# Working capital, dividends, effective and average tax rate

DeBauge Realtors, Inc., is a realty firm owned by Jeff and Kristi DeBauge. The DeBauge family owns 100% of the corporation's stock. The following summarized data (in thousands) are taken from the December 31, 2010, financial statements:

For the Year Ended December 31, 2010:

Commissions revenue $145

Cost of services provided 61

Advertising expense 27

________

Operating income $ 57

Interest expense 5

Income tax expense 19

Net income $ 33

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At December 31, 2010:

Assets

Cash and short-term investments $ 31

Accounts receivable, net 42

Property, plant, and equipment, net 124

Total assets $ 197

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Liabilities and Owners' Equity

Accounts payable $ 93

Income taxes payable 8

Notes payable (long term) 48

Paid-in capital 23

Retained earnings 25

Total liabilities and owners' equity $ 197

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At December 31, 2009, total assets were $204 and total owners' equity was $48. There were no changes in notes payable or paid-in capital during 2010.

Calculate the effective interest rate on the notes payable for DeBauge Realtors, Inc. (Round your answer to 2 decimal places.)

Effective interest rate ______ %

Calculate the company's average income tax rate. (Hint: You must first determine the earnings before taxes.) (Round your answer to the nearest whole percent. )

Average income tax rate _______ %

Calculate the amount of dividends declared and paid to Jeff and Kristi DeBauge during the year ended December 31, 2010. (Hint: Do a T-account analysis of retained earnings.) (Amounts should be entered in the full amount and not in 000s. (Example - enter 20,000 and not 20). Since dividends are a deduction from retained earnings, enter the amount of dividends with a minus sign.)

Dividends declared and paid $ _________

Calculate the amount of working capital and the current ratio at December 31, 2010. (Negative amount should be indicated by a minus sign. Amounts should be entered in the full amount and not in 000s. (Example - enter 20,000 and not 20). Round your ratio answer to 2 decimal places.)

Working capital $ ________

Current ratio _____________

#### Solution Preview

Calculate the effective interest rate on the notes payable for DeBauge Realtors, Inc. (Round your answer to 2 decimal places.)

Effective interest rate 10.42 %

Because the notes payable did not change in 2010, its principal balance was $48,000 throughout the year. Interest expense was $5,000 in 2010.

Effective interest rate = $5,000/$48,000

Effective interest rate = 10.42 percent

Calculate the company's average income tax rate. (Hint: You must first determine the earnings before taxes.) (Round your answer to the nearest whole percent. )

Average income tax rate 37 %

Taxable income = Operating income - Interest expense

Taxable income = $57,000 - $5,000

Taxable income ...

#### Solution Summary

This solution illustrates how to compute working capital, dividends, effective and average tax rate.