At the end of the second quarter of 20X1, Malta Corporation assembled the follow

Question

At the end of the second quarter of 20X1, Malta Corporation assembled the following information: 1. The first quarter resulted in a $100,000 loss before taxes. During the second quarter, sales were $1,210,000; purchases were $660,000; and operating expenses were $330,000. 2. Cost of goods sold is determined using the FIFO method. The inventory at the end of the first quarter was reduced by $14,000 to a lower-of-cost-or-market figure of $88,000. During the second quarter, replacement costs recovered, and by the end of the period, market value exceeded the ending inventory cost by $11,250 . The ending inventory is estimated using the gross profit method. The estimated gross profit rate is 46 percent. 4. At the end of the first quarter, the effective annual tax rate was estimated at 45 percent. At the end of the second quarter, expected annual income is $640,000. An investment tax credit of $15,000 and dividends received deduction of $82,500 are expected for the year. The combined state and federal tax rate is 40 percent. 5. The tax benefits from operating losses are assured beyond a reasonable doubt. Prior-years income totaling $50,000 is available for operating loss carrybacks. Required: a. Calculate the expected effective annual tax rate at the end of the second quarter for Malta. (Round your answer to 1 decimal place.) Estimated effective annual tax rate

Explanation / Answer

In the question, For first quarter Sales, COGS and other informations are missing for creating Income statement for First period.

For second Period:-

Sales = $1210000

COGS = 54 % of sales as we have 46 % gross perofit rate = 1210000 * 0.54 = $653400

Ending Inventory for second period as below table:-

Here valuation increase in Inventory has been added.

So from above opearting profit shall be as below table:-

The Investment Tax Credit, Dividend Received deduction and Prior year loss carryforward are provided for whole year so it can be included in our calculation for each period only using one fourth of the total in calculating tax.

Income statement for second period will be as below:-

Here taxes paid will not be same as above, Actual taxes payable shall be equal to calculated at tax authority as they do not calculate inventory valuation losses and gains.

By back calculating, below tax for each period is calculated.

Annual Income = $640000

Income before tax = 640000 / 0.6 = $1066667 = 1066667 - 50000 = 1016667

Tax for each period = 1016667 *0.4 / 4 = $101666.7

So effective tax rate shall be = 101666.7 / 200975 = 50.58%

Hope above is ok. Please let me know if you have any other problem with above.

Thank You!!

Starting Inventory 88000 Increase in value 11250 Purchases 660000 Total Inventory 759250 Ending Invenory 105850

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.