Exercise 19-26 (Algorithmic) (LO. 4, 10) Rover Corporation would like to transfer excess cash to its sole shareholder, Aleshia, who is also an employee. Aleshia is in the 24% tax bracket, and Rover is subject to a 21% rate. Because Aleshia's contribution to the business is substantial, Rover believes that a $94,800 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying Aleshia a $94,800 dividend because the tax rate on dividends is lower than the tax rate on compensation. Answer the following questions to determine whether Rover is correct in believing that a dividend is the better choice. a. Regarding taxes, which would benefit Aleshia the most? The $94,800 dividend from the bonus. because after taxes she would have $ 80,580 from the dividend and 72,048 b. Regarding taxes, which would benefit Rover Corporation the most? The $25,000 bonus because it would save Rover 5,250 in taxes. c. Considering the two parties together, which alternative would provide the most overall tax savings? The $94,800 bonus because when the overall effect to both the corporation and the shareholder are considered the net tax savings is $
Exercise 19-26 (Algorithmic) (LO. 4, 10) Rover Corporation would like to transfer excess cash to its sole shareholder, Aleshia, who is also an employee. Aleshia is in the 24% tax bracket, and Rover is subject to a 21% rate. Because Aleshia's contribution to the business is substantial, Rover believes that a $94,800 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying Aleshia a $94,800 dividend because the tax rate on dividends is lower than the tax rate on compensation. Answer the following questions to determine whether Rover is correct in believing that a dividend is the better choice. a. Regarding taxes, which would benefit Aleshia the most? The $94,800 dividend from the bonus. because after taxes she would have $ 80,580 from the dividend and 72,048 b. Regarding taxes, which would benefit Rover Corporation the most? The $25,000 bonus because it would save Rover 5,250 in taxes. c. Considering the two parties together, which alternative would provide the most overall tax savings? The $94,800 bonus because when the overall effect to both the corporation and the shareholder are considered the net tax savings is $
Chapter5: Corporations: Earnings & Profits And Dividend Distributions
Section: Chapter Questions
Problem 17CE
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Transcribed Image Text:Exercise 19-26 (Algorithmic) (LO. 4, 10)
Rover Corporation would like to transfer excess cash to its sole shareholder, Aleshia, who is also an employee. Aleshia is in the 24% tax
bracket, and Rover is subject to a 21% rate. Because Aleshia's contribution to the business is substantial, Rover believes that a $94,800
bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying
Aleshia a $94,800 dividend because the tax rate on dividends is lower than the tax rate on compensation.
Answer the following questions to determine whether Rover is correct in believing that a dividend is the better choice.
a. Regarding taxes, which would benefit Aleshia the most?
The $94,800 dividend
from the bonus.
because after taxes she would have $
80,580
from the dividend and
72,048
b. Regarding taxes, which would benefit Rover Corporation the most?
The $25,000 bonus
because it would save Rover
5,250
in taxes.
c. Considering the two parties together, which alternative would provide the most overall tax savings?
The $94,800 bonus
because when the overall effect to both the corporation and the shareholder are considered the net tax
savings is $
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