Calculating Income Tax and Constructing Income Statements Using the following information, class notes, and the posted PowerPoint slides as resources complete the following: "Can't get enough of that wonderful Duff!" Duff Beer is a brand of beer that began as a fictional beverage on the television show The Simpsons. In 2016 Time magazine included Duff Beer in its list of the most influential fictional companies of all time. The beer is now commercially available and sold in a handful of locations. Use the information below to answer the following problems. a. Interest expense: $17,000 b. Cost of goods sold: $578,000 C. Selling and marketing expenses: $55,000 d. Administrative expenses: $22,000 e. Number of shares outstanding: 550,000 f. Interest income $60,000 g. Sales: $1,000,000 h. Dividends paid: $72,000 Calculating Depreciation Duff purchased $200,000 worth of bottling equipment last year. The equipment is expected to last for 8 years, but falls in the MACRS 5-year asset class for depreciation purposes. Calculate the MACRS depreciation expense for the equipment that should be recorded for each year. Use the MACRS table provided on page 69 in the text. 1. If Duff Beer decides to use the straight-line depreciation method instead, what will their depreciation expense be each year? III. Computing a Corporation's Income Taxes Answer the following questions using the table below and relevant information from (1) and (11) above. Corporate Tax Rates TABLE 3-6 15% 25% 34% 35% $0-$50,000 $50,001-$75,000 $75,001-$10,000,000 over $10,000,000 2. What is the company's taxable income? 3. How much income tax will Duff pay? 4. What is the firm's marginal tax rate? Average tax rate? 5. How much did Duff save in taxes by investing in the bottling equipment? Spring 2020 IV. Constructing an Income Statement Use the information from (1) and (11) above to construct an income statement (note the information here is not necessarily provided in the order in which it should appear on an income statement). Then answer the following questions. 6. How much net income did the firm make on a per share basis? 7. The dividend-payout ratio- is the rate of dividends to earnings (calculated as dividendset income). Based on your calculations, does it appear that Duff Beer Company is retaining most of their earnings or distributing them to shareholders? 8. If a firm is retaining most of their earnings what does this suggest about their plans for expansion? Are they most likely a mature, well-established firm, or a growing firm? V. Constructing A Common-Sized Income Statement A common-sized income statement is an income statement in which a firm's expenses and profits are expressed as a percentage of its sales. The construction of a common-sized income statement allows us to express expenses and profits on a relative basis, so that we can more easily compare a firm's income performance across time and with competitors. When you hear someone use the term profit margin, they are referring to this type of income statement. a. Gross profit margin- is a ratio denoting the gross profit earned by the firm as a percentage of its net assets. Gross profit magin = gross profits/ sales b. operating profit margin- a ratio that serves as an overall measure of the company's operating effectiveness. perating projus sales Operating profit magin = operating profits/ c. Net profit margin- a ratio that measure the net income of a firm as a percent of sales. Net profit magin = net profits/coles sales 10. The depreciation expense for Duff's bottling equipment in year 3 (using MARCS) was: a. $40,000 b. $38,400 C. $142,400 d. $25,000 11. The total amount of depreciation for the bottling equipment (using the straight-line method) was: a. $40,000 b. $120,000 C. $200,000 d. $320,000 12. Under the MACRS depreciation method, the bottling equipment was deprived over years a. 8 years b. 6 years C. 5 years d. 11 years 13. Under the straight-line depreciation method, the bottling equipment was depreciated over a. 8 years b. 6 years c. 5 years d. 11 years _years 14. What was Duff Beer's depreciation expense in year 3 using the straight-line depreciation method? a. $40,000 b. $38,400 C. $142,400 d. $25,000 15. The marginal tax rate for Duff beer was: a. 15% b. 25% c. 31% d. 34% e. 35% 16. The average tax rate for Duff Beer was: a. 24.57% b. 30.62% C. 30.97% d. 34.00% 17. How much did Duff Beer save in taxes by investing in the bottling equipment? a. $13,600 b. $38,400 C. $40,00 d. Duff did not save anything on taxes because they didn't finance the equipment 18. How much net income did Duff Beer make on a per-share basis? a. $0.16 b. $0.30 C. $0.44 d. $1.82 19. Referring to the income statement you constructed, what is Duff Beer's dividend payout ratio? a. $0.30 b. $72,000 C. 26.92% d. 29.82% 20. The operating profit margin for Duff Beer is: a. 42.2% b. 30.5% C. 34.5% d. 24.1% 21. The net profit margin for Duff beer: a. 24.1% b. 42.2% C. 25.84% d. 30.5%