Appendix 2A
Federal Income Taxes
APPENDIX 2A
FEDERAL INCOME TAXES
ANSWERS TO QUESTIONS:
1. The operating, or ordinary income of a corporation is the income that results from the firm’s
normal business activities.
Capital gains income basically occurs as a result of the sale of fixed corporate assets. As a
Corporations that own stock in another corporation may receive cash dividends on their stock;
Operating income is taxed at varying marginal rates between 15% and 38%. The largest
corporations, with taxable incomes in excess of $18,333,333 pay a top marginal rate of 35%.
2. An S corporation has its business income taxed directly to the shareholders at individual
3. Dividends are paid out of after-tax earnings by corporations, and individuals pay taxes on
dividends. Thus, dividends normally are taxed twice. When dividends are received by a
SOLUTIONS TO PROBLEMS:
1. Taxable income = Ordinary income + capital gains income + (dividend
2. Tax computation:
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Appendix 2A
Federal Income Taxes
Ordinary income = EBIT – Interest = $1,000,000 – $100,000 =
(Dividend payments to stockholders and debt principal repayment
have no impact on taxable income and hence on taxes.)
3. a. 39%
4. Year Taxable income Tax calculation Tax due
2015 $30,000 0.15 x $30,000 $4,500
2016 $80,000 $13,750+0.34($80,000-$75,000) $15,450
*Adjusted 2018 taxable income = $85,000 – $75,000(loss carryback) =
$10,000.
5. a. EBT = $25,000,000 – 0.15($10,000,000) = $23,500,000
b. EAT = $25,000,000(1 – 0.4) = $15,000,000
Earnings available for common stockholders:
6. Taxable dividend income = $3,000,000 x 0.3 = $900,000
7. a. Gain = $150,000 – $100,000 = $50,000
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Appendix 2A
Federal Income Taxes
8. a.
Sales ($ millions) $400.0
Cost of goods sold -150.0
Operating expenses -100.0
b.
Sales ($ millions) $400.0
Cost of goods sold -150.0
Operating expenses -100.0
Earnings after taxes but
before dividend receipts$29.25
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