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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 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?
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