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Interest versus dividend income

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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 firms 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.

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Solution Summary

This solution illustrates how to compute a corporation's tax on its operating earnings, interest income, and dividend income.

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a. Calculate the firms tax on its operating earnings only.

After-tax earnings = Pre-tax earnings * (1-tax rate)
After-tax earnings = $490,000 * (1-.40)
After-tax earnings = $294,000

b. Find the tax and the after- tax amount attributable to the interest income from Zig Manufacturing bonds.

Tax on bond interest = Bond interest ...

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