Company G, which has a 30 percent marginal tax rate, owns a controlling interest in Company J, which has a 21 percent marginal tax rate. Both companies perform engineering services. Company G is negotiating a contract to provide services for a client. Upon satisfactory completion of the services, the client will pay $85,000 cash. Compute the after-tax cash from the contract assuming that Company G is the party to the contract and provides the services to the client. Compute the after-tax cash from the contract assuming that Company J is the party to the contract and provides the services to the client. Compute the after-tax cash from the contract assuming that Company J is the party to the contract, but Company G actually provides the services to the client.

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TomShelby TomShelby · Answer 1 · 2019-09-17T19:06:42+02:00

Answer:

Company G

tax expense 25,500

after tax income 59,500

Company J

tax expense 17,850

after-tax income 67,150

Explanation:

under company G the tax income will be as follow:

income x tax-rate = tax income expense

85,000 x 30% = 25,500

then, we subtract the tax expense to get the after-tax income

85,000 - 25,500 = 59,500

For Company J we do the same but with a rate of 21%

85,000 x 21% = 17,850

85,000 - 17,850 = 67,150