Interest versus dividend income During the year just ended, Shering Distributors

Question

Interest versus dividend income During the year just ended, Shering Distributors, Inc, had pretax earnings from operations of $485,000. In addition, during the year it received $25,000 n income rom interest on bondst held i,2g Manufacturing and received S25000 n ncome from, dvidends on ts 5% common stock hoang n lak i d es inc m the 34% tax bracket and is eligible for a 70% 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 atributable to the interest income from Zig Manufacturing bonds c. Find the tax and the after-tax amount attributable to the dvidend income from the Tank Industries, Inc, common stock est . compare, contrast and discuss the after-tax amounts resulting trom the interest income and dividend ncome caculated in pats band e. What is the firm's total tax liability for the year? a. The tax on operating earnings is (Round to the nearest dolar) 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 (34%) After-dax amount

Explanation / Answer

Solution:- a) Calculation of tax on operating income:- Firm tax = Pre tax operating earning *Tax rate =$485,000*34% =$164,900 Hence the firm tax on operating income is $164,900 b) Calcuation of tax and after tax income attributable to interest income Partiulars Amount Interest income before tax $25,000 Less:- Applicable exclusion $0 Taxable income $25,000 Less:-tax @34% $8,500 After tax income $16,500 Hence the tax on interest income is $8,500 and after tax income is $16,500. c) Calcuation of tax and after tax income attributable to dividend income Partiulars Amount Interest income before tax $25,000 Less:- Applicable exclusion (70%) $17,500 Taxable income $7,500 Less:-tax @34% $2,550 After tax income before exclusion $4,950 Add:-Excuusion $17,500 After tax income $22,450 Hence the tax on dividend income is $2,550 and anter tax income is $22,450. d) Even the interest and dividend received are equal , but after tax dividend income is much higher because of exclusion of 70% dividend income from tax. e) Form's total tax liablity for the year Particulars Amount Tax on operating income $164,900 Tax on interest income $8,500 Tax on dividend income $2,550 Total tax $175,950 Please feel free to ask if you have any query in the comment section.

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