1-1. William B. Waugh Corporation—Corporate Income Tax $3,000,000 of Goods Sold + Operating (2,100,000) Operating Profits $900,000 Income ($6,000 * 30% = ) 1,800 Interest (400,000) Short Term Capital Gain (Selling Price – Cost) ($50,000-$45,000) 5,000 Long Term Capital Gain ** (Selling Price – Cost) ($100,000-$80,000) 20,000 Taxable Ordinary Income $526,800

$50,000 x .15 = $7,500 25,000 x .25 = 6,250 451,800 x .34 = 153,612 $526,800 167,362 Surtax: $235,000 x .05 = 11,750 Total taxes due = $179,112

**Long Term Capital Gain Selling Price (#Shares)(Price/Share) 1000 x $100.00 $100,000 Cost (#Shares)(Price/Share) 1000 x $80.00 80,000

1-2. L. B. Menielle, Inc.—Corporate Income Tax

Sales $5,000,000 Cost of Goods Sold (2,000,000) Gross Profits $3,000,000 Operating Expenses (1,000,000) Operating Profits $2,000,000 Interest Income 20,000 Dividend Income ($25,000 * 30% = ) 7,500 Interest Expense (100,000) Taxable Ordinary Income $1,927,500

Capital Gains and Losses Long-Term Gain (Loss) $40,000 Short-Term Gain (Loss) (50,000) Net Short-Term Gain (Loss) ($10,000) ***

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 1,852,500 x 0.34 = 629,850 $1,927,500 643,600

Surtax: 235,000 x 0.05 = 11,750 $655,350

***The $10,000 net short-term capital loss may not be deducted from ordinary income. However, if net capital gains were realized in the previous three years, the loss may be carried back to offset those prior gains, which would reduce the corporation’s tax liability in the present year. If gains did not exist in prior years, the loss could be carried forward for five years.

1-3. Sandersen, Inc.—Corporate Income Tax

Sales $3,000,000 Cost of Goods Sold (2,000,000) Gross Profits $1,000,000 Operating Expenses (400,000) Expense (100,000) Operating Profits $500,000 Dividend Income ($50,000 * 30% = ) 15,000 Interest Expense (150,000)

Taxable Ordinary Income $365,000

Tax Liability

$50,000 x 0.15 = $ 7,500 25,000 x 0.25 = 6,250 290,000 x 0.34 = 98,600 $365,000 112,350

Surtax: 235,000 x 0.05 = 11,750 $124,100

1-4. A. Don Drennan, Inc.—Corporate Income Tax

Sales $6,000,000 Cost of Goods Sold—($6,000,000 * 70%) (4,200,000) Gross Profits $1,800,000 Operating Expenses & Depreciation (800,000) Taxable Ordinary Income $1,000,000

Short Term Loss Sales Price $75,000 Purchase Price (80,000) Short-Term Loss ($ 5,000) ***

Tax Liability

$50,000 x 0.15 = $ 7,500 25,000 x 0.25 = 6,250 925,000 x 0.34 = 314,500 $1,000,000 328,250

Surtax: 235,000 x 0.05 = 11,750 $340,000

***Drennan, Inc. has a $5,000 capital loss carryback and/or carryforward to use.

1-5. Robbins Corporation—Corporate Income Tax

Sales $1,000,000 Cost of Goods Sold (600,000) Gross Profits $400,000 Operating Expenses (100,000) Depreciation Expense (150,000) Dividend Income ($40,000 * 30% = ) 12,000 Interest Expense (200,000) Taxable Ordinary Income ($38,000)

***Management will need to file for an operating loss carryback and/or a carryforward.

1-6. Fair Corporation—Corporate Income Tax

Sales $5,000,000 Cost of Goods Sold (4,300,000) Gross Profits $700,000 Operating Expenses (100,000) Dividend Income ($5,000 * 30% = ) 1,500 Ordinary Income $601,500

Plus Capital Gains Land: Sales Price $150,000 Selling Price (100,000) 50,000

Stock: Selling Price (#Shares)x(Price/Share) 1,000 x $150 $150,000 Cost (#Shares)x(Price/Share) 1,000 x $100 (100,000) 50,000 Taxable Ordinary Income $701,500

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 626,500 x 0.34 = 213,010 $701,500 $226,760

Surtax: 235,000 x 0.05 = 11,750 $238,510

1-7. J. P. Hulett, Inc.—Corporate Income Tax

Sales $4,000,000 Cost of Goods Sold (3,000,000) Gross Profits $1,000,000 Operating Expenses (500,000) Depreciation Expenses (350,000) Operating Profits $150,000 Dividend Income ($12,000 * 30% = ) 3,600 Taxable Income $153,600

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 78,600 x 0.34 = 26,724 $153,600 $40,474

Surtax: 53,600 x 0.05 = 2,680 (153,600-100,000) $43,154

1-8. Anderson & Dennis, Inc.—Corporate Income Tax

Sales $5,000,000 Cost of Goods Sold (3,000,000) Gross Profits $2,000,000 Operating Expenses (175,000) Depreciation Expense (125,000) Operating Profits $1,700,000 Interest Expense (200,000) Ordinary Income $1,500,000

Capital Gains and Losses Long-Term Gain (Loss) $40,000 Short-Term Gain (Loss) (60,000) Net Short-Term Gain (Loss) ($20,000) ***

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 1,425,000 x 0.34 = 484,500 $1,500,000 $498,250

Surtax: 235,000 x 0.05 = 11,750 $510,000

***The $20,000 net capital loss may not be deducted from ordinary income. However, if net capital gains were realized in the previous three years, the loss may be carried back to offset those prior gains, which would reduce the corporation’s tax liability in the present year. If gains did not exist in prior years, the loss could be carried forward for five years.

1-9. G. R. Edwin, Inc.—Corporate Income Tax

Sales $6,000,000 Cost of Goods Sold (3,000,000) Gross Profits $3,000,000 Operating Expenses (2,600,000) Interest Expense (30,000) Taxable Income $370,000

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 295,000 x 0.34 = 100,300 $370,000 $114,050

Surtax: 235,000 x 0.05 = 11,750 $125,800

1-10. The Analtoly Corporation—Corporate Income Tax

Sales $4,500,000 Cost of Goods Sold and Operating Expenses (3,200,000) Depreciation Expense (50,000) Operating $1,250,000 Interest Expense (150,000)

Long-Term Gain: Selling Price $120,000 Purchase Price (40,000) 80,000

Taxable Ordinary Income $1,180,000

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 1,105,000 x 0.34 = 375,700 $1,180,000 389,450

Surtax: 235,000 x 0.05 = 11,750 $401,200

1-11. Utsumi, Inc.—Corporate Income Tax

Sales $6,500,000 Cost of Goods Sold and Cash Operating Expenses (4,550,000) Depreciation Expense (75,000) Operating Profit $1,875,000 Interest Expense (160,000) Dividend Income $ 60,000 Less 70% Exclusion (42,000) 18,000 Long-Term Gain: Selling price $400,000 Purchase Price (320,000) 80,000 Taxable Income $1,813,000

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 25,000 x 0.34 = 8,500 235,000 x 0.39 = 91,650 1,478,000 x 0.34 = 502,520 $1,813,000 $616,420

1-12. Taxable Income = $300,000

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 225,000 x 0.34 = 76,500 $300,000 90,250

Surtax: 200,000 x 0.05 = 10,000 $100,250

1-13. Taxable Income = $20,000,000.

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 9,925,000 x 0.34 = 3,374,500 10,000,000 x 0.35 = 3,500,000 $20,000,000 $6,888,250

Surtax: 235,000 x 0.05 = 11,750 3,333,333 x 0.03 = 100,000 $111,750 $7,000,000

Since the taxable income is over $18 1/3 million, we need only multiply the taxable income times 35% to come up with federal taxes due or

$20,000,000 X .35 = $7,000,000

1-14. a. For taxable income above $335,000 and below $18,333,333 both the marginal and average tax rates are the same, 34%; and for taxable income greater than $18 1/3 million both the marginal and average tax rates are the same and they are 35%. Thus, since the taxable income is above $18 1/3 million, we can calculate Boisjoly’s federal taxes by multiplying the taxable income ($19 million) times 35% and we get $6,650,000 ($19 million X .35).

b. Average tax rate: $6,650,000/$19,000,000 = 35% Marginal tax rate: 35%

c. $29,000,000 X .35 = $10,150,000

d. Average tax rate: $10,150,000/$29,000,000 = 35% Marginal tax rate: 35%

SOLUTION TO COMPREHENSIVE PROBLEM a. The goal of profit maximization is too simplistic in that it assumes away the problems of uncertainty of returns and the timing of returns. Rather than use this goal, we have chosen maximization of shareholders’ wealth—that is, maximization of the market value of the firm’s common stock—because the effects of all financial decisions are included. The shareholders react to poor investment or dividend decisions by causing the total value of the firm’s stock to fall and react to good decisions by pushing the price of the stock upward. In this way, all financial decisions are evaluated, and all financial decisions affect shareholder wealth. b. Simply put, investors will not put their money in risky investments unless they are compensated for taking on that additional risk. In effect, the return investors expect is composed of two parts. First, they receive a return for delaying consumption, which must be greater than the anticipated rate of inflation. Second, they receive a return for taking on added risk. Otherwise, both risky and safe investments would have the same expected return associated with them, and no one would take on the risky investments. c. The firm receives cash flows and is able to reinvest them, which cannot be done with accounting profits. In effect, accounting profits are shown when they are earned rather than when the money is actually in hand. Unfortunately, a firm’s accounting profits and cash flows may not be timed to occur together. For example, capital expenses, such as the purchase of a new plant or piece of equipment, are depreciated over several years, with the annual depreciation subtracted from profits. However, the associated with these expenses generally occurs immediately. It is the cash inflows that can be reinvested and cash outflows that involve paying out money. Therefore, cash flows correctly reflect the true timing of the benefits and .

d. In an efficient market, information is impounded into security prices with such speed that there are no opportunities for investors to profit from publicly available information. Actually, what types of information are immediately reflected in security prices and how quickly that information is reflected determine how efficient the market actually is. The implications for us are that stock prices reflect all publicly available information regarding the value of the company. This means we can implement our goal of maximization of shareholder wealth by focusing on the effect each decision should have on the stock price, all else held constant. It also means that earnings manipulations through accounting changes should not result in price changes. In effect, our preoccupation with cash flows is validated. e. The agency problem is the result of the separation of management and the ownership of the firm. As a result, managers may make decisions that are not in line with the goal of maximization of shareholder wealth. To control this problem, we monitor managers and try to align the interests of shareholders and managers. The interests of shareholders and managers can be aligned by setting up stock options, bonuses, and perquisites that are directly tied to how closely management decisions coincide with the interest of shareholders. f. Ethical errors are not forgiven in the business world. Business interaction is based upon trust, and there is no way that trust can be eliminated quicker than through an ethical violation. The fall of Ivan Boesky and Drexel, Burnham, Lanbert and the near collapse of Salomon Brothers illustrates this fact. As a result, acting in an ethical manner is not only morally correct, but it is congruent with our goal of maximization of shareholder wealth. g. (1) A sole proprietorship is a business owned by a single individual who maintains complete title to the , but who is also personally liable for all indebtedness incurred. (2) A partnership is an association of two or more individuals coming together as co-owners for the purpose of operating a business for profit. The partnership is equivalent to the sole proprietorship, except that the partnership has multiple owners. (3) A corporation is a legal entity functioning separate and apart from its owners. It can individually sue and be sued, purchase, sell, or own property, and be subject to criminal punishment for crimes.

h. Sales $4,000,000 Cost of Goods Sold (2,400,000) Gross Profit $1,600,000 Tax-Deductible Expenses: Operating Expenses ($600,000) Interest Expenses (300,000) (900,000) $700,000 Other Income: Interest Income 22,000 Preferred Dividend Income ($30,000) Less 70% exclusion ($21,000) 9,000 Taxable Ordinary Income $731,000 Gain on Sale: Selling Price $100,000 Cost (60,000) 40,000 Taxable Income $771,000

Tax Liability:

.15 x $50,000 = $7,500 .25 x 25,000 = 6,250 .34 x 696,000 = 236,640 5% surtax for income between $100,000 and $335,000 11,750 $262,140

ALTERNATIVE PROBLEMS AND SOLUTIONS

ALTERNATIVE PROBLEMS

1-1A. (Corporate Income Tax) The M.M. Roscoe Corporation is a regional truck dealer. The firm sells new and used trucks and is actively involved in a parts business. During the most recent year, the company generated sales of $4 million. The combined cost of goods sold and the operating expenses were $3.2 million. Also, $300,000 in interest expense was paid during the year. The firm received $5,000 during the year in dividend income for 1,000 shares of common stock that had been purchased three years previously. However, the stock was sold toward the end of the year for $100 per share; its initial cost was $80 per share. The company also sold land that had been recently purchased and had been held for only four months. The selling price was $55,000; the cost was $45,000. Calculate the corporation’s tax liability. 1-2A. (Corporate Income Tax) Sales for J.P. Enterprises during the past year amounted to $5 million. The firm provides parts and supplies for oil field service companies. Gross profits for the year were $2.5 million. Operating expenses totaled $900,000. The interest and dividend income from securities owned were $15,000 and $25,000, respectively. The firm’s interest expense was $100,000. The firm sold securities on two occasions during the year, receiving a gain of $45,000 on the first sale but losing $60,000 on the second. The stock sold first had been owned for five years; the stock sold second had been purchased three months prior to the sale. Compute the corporation’s tax liability. 1-3A. (Corporate Income Tax) Carter B. Daltan, Inc., sells minicomputers. During the past year, the company’s sales were $3.5 million. The cost of its merchandise sold came to $2 million, and cash operating expenses were $500,000; depreciation expenses were $100,000, and the firm paid $165,000 in interest on bank loans. Also, the corporation received $55,000 in dividend income but paid $25,000 in the form of to its common stockholders. Calculate the corporation’s tax liability. 1-4A. (Corporate Income Tax) Kate Menielle, Inc., had sales of $8 million during the past year. The company’s cost of goods sold was 60% of sales; operating expenses, including depreciation, amounted to $900,000. The firm sold a capital (stock) for $75,000, which had been purchased five months earlier at a cost of $80,000. Determine the company’s tax liability. 1-5A. (Corporate Income Tax) The Burgess Corporation is an oil wholesaler. The company’s sales last year were $2.5 million, with the cost of goods sold equal to $700,000. The firm paid interest of $200,000, and its cash operating expenses were $150,000. Also, the firm received $50,000 in dividend income while paying only $15,000 in dividends to its preferred stockholders. Depreciation expense was $150,000. Compute the firm’s tax liability.

1-6A. (Corporate Income Tax) The A.K.U. Corporation had sales of $5.5 million this past year. The cost of goods sold was $4.6 million and operating expenses were $125,000. Dividend income totaled $5,000. The firm sold land for $150,000 that had cost $100,000 five months ago. The firm received $140 per share from the sale of 1,000 shares of stock. The stock was purchased for $100 per share three years prior. Determine the firm’s tax liability. 1-7A. (Corporate Income Tax) Sales for Phil Schubert, Inc., during the past year amounted to $5 million. The firm supplies statistical information to engineering companies. Gross profits totaled $1.2 million, and operating and depreciation expenses were $500,000 and $400,000, respectively. Dividend income for the year was $15,000. Compute the corporation’s tax liability. 1-8A. (Corporate Income Tax) Williams & Crisp, Inc., sells computer software. The company’s past year’s sales were $4.5 million. The cost of its merchandise sold came to $2.2 million. Operating expenses were $175,000, plus depreciation expenses totaling $130,000. The firm paid $150,000 interest on loans. The firm sold stock during the year, receiving a $50,000 gain on stock owned six years but losing $70,000 on stock held four months. Calculate the company’s tax liability. 1-9A. (Corporate Income Tax) J. Johnson, Inc., had sales of $7 million during the past year. The cost of goods sold amounted to $4 million. Operating expenses totaled $2.6 million and interest expense was $40,000. Determine the firm’s tax liability. 1-10A. (Corporate Income Tax) The Kusomoto Corporation is an electronics dealer and distributor. Sales for the last year were $6.9 million, and cost of goods sold and operating expenses totaled $4.3 million. Kusomoto also paid $180,000 in interest expense, and depreciation expense totaled $40,000. In addition, the company sold securities for $117,000 that it had purchased four years earlier at a price of $37,000. Compute the tax liability for Kusomoto. 1-11A. (Corporate Income Tax) Martinez, Inc. supplies wholesale industrial chemicals. Last year the company had sales of $8.3 million. Cost of goods sold and operating expenses amounted to 77% of sales, and depreciation and interest expense were $79,000 and $150,000, respectively. Furthermore, the company sold 50,000 shares of Rose Corporation for $7.50 a share. These shares were purchased a year ago for $5.00 each. In addition, Martinez received $72,000 in dividend income. Compute the corporation’s tax liability.

SOLUTIONS FOR ALTERNATIVE PROBLEMS

1-1A. M.M. Roscoe Corp.—Corporate Income Tax Sales $4,000,000 Cost of Goods Sold + Operating Expenses (3,200,000) Operating Profits $800,000 Dividend Income $5,000 Less 70% Exclusion (3,500) 1,500 Interest Expense (300,000) S-T Capital Gain Selling Price $55,000 Cost (45,000) 10,000 L-T Capital Gain Selling Price (#Shares)(Price/Share) 1,000 x $100 $100,000 Cost (#Shares)(Price/Share) 1,000 x $80 (80,000) 20,000 Taxable Ordinary Income $531,500

Tax liability: $50,000 x .15 = $7,500 25,000 x .25 = 6,250 456,500 x .34 = 155,210 $531,500 x .34 = $180,710

Surtax: $235,000 x .05 = 11,750 Total taxes due = $180,710

1-2A. J.P. Enterprises—Corporate Income Tax Sales $5,000,000 Cost of Goods Sold (2,500,000) Gross Profits $2,500,000 Operating Expenses (900,000) Operating Profits $1,600,000 Interest Income 15,000 Dividend Income $25,000 Less 70% Exclusion (17,500) 7,500 Interest Expense (100,000) Taxable Ordinary Income $1,522,500

Capital Gains and Losses Long-Term Gain (Loss) $45,000 Short-Term Gain (Loss) (60,000) Net Short-Term Loss ($15,000)

Tax Liability: $50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 25,000 x 0.34 = 8,500 235,000 x 0.39 = 91,650 1,187,500 x 0.34 = 403,750 $1,522,500 $517,650

The $15,000 net short-term capital loss may not be deducted from ordinary income. However, if net capital gains were realized in the previous three years, the loss may be carried back to offset those prior gains, which would reduce the corporation’s tax liability in the present year. If gains did not exist in prior years, the loss could be carried forward for five years.

1-3A. Carter B. Daltan—Corporate Income Tax Sales $3,500,000 Cost of Goods Sold (2,000,000) Gross Profits $1,500,000 Cash Operating Expenses (500,000) Depreciation Expense (100,000) Operating Profits $ 900,000 Dividend Income $55,000 Less 70% Exclusion (38,500) 16,500 Interest Expense (165,000) Taxable Ordinary Income $751,500 Tax Liability $50,000 x 0.15 = $ 7,500 25,000 x 0.25 = 6,250 25,000 x 0.34 = 8,500 235,000 x 0.39 = 91,650 416,500 x 0.34 = 141,610 $751,500 $255,510

1-4A. Kate Menielle, Inc.—Corporate Income Tax Sales $8,000,000 Cost of Goods Sold - (60%) (4,800,000) Gross Profits $3,200,000 Operating Expenses & Depreciation (900,000) Taxable Ordinary Income $2,300,000 S-T Gains Sales Price $75,000 Purchase Price (80,000) Short-Term Gain (Loss) ($ 5,000) Tax Liability on $2,300,000 $782,000 Company has a $5,000 capital loss carryback-carryforward to use.

1-5A. Burgess Corporation—Corporate Income Tax Sales $2,500,000 Cost of Goods Sold (700,000) Gross Profits $1,800,000 Cash Operating Expenses (150,000) Depreciation Expense (150,000) Dividend Income $50,000 Less 70% Exclusion (35,000) 15,000 Interest Expense (200,000) Taxable Ordinary Income $1,315,000 Tax Liability: $50,000 x 0.15 = $ 7,500 25,000 x 0.25 = 6,250 25,000 x 0.34 = 8,500 235,000 x 0.39 = 91,650 980,000 x 0.34 = 333,200 $1,315,000 $447,100

1-6A. A.K.U. Corporation—Corporate Income Tax Sales $5,500,000 Cost of Goods Sold (4,600,000) Gross Profits $900,000 Operating Expenses (125,000) Dividend Income $5,000 Less 70% Exclusion (3,500) 1,500 Ordinary Income $776,500 Plus Capital Gains Land: Sales Price $150,000 Selling Price (100,000) 50,000 Stock: Selling Price (#Shares)(Price/Share) 1,000 x $140 $140,000 Cost (#Shares)(Price/Share) 1,000 x $100 (100,000) 40,000 Taxable income $866,500 Tax Liability: $50,000 x 0.15 = $7,500 $25,000 x 0.25 = 6,250 $25,000 x 0.34 = 8,500 $235,000 x 0.39 = 91,650 $531,500 x 0.34 = 180,710 $866,500 $294,610

1-7A. Phil Schubert, Inc.—Corporate Income Tax Sales $5,000,000 Cost of Goods Sold (3,800,000) Gross Profits $1,200,000 Cash Operating Expenses (500,000) Depreciation Expenses (400,000) Operating Profits $300,000 Dividend Income $15,000 Less 70% Exclusion (10,500) 4,500 Taxable Income $304,500 Tax Liability: $50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 25,000 x 0.34 = 8,500 204,500 x 0.39 = 79,755 $304,500 $102,005

1-8A. Williams & Crisp, Inc.—Corporate Income Tax Sales $4,500,000 Cost of Goods Sold (2,200,000) Gross Profits $2,300,000 Cash Operating Expenses (175,000) Depreciation Expense (130,000) Operating Profits $1,995,000 Interest Expense (150,000) Ordinary Income $1,845,000 L-T Capital Gain (Loss) $50,000 S-T Capital Gain (Loss) (70,000) Gain (Loss) on Capital Sales ($20,000)

Tax Liability: $50,000 x 0.15 = $7,500 $25,000 x 0.25 = 6,250 $25,000 x 0.34 = 8,500 $235,000 x 0.39 = 91,650 $1,510,000 x 0.34 = 513,400 $1,845,000 $627,300

The $20,000 capital loss must be carried back to offset net capital gains in the past three years or forward for the next five years.

1-9A. J. Johnson, Inc.—Corporate Income Tax

Sales $7,000,000 Cost of Goods Sold (4,000,000) Gross Profits $3,000,000 Operating Expenses (2,600,000) Interest Expense (40,000)

Taxable Income $360,000

Tax Liability:

$50,000 x 0.15 = $7,500 $25,000 x 0.25 = 6,250 $25,000 x 0.34 = 8,500 $235,000 x 0.39 = 91,650 $25,000 x 0.34 = 8,500 $360,000 $122,400

1-10A. The Kusomoto Corporation—Corporate Income Tax

Sales $6,900,000 Cost of Goods Sold and Cash Operating Expenses (4,300,000) Depreciation Expense (40,000) Operating Profit $2,560,000 Interest Expense (180,000) Long Term Gain: Selling Price $117,000 Purchase Price (37,000) 80,000 Taxable Income $2,460,000

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 25,000 x 0.34 = 8,500 235,000 x 0.39 = 91,650 2,125,000 x 0.34 = 722,500 $2,460,000 $836,400

1-11A. Martinez, Inc.—Corporate Income Tax

Sales $8,300,000 Cost of Goods Sold and Cash Operating Expenses (6,391,000) Depreciation Expense (79,000) Operating Profit $1,830,000 Interest Expense (150,000) Dividend Income $72,000 Less 70% Exclusion (50,400) 21,600

Long term gain: Selling price $375,000 Purchase price (250,000) 125,000

Taxable Income $1,826,600

Tax Liability:

$50,000 x 0.15 = $7,500 25,000 x 0.25 = 6,250 25,000 x 0.34 = 8,500 235,000 x 0.39 = 91,650 1,491,600 x 0.34 = 507,144 $1,826,600 $621,044