Mr Longwood and Mrs Kennett are the equal shareholders in LK Corporation. Both shareholders have a 37 percent marginal tax rate on ordinary income. LK's financial records show the following:
Gross income from sales $ 875,000
Operating expenses (420,000 )
Interest paid on debt to shareholders (75,000 )
Dividend distributions:
Mr Longwood (50,000 )
Mrs Kennett (50,000 )
a. Compute the combined tax cost for LK, Mr Longwood, and Mrs Kennett attributable to LK's operations.
b. How would your computation change if the interest on the shareholder debt was $175,000 and LK paid no dividends?

Question

Mr Longwood and Mrs Kennett are the equal shareholders in LK Corporation. Both shareholders have a 37 percent marginal tax rate on ordinary income. LK's financial records show the following:
Gross income from sales $ 875,000 
Operating expenses (420,000 )
Interest paid on debt to shareholders (75,000 )
Dividend distributions: 
Mr Longwood (50,000 )
Mrs Kennett (50,000 )
a. Compute the combined tax cost for LK, Mr Longwood, and Mrs Kennett attributable to LK's operations. 
b. How would your computation change if the interest on the shareholder debt was $175,000 and LK paid no dividends?

Quizplus · Accepted Answer

The Answer of Mr Longwood and Mrs Kennett are the equal shareholders in LK Corporation. Both shareholders have a 37 percent marginal tax rate on ordinary income. LK's financial records show the following:
Gross income from sales $ 875,000 
Operating expenses (420,000 )
Interest paid on debt to shareholders (75,000 )
Dividend distributions: 
Mr Longwood (50,000 )
Mrs Kennett (50,000 )
a. Compute the combined tax cost for LK, Mr Longwood, and Mrs Kennett attributable to LK's operations. 
b. How would your computation change if the interest on the shareholder debt was $175,000 and LK paid no dividends?

Mr Longwood and Mrs Kennett Are the Equal Shareholders in LK