Moose Industries faces the following tax schedule: Last year the company realize

Question

Moose Industries faces the following tax schedule:

Last year the company realized $9,000,000 in operating income (EBIT). Its annual interest expense is $1,500,000. What was the company’s net income for the year?

Question 5 options:

Taxable Income Tax on Base of Bracket Percentage on Excess above Base Up to $50,000 $0 15% $50,000-$75,000 7,500 25    $75,000-$100,000 13,750 34    $100,000-$335,000 22,250 39    $335,000-$10,000,000 113,900 34    $10,000,000-$15,000,000 3,400,000 35    $15,000,000-$18,333,333 5,150,000 38    Over $18,333,333 6,416,667 35   

Explanation / Answer

EBIT = $9,000,000

Interest Expense = $1,500,000

EBT = $9,000,000 - $1,500,000 = $7,500,000 ---> Taxable Income

Now, this taxable income needs to be divided into different buckets based on tax bracket table.

For first $50,000, tax rate is 15%. So tax for this amount is $50000 * 15% = $7,500. Remaining $700,000 needs to be divided into buckets.

For next $25,000, tax rate is 25%. So tax amount is $25000 * 25% = $6,250. Remaining $675,000 needs to be divided into further buckets.

For next $25,000, tax rate is 34%. So tax amount is $25000 * 34% = $8,500. Remaining $650,000 needs to be divided into further buckets.

For next $235,000, tax rate is 39%. So tax amount is $235,000 * 39% = $91,650. Remaining $7,165,000 needs to be divided into further buckets.

For remaining balance, it would be accomodated completely in this bucket, tax rate is 34%. So tax amount is $7,165,000 * 34% = $2,436,100.

Total Tax amount = $7,500 + $6,250 + $8,500 + $91,650 + $2,436,100 = $2,550,000

Net Income = EBT - tax = 7,500,000 - 2,550,000 = $4,950,000

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