excess over $10,000,000 $5,150,000 + 38% of the excess over $15,000,000 $6,416,667 + 35% of the excess over $18,333,333

Explanation / Answer

Computation of taxable income and tax liability of Western Corporation:

Particulars

Amount (In $)

Amount (In $)

Net income after tax

$500,000

Add: Items lowered the net income but those are not affect the taxable:

1) Federal income tax expense per books

$103,000

2) Capital losses exceeded its capital gains

$2,000

$105,000

Less: Items increased the net income but those are not affect the taxable:

1) MACRS depreciation in excess of book Depreciation

$15,000

2) Interest from municipal bonds

$5,000

Note: Generally investment in municipal bonds are exempted from federal taxes, however, Assumed that company invested in exempted bonds.

3) Dividends from less-than-20%-owned domestic corporations (other than debt-financed
stock) ($15000*70%) (I.e. 70% special deduction)

$10,500

$30,500

Taxable income

$574,500

Tax liability

Not Over $50000                  -15%

$7,500

Over $50000 to $75000      - 25%

$6,250

Over $75000 to $100000    - 34%

$8,500

Over $100000 to $335000    - 39%

$91,650

Over $335000 to $10000000    - 34%

$81,430

Total tax liability

$103,680

$195,330

Computation of taxable income and tax liability of Western Corporation:

Particulars

Amount (In $)

Amount (In $)

Net income after tax

$500,000

Add: Items lowered the net income but those are not affect the taxable:

1) Federal income tax expense per books

$103,000

2) Capital losses exceeded its capital gains

$2,000

$105,000

Less: Items increased the net income but those are not affect the taxable:

1) MACRS depreciation in excess of book Depreciation

$15,000

2) Interest from municipal bonds

$5,000

Note: Generally investment in municipal bonds are exempted from federal taxes, however, Assumed that company invested in exempted bonds.

3) Dividends from less-than-20%-owned domestic corporations (other than debt-financed
stock) ($15000*70%) (I.e. 70% special deduction)

$10,500

$30,500

Taxable income

$574,500

Tax liability

Not Over $50000                  -15%

$7,500

Over $50000 to $75000      - 25%

$6,250

Over $75000 to $100000    - 34%

$8,500

Over $100000 to $335000    - 39%

$91,650

Over $335000 to $10000000    - 34%

$81,430

Total tax liability

$103,680

$195,330

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