The Bookbinder Company has made $150,000 before taxes during each of the last 15
ID: 2652147 • Letter: T
Question
The Bookbinder Company has made $150,000 before taxes during each of the last 15 years, and it expects to make $150,000 a year before taxes in the future. However, in 2013 the firm incurred a loss of $650,000. The firm will claim a tax credit at the time it files its 2013 income tax return, and it will receive a check from the U.S. Treasury. Show how it calculates this credit, and then indicate the firm’s tax liability for each of the next 5 years. Assume a 40% tax rate on all income to ease the calculations. 1) Prepare an ending 1998 Income Statement and Balance Sheet from the following information: Sales $800,000; Cost of Goods Sold $300,000; Accounts Receivables $20,000; Bonds Outstanding $160,000; Accounts Payable $20,000; Advertising Expense $1,000; Administrative Expenses $35,000; Interest Expense $24,000; Depreciation Expense $40,000; Dividends Paid $137,000; Rent Expense $5,000; Accruals $20,000; Common Stock $100,000; Retained Earnings $245,000 (Beginning 0f 1998); Cash $20,000; Inventory $45,000; Net Fixed Assets $600,000 (Beginning of 1998). (Assume a 40% Tax Rate)Explanation / Answer
Answer:
Calculation of Tax Liability:
Year 2013
Year 2014
Year 2015
Year 2016
Year 2017
Year 2018
Net income for the year (A)
-650000
150000
150000
150000
150000
150000
Loss to be Set off Against current year income (B)
0
-150000
-150000
-150000
-150000
-50000
Loss to be carried forward
-650000
-500000
-350000
-200000
-50000
0
Taxable income
0
0
0
0
0
100000
Tax Liability = 40%
40000
Year 2013
Year 2014
Year 2015
Year 2016
Year 2017
Year 2018
Net income for the year (A)
-650000
150000
150000
150000
150000
150000
Loss to be Set off Against current year income (B)
0
-150000
-150000
-150000
-150000
-50000
Loss to be carried forward
-650000
-500000
-350000
-200000
-50000
0
Taxable income
0
0
0
0
0
100000
Tax Liability = 40%
40000
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