Question

  Last​ year, Shering Corporation had pretax earnings from operations of$ 490,000. 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?

Answer 1

a. Operating earnings = 490,000

Tax on operating earnings = 0.21*490,000 =102,900

b. Interest income = 20,000

Tax on interest income = 0.21*20,000 = 4,200

After-tax amount attributable to the interest income from Zig Manufacturing bonds = 20,000-4,200 = 15,800

c. Dividend Income = 20,000

Since there is a 50% dividend exclusion, taxable dividends = 20,000*0.5 = 10,000

Tax on dividends = 0.21*10,000 = 2,100

After-tax amount attributable to the dividend income from the Tank​ Industries, Inc., common stock. = 20,000-2,100 = 17,900

d. Interest income is fully taxable and hence the after tax interest amount is 15,800. The dividend is taxed only on 50% and hence the after tax dividend amount = 17,900

e. Total tax liability = 102,900+4,200+2,100 = $109,200