Question

Exercise 19-23 (Algorithmic) (LO. 4, 10) Rover Corporation would like to transfer excess cash to its sole shareholder, Aleshla, who is also an employee. Aleshia is in the 24% tax bracket, and Rover is subject to a 21% rate. Because Aleshia's contribution to the business is substantial, Rover believes that a $99,600 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying Aleshia a $99,600 dividend because the tax rate on dividends is lower than the tax rate on compensation. Answer the following questions to determine whether Rover is correct in believing that a dividend is the better choice. a. Regarding taxes, which would benefit Aleshia the most? The $99,600 dividend ✓ because after taxes she would have $ bonus. from the dividend and X from the b. Regarding taxes, which would benefit Rover Corporation the most? The $99,600 bonus ✓ because it would save Rover $ in taxes C. Considering the two parties together, which alternative would provide the most overall tax savings? The $99,600 bonus because when the overall effect to both the corporation and the shareholder are considered the net tax savings is

Answer 1

a. The $99,600 dividend because after taxes she would have $79,680 from the dividend and $77,688 from the bonus.

b. The $99,600 bonus because it would save Rover $21,912.

c. The $99,600 bonus because when the overall effect to both the corporation and the shareholder are considered the net tax savings is $21912