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 $490,000. In addition, during the year 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 40% tax bracket and is eligible for a 70% dividend exclusion on its Tank Industries stock.

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.
e. What is the firm's total tax liability for the year?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part B:

Amount of Tax = $8000

After Tax Amount = $12000

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Part B:

Interest Amount 20000 Less: Applicable exclusion (70000*20%) 0 Taxable Amount 20000 Tax (20000*40%) 8000 After Tax Amount 12000

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