Assume that Western Exploration Corp. is considering the acquisition of Ogden Drilling Company. The latter has a \(470,000 tax loss carryforward. Projected earnings for the Western Exploration Corp. are as follows: 20X1 20X2 20X3 Total Values Before-tax income ................................. \)185,000 \(250,000 \)370,000 \(805,000 Taxes (35%) ........................................... 64,750 87,500 129,500 281,750 Income available to stockholders .......... \)120,250 \(162,500 \)240,500 $523,250. How much will the total taxes of Western Exploration Corp. be reduced as a result of the tax loss carryforward? b. How much will the total income available to stockholders be for the three years if the acquisition occurs? Use the same format as that in the text.

Step by step solution

01

Step-by-Step-SolutionStep 1: Calculation of reduction in total tax

(a) Reduction in total tax is calculated as follows:

$$\begin{gathered} \mathbf{Reduction}\mathbf{}\mathbf{in}\mathbf{}\mathbf{Total}\mathbf{}\mathbf{Taxes}\mathbf{=}\mathbf{Tax}\mathbf{}\mathbf{Loss}\mathbf{}\mathbf{Carryforward}\mathbf{\times }\mathbf{Tax}\mathbf{}\mathbf{Rate} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{470}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{35}\mathbf{\%} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{164}\mathbf{,}\mathbf{500} \end{gathered}$$

02

Calculation of income available to stockholders

(b) Income available to stockholders is calculated as follows:

	20X1	20X2	20X3	Total Values
Before tax income	$185,000	$250,000	$370,000	$805,000
Tax loss carry forward	185,000	250,000	35,000	470,000
Net taxable income	0	0	335,000	335,000
Taxes (35%)			117,250	117,250
Income available to stockholders (Before tax income – Tax)			$252,750	$687,750

Thus, income available to stockholders is $687,750.

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