Uniontown Books began operating in 2011. The company lost money its first three years of operations, but has had an operating profit during the past two years. The company's operating income (EBIT) for its first five years was as follows: Year EBIT 2011 -$2,200,000 2012 -$2,000,000 2013 -$1,000,000 2014 $1,200,000 2015 $7,000,000 The company has no debt, and therefore, pays no interest expense. Its corporate tax rate has remained at 34% during this 5-year period. What was Uniontown's tax liability for 2015

$1,020,000

Explanation:

Uniontown's tax liability for 2015 will be calculated thus:

Firstly, we'll calculate the loss to be adjusted in 2015 which will be:

2011 = $1,000,000

2012 = $2,000,000

2013 = $1,000,000

Total = $4,000,000

The profit after the adjustment of loss will be:

= EBIT in 2015 - Adjusted loss

= $7,000,000 - $4,000,000

= $3,000,000

Since Corporate tax rate is 34%, then. The tax liability for 2015 will be:

= $3,000,000 × 34%

= $1,020,000

Therefore, Uniontown's tax liability for 2015 is $1,020,000.

Note that from the total loss of $2,200,000 in 2011, $1,000,000 is adjusted in later years as $1,200,000 is adjusted in 2014.

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