Question

Interest versus dividend income Last year, Shering Corporation had pretax earnings from operations of $484,000. In addition, it received $29,000 in income from interest on bonds it held in Zig Manufacturing and received $29.000 in income from dividends on its 5% common stock holding in Tank Industries, Inc. Shering is in the 21% tax bracket and is eligible for a 50% dividend exclusion on its Tank Industries stock. a. Calculate the firm's tax on its operating earnings only. b. Find the tax and the after-tax amount attributable to the interest income from Zig Manufacturing bonds. c. Find the tax and the after-tax amount attributable to the dividend income from the Tank Industries, Inc., common stock. d. Compare, contrast, and discuss the after-tax amounts resulting from the interest income and dividend income calculated in parts b. and c. e. What is the firm's total tax liability for the vear?

Answer 1

A. Calculation of firms tax on its Operating Earnings only:

$484000*0.21 tax rates=$101640

B. Calculation of tax and the after tax amount attributable to the interest income from Zig Manufacturing bonds:

Interest income

Before-tax amount =$29,000

Less: Applicable exclusion =0

Taxable amount =29,000

Tax (21%) =6090

After-tax amount    =22910

C. Calculation of tax and the after tax amount attributable to the dividend income from Tank Industries INC Common stock.

Dividend income

Before-tax amount =$29,000

Less: Applicable exclusion =14,500(0.50 x $29,000)

Taxable amount =14500

Tax (21%) =3045

After-tax amount =11455

D. Compare, contrast, and discuss the after-tax amounts resulting from the interest income and dividend income calculated in parts b and c.

The after-tax amount of dividends received, $11455, exceeds the after-tax amount of interest, $22910, due to the 50% corporate dividend exclusion. This increases the attractiveness of stock investments by one corporation in another relative to bond investments.

E. The firm’s total tax liability for the year:

Taxes on operating earnings (from a.) $101640

Taxes on interest income (from b.) + 6090

Taxes on dividend income (from c.) + 3045

Total tax liability = $110775