Problem: Interest versus Dividend Income
Last year, Shering Corporation had pretax earnings of $485,000. In addition, during the year it received $30,000 in income from interest on bonds it held in Zig Manufacturing and received $30,000 in income from dividends on its 6% common stock holding in Tank Industries, Inc. Shering faces a flat 21% tax rate and is eligible for a 50% dividend exclusion on its Tank Industries stock.
I. Calculate the firm's tax on its operating earnings only.
II. Find the tax and the after-tax amount attributable to the interest income from Zig Manufacturing bonds.
III. Find the tax and theafter-tax amount attributable to the dividend income from the Tank Industries, Inc., common stock.
IV. Compare, contrast, and discuss the after-tax amounts resulting from the interest income and dividend income calculated in parts II and III.
V. What is thefirm's total tax liability for the year?