GB-530: Corporate Finance

Hard Assignment 1
The Bookbinder Company had $500,000 cumulative operating losses prior to the
beginning of last year. It had $100,000 in pre-tax earnings last year before using the past
operating losses and has $300,000 in the current year before using any past operating
losses. It projects $350,000 pre-tax earnings next year.

a. How much taxable income was there last year? How much, if any, cumulative
losses remained at the end of the last year?
Taxable income last year: Taxable income = Pre-tax earnings - Cumulative operating losses
Taxable income = $100,000 - $500,000 = -$400,000 Since the taxable income cannot be
negative, the answer is $0.
Cumulative losses at the end of last year: Cumulative losses = Cumulative operating losses -
Taxable income Cumulative losses = $500,000 - $0 = $500,000

b. What is the taxable income in the current year? How much, if any, cumulative
losses remain at the end of the current year?
Taxable income in the current year: Taxable income = Pre-tax earnings - Cumulative operating
losses Taxable income = $300,000 - $500,000 = -$200,000 Again, the taxable income cannot be
negative, so the answer is $0.
Cumulative losses at the end of the current year: Cumulative losses = Cumulative operating
losses - Taxable income Cumulative losses = $500,000 - $0 = $500,000

c. What is the projected taxable income for next year? How much, if any, cumulative
losses are projected to remain at the end of next year?
Projected taxable income for next year: Taxable income = Pre-tax earnings - Cumulative
operating losses Taxable income = $350,000 - $500,000 = -$150,000 Once again, the taxable
income cannot be negative, so the answer is $0.
Cumulative losses projected to remain at the end of next year: Cumulative losses = Cumulative
operating losses - Taxable income Cumulative losses = $500,000 - $0 = $500,000 Therefore, the
answers are: - Taxable income last year: $0 - Cumulative losses at the end of last year: $500,000
- Taxable income in the current year: $0 - Cumulative losses at the end of the current year:
$500,000 - Projected taxable income for next year: $0 - Cumulative losses projected to remain at
the end of next year: $500,000