Last year, Shering Corporation had pretax earnings from operations of $493,000.
ID: 2814854 • Letter: L
Question
Last year, Shering Corporation had pretax earnings from operations of $493,000. In addition, it received $ 25,000 in income from interest on bonds it held in Zig Manufacturing and received $25,000 in income from dividends on its 6% 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?
Explanation / Answer
a)The firm's tax on its operating earings=$493000*21% =$103530
b)
Particulars Income from Interest(Interest Income)
Amount before tax $25000
less:applicable exclusion 0
Taxable Amount $25000
21% Tax $5250
Amount after tax($25000-$5250) $19750
c)
Particulars Income Received from dividend(Dividend Income)
Amount before tax $25000
less: applicable exclusion $12500 ($25000*50%)
Taxable Amount $12500
21% Tax $2625
Amount after tax($25000-2625) $22375
d)
According to part b and part c, the amount after tax of dividends received i.e. $22375 exceeds the amount after tax of interest income i.e. $19750 due to applicable exclusion of 50%.
e)
Particulars Amount
Tax on operating earning $103530
Tax on interest income $5250
Tax on dividend income $2625
Total Tax Liability(103530+5250+2625) $111405
FIRM'S TOTAL TAX LIABILITY =$111,405
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