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# Working capital, dividends, effective and average tax rate

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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
________
Operating income \$ 57
Interest expense 5
Income tax expense 19
Net income \$ 33
=======
At December 31, 2010:
Assets
Cash and short-term investments \$ 31
Accounts receivable, net 42
Property, plant, and equipment, net 124
Total assets \$ 197
========
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
========

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.

\$2.19