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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
    Advertising expense 27
    ________
    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 _____________

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    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

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