Over the last five years, corporation A has been consistently profitable. Its earnings before taxes were as follows:
Year 1 2 3 4 5
Earnings $1,000 $2,800 $4,400 $5,100 $4,700
a. If the corporate tax rate was 25 percent, what were the firm’s income taxes for each year?
b. Unfortunately, in year 6 the firm experienced a major decline in sales, which resulted in a loss of $10,800. What impact will the loss have on the firm’s taxes for each year if the permitted carryback is two years?
