Question

Interest versus dividend income Last year, Shering Corporation had pretax earnings from operations of $484,000. In addition, it received $20,000 in income from interest on bonds it held in Zig Manufacturing and received $20,000 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 year? a. The tax on operating earnings is $ . (Round to the nearest dollar.) b. Complete the table below to compute the tax and the after-tax amount attributable to the interest income: (Round to the nearest dollar.) Interest Income Before-tax amount Less: Applicable exclusion Taxable amount Tax (21%) After-tax amount c. Complete the table below to compute the tax and the after-tax amount attributable to the dividend income: (Round to the nearest dollar.) Dividend Income Before-tax amount Less: Applicable exclusion Taxable amount Tax (21%) After-tax amount d. Compare, contrast, and discuss the after-tax amounts resulting from the interest income and dividend income calculated in parts b. and C. (Select all the choices that apply.) A. The after-tax amount of dividends received, $17,900, exceeds the after-tax amount of interest, $15,800, due to the 50% corporate dividend exclusion. B. The after-tax amount of dividends received, $15,800, exceeds the after-tax amount of interest, $17,900, due to the 50% corporate dividend exclusion. C. Since the after-tax amount of interest exceeds the after-tax amount of dividends, this increases the attractiveness of stock investments by one corporation in another relative to bond investments. D. Since the after-tax amount of dividends exceeds the after-tax amount of interest, this increases the attractiveness of stock investments by one corporation in another relative to bond investments. e. The total tax liability for the year is $ . (Round to the nearest dollar.)

Answer 1

- $ 20,000 Solution : - shering corporation Pretar cernings from operations - $484,000 Income from interest on bonds : $ 20,000 Income from dividend on 54. Common Stock in Tanic Industries Inc Tax bracket = 217 Eligible for 50 7. dividend exclusion on its Tank industries stock . (a) calculation of firm's tax on its operating earnings only: . Firm's tax = $484000 4214.. = $ 101,640 Note: Dividend and Interest Income are non-operating Income.. (b) Computation of tax and after tax amount afist attributable to the Interest Income: Interet Income Before tax amount $ 20,000 less :- Applicable exclusion Tarable amount $ 20,000 4,200 Tax (311) $ 15,800 After tax amount.

after tax amount $ 20,000 ? computation of tax and the atinibutable to dividend Income: Dividend Income Before tax amount less :- Applicable exclusioni (50 %) Taxable amount Tax @ 214. After-tax amount 10,000 $10000 (2.100) $ 7,900 (d) compare , contrast and did cold the after tax cimount's rubulting from the Interest income and dividend In cemie calculated in part (b) and (0) the after the amount of dividend Received $7,800 (0) Since the after tax amount of Interest ($15800) exceeds the after tax amount of civickend 1$ 7,900) This Increases the attractiveness of stock Investment by cspåration in another relative to bond Investments . (d) Total Tax liability Tay liability on operating Income - $ 101,640 Dat liability on internet In comme - $ 15,800 Tax liability on dividend Income - $ 7,900 $125340