Question

1. Company G is a corporation that has a 45% tax rate and a 15% dividend income tax rate for its shareholders. If the income before tax of the company is $8,000 and $2,000 is distributed to shareholders as dividends. a. What is the corporate tax liability of the company? b. What is the dividend income tax liability of shareholders?
2. Assume that Corporation G is an S-corporation. a. What will be the corporate tax liability of the company? b. What is the dividend income tax liability of shareholders?
3. If a company has $20,000 earnings after tax (EAT): a. How much is the retained earnings amount if 86% is given as dividend to shareholders? b. What is the earning per share if there are 20 shareholders with ten shares each?

Answer 1

PART 1

a) Corporate tax liability = Income before tax*Tax rate

= 8000*45%= $3600

b) Dividend income tax liability of shareholders= Dividend received by shareholders* Tax rate

= 2000*15%= $300

PART 2:

a) Corporate tax liability = 0 since Corporation G is an S-corporation.

b) Dividend income tax liability of shareholders=Corporate income* Individual Tax rate

= 8000*15% = 1200

PART 3:

EAT= 20000

a) Retained earning= EAT*(1-dividend rate)

= 20000*(1-86%) = $2800

b) Earnings per share= Net Income/Shares outstanding

= 20000/ (20*10)

= $100