Interest versus dividend income During the year just ended S

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. a. Calculate the firm\'s tax on its operating eamings 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? a. The tax on operating earnings is(Round to the nearest dollar.) 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 c. Complete the table below to compute the tax and the after-tax amount attributable to the dividend income: (Round to the nearest dollar.) Dividend Income Before-tax amount

Solution

1) tax on operating earning = operating earning × applicable tax rate

= $490000×40%

=$196000

2) After tax interest income

Before tax interest income =. $20000

Less : Applicable exclusion=. NIL

Taxable amount =. $20000

Tax (40%)=. $ 8000

After tax interest income =. $ 12000

3) after tax dividend income

Before tax dividend income =. $20000

Less Applicable exclusion. ($20000×70%). =. $ 14000

Taxable dividend. =. $6000

Tax(40%) =. $2400

After tax income. = $17600

4) b

5) total tax liability

Tax on operating income = $196000

Tax on interest income = $ 8000

Tax on dividend income. = $ 2400

Total tax liability. = $206400