Last year, Shering Corporation had pretax earnings from operations of$ 490,000.
ID: 2819079 • Letter: L
Question
Last year, Shering Corporation had pretax earnings from operations of$ 490,000. Inaddition, 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?
Explanation / Answer
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
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