Elasticity Reveiw
Problem Set 1 Solutions
1. Calculating Taxes. The Herrera Co. had $246,000 in taxable income. Using the rates from Table 2.3 in the chapter calculate the company's income taxes. What is the average tax rate? What is the marginal tax rate?
The total amount of income tax is 0.15($50,000 = $7,500 + 0.25(($75,000 – 50,000) = $6,250 + 0.34(($100,000 – 75,000) = $8,500 + 0.39(($246,000 – 100,000) = $56,940 Total = $79,190
The average tax rate is the total amount of tax divided by taxable income, so:
Average tax rate = $79,190 / $246,000 = 0.3219 or 32.19%
The marginal tax rate is the tax rate on the next $1 of earnings (taxable income). Since taxable income of $246,000 falls in the 39% tax bracket, it is our marginal tax rate.
2. Calculating Net Capital Spending. Gordon Driving School's 2009 balance sheet showed net fixed assets of $1.65 million, and the 2010 balance sheet showed net fixed assets of $1.73 million. The company's 2010 income statement showed a depreciation expense of $284,000. What was Gordon’s net capital spending for 2010?
Net capital spending = (Ending NFA – Beginning NFA) + Depreciation Net capital spending = $1,730,000 – 1,650,000 + 284,000 Net capital spending = $364,000
3. Building an Income Statement. During the year, the Senbet Discount Tire Company had gross sales of $1.2 million. The firm's cost of goods sold and selling expenses were $450,000 and $225,000, respectively. Senbet also had notes payable of $900,000. These notes carried an interest rate of 9 percent. Depreciation was $110,000. Senbet’s tax rate was 35 percent.
a. What was Senbet’s net income?
The interest expense for the company is the amount of debt (notes payable in this case) times the interest rate on the debt. Thus the amount of interest expense is $900,000(0.09 = $81,000.
So, the income statement for the company is: Income Statement Sales $1,200,000
1. Calculating Taxes. The Herrera Co. had $246,000 in taxable income. Using the rates from Table 2.3 in the chapter calculate the company's income taxes. What is the average tax rate? What is the marginal tax rate?
The total amount of income tax is 0.15($50,000 = $7,500 + 0.25(($75,000 – 50,000) = $6,250 + 0.34(($100,000 – 75,000) = $8,500 + 0.39(($246,000 – 100,000) = $56,940 Total = $79,190
The average tax rate is the total amount of tax divided by taxable income, so:
Average tax rate = $79,190 / $246,000 = 0.3219 or 32.19%
The marginal tax rate is the tax rate on the next $1 of earnings (taxable income). Since taxable income of $246,000 falls in the 39% tax bracket, it is our marginal tax rate.
2. Calculating Net Capital Spending. Gordon Driving School's 2009 balance sheet showed net fixed assets of $1.65 million, and the 2010 balance sheet showed net fixed assets of $1.73 million. The company's 2010 income statement showed a depreciation expense of $284,000. What was Gordon’s net capital spending for 2010?
Net capital spending = (Ending NFA – Beginning NFA) + Depreciation Net capital spending = $1,730,000 – 1,650,000 + 284,000 Net capital spending = $364,000
3. Building an Income Statement. During the year, the Senbet Discount Tire Company had gross sales of $1.2 million. The firm's cost of goods sold and selling expenses were $450,000 and $225,000, respectively. Senbet also had notes payable of $900,000. These notes carried an interest rate of 9 percent. Depreciation was $110,000. Senbet’s tax rate was 35 percent.
a. What was Senbet’s net income?
The interest expense for the company is the amount of debt (notes payable in this case) times the interest rate on the debt. Thus the amount of interest expense is $900,000(0.09 = $81,000.
So, the income statement for the company is: Income Statement Sales $1,200,000