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Waypine's 2015 Strategy Options

Waypine Enterprises reported a pretax operating loss of $84,000 in 2014 and recognized a $6,000 tax benefit. In 2015, management anticipates $60,000 in pretax income in the first six months. Additional income or loss depends on one of three strategies pursued in the second quarter. The strategies involve existing operations with new units or investments, or building a new research center. The effective tax rate for the first six months of 2015 depends on the strategy chosen.

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Muhammad Shahid
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35 views1 page

Waypine's 2015 Strategy Options

Waypine Enterprises reported a pretax operating loss of $84,000 in 2014 and recognized a $6,000 tax benefit. In 2015, management anticipates $60,000 in pretax income in the first six months. Additional income or loss depends on one of three strategies pursued in the second quarter. The strategies involve existing operations with new units or investments, or building a new research center. The effective tax rate for the first six months of 2015 depends on the strategy chosen.

Uploaded by

Muhammad Shahid
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Waypine Enterprises reported a pretax operating loss of 84

000 in #6263
Waypine Enterprises reported a pretax operating loss of $84,000 in 2014, its first year of
operations, and recognized a tax benefit of $6,000, based on the assumption that $40,000 of
the loss could be offset against future pretax income. Management anticipates that there will be
pretax operating income in the first six months of 2015 of $60,000 traceable to existing
operations. However, additional income (loss) for the year is dependent on which of several
strategies the company begins to pursue in the second quarter of 2015. Those strategies are as
follows:Strategy A-Existing operations would generate pretax income of $30,000 for the balance
of the year and a new operating unit would begin operations in the second quarter of 2015, with
projected pretax operating income (loss) of ($85,000), ($40,000), and ($20,000) for 2015
quarters 2 through 4, respectively. It is more likely than not that the operating units would
generate pretax operating income of $30,000 in each of the next two years.Strategy B-Existing
operations would generate pretax loss of ($30,000) for the balance of the year and a 40%
interest would be acquired in a limited liability company (LLC). The 40% interest would result in
Waypine recognizing pretax income (loss) of ($40,000), $16,000, and $20,000 for 2015 quarters
2 through 4, respectively. It is likely that Waypine would recognizepretax operating income of
$30,000 in 2016, traceable to this investment. Furthermore, it isanticipated that Waypine would
dispose of its 40% interest in late 2016, resulting in a recognized gain of approximately
$35,000.Strategy C-Existing operations would generate pretax income of $30,000 for the
balance of the year and construction would begin on a new research and development (R&D)
center. The R&D center would become operational in the third quarter of 2015 and generate net
licensing pretax income of $50,000 in 2015, along with income tax credits of $5,000.Assume
that the statutory tax rates in 2015 are 15% on the first $50,000 of income, 25% on the next
$50,000 of income, and 30% on all remaining income. Calculate the estimated effective tax rate
to be applied to income in the first six months of 2015, given each of the above strategies.View
Solution:
Waypine Enterprises reported a pretax operating loss of 84 000 in

ANSWER
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