Interest versus dividend income During the year just ended, $30,000 in income fr

Question

Interest versus dividend income During the year just ended, $30,000 in income from interest on bonds i held in Zig Manufacturing and recelved $30,000 in income from dividends on its the 40% tax bracket and is eligible for a 70% didend edusion on its Tank industries stock a. Calculate the firm's tax on its operating earnings only b. Find the tax and the ater-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? year it 4% co on stock holdn n Ta k l dismes, i c S ings n a. The tax on operating earnings is s(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 (40%) , After-tax amount

Explanation / Answer

Solution: A. The firm’s tax on its operating earnings only 194,400 Working Notes: The firm’s tax on its operating earnings = Operating earnings x tax rate =$486,000 x 40% =$194,400 B. Interest Income Before-tax amount 30,000 Less: Applicable exclusion 0 Taxable amount 30,000 Tax @ 40% 12000 After-tax amount 18,000 Working Notes: Interest Income Before-tax amount 30,000 a Less: Applicable exclusion 0 b [exclusion in case of dividend income only] Taxable amount 30,000 c=a-b Tax @ 40% 12000 d [30,000 x 40% ] After-tax amount 18,000 e=c-d C. Dividend Income Before-tax amount 30,000 Less: Applicable exclusion 21000 Taxable amount 9,000 Tax @ 40% 3600 After-tax amount 26,400 Working Notes: Dividend Income Before-tax amount 30,000 a Less: Applicable exclusion 21000 b [$30,000 x 70%] Taxable amount 9,000 c=a-b Tax @ 40% 3600 d [9,000 x 40% ] After-tax amount 26,400 e=a-d [30,000 - 3,600] D. After-tax amount of dividend income $26,400 After-tax amount of Interest income $18,000 After tax amount of dividend income is much higher than the after tax amount of interest income, due to the 70% corporate dividend exclusion, As a result , Investment in Stock seems more beneficial than that of investment in Bond. E. The firm’s total tax liability for the year 210,000 Working Notes: Taxes on operating earnings 194,400 see calculation in a. above Taxes on interest income 12,000 see calculation in b. above Taxes on dividend income 3,600 see calculation in c. above Total tax liability 210,000 Please feel free to ask if anything about above solution in comment section of the question.

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