Zombies, Inc. is suing Frankenstein, Inc. for copyright infringement (Zombies ma

ID: 2775839 • Letter: Z

Question

Zombies, Inc. is suing Frankenstein, Inc. for copyright infringement (Zombies maintains they came up with the motto in problem 1 first!). OK, this has absolutely nothing to do with this problem I just thought I'd throw it in. Anyway, you've left Frankenstein for Zombies (well you do understand the industry after all) and are now preparing Zombies current Income Statement. You are down to the lines "tax" and "net profit after tax" and therefore need to calculate Zombies federal tax. Here's the data you have been working with: Sales: $1,400,000; cost of goods sold: $845,000; G&A: $300,000; advertising: $75,000. Zombies took out a $120,000 loan this year and paid $12,000 in loan interest. They had invested in Disney (there was something about the song, "It's a small world" that they thought could be used to drive humans crazy) and received a dividend check from Disney of $20,000. Their capital structure includes both preferred and common stock and they paid $10,000 and $15,000 respectively in dividends.

Given all that I need you to tell me three things: what was their federal tax bill, what was their average tax rate, what was their marginal tax rate.

Explanation / Answer

Zombies Inc

Total Federal Tax Liability = $ 51,110

Marginal Tax Rate = 39%

Average Tax Rate = 29.37%

Sales

$ 1,400,00

Cost of Goods Sold

$ 845,000

General & Administrative Expenses

$ 300,000

Advertising Expenses

$ 75,000

Taxable portion Dividends Received (70% exempted) $ 20000 * 0.30

$ 6,000

Interest Paid

$ 12,000

Earnings Before Taxes

(Sales – COGS-G&A –Advertising + Taxable portion of Dividends Received – Interest)

$ 174,000

Dividends paid by Zombies Inc are from Net Income after taxes and hence the same does not come into above calculations

Corporate Tax Rates are as follows

Upto $ 50,000 - 15%

50000 – 75000 - 25%

75000 -10000 – 34%

100000 – 335000 – 39%

Corporate Tax Liability of Zobie Inc

Tax = 50000 * 15% + (75000-50000) * 25% + (100000-75000)* 34% + (174000-100000) * 39%

= 50000 * 15% + 25000 * 25% + 25000 * 34% + 74000 * 39%

= 7,500 + 6,250 + 8,500 + 28,860

= 51,110

Average Tax Rate = (51,110/174000)*100 = 29.374 or 29.37%