Mr. Longwood and Mrs. Kennett are the equal shareholders in LK Corporation. Both shareholders have a 39.6 percent marginal tax rate on ordinary income. LK's financial records show the following: $$\begin{array} { l l }
\text { Gross income from sales } & \$ 875,000 \
\text { Operating expenses } & 420,000 \
\text { Interest paid on debt to shareholders } & ( 75,000 ) \
\text { Dividend distributions: } & \
\quad \text { Mr. Longwood } & ( 50,000 ) \
\text { Mrs. Kennett } & ( 50,000 )
\end{array}$$ 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 39.6 percent marginal tax rate on ordinary income. LK's financial records show the following: $$\begin{array} { l l } 
\text { Gross income from sales } & \$ 875,000 \
\text { Operating expenses } & 420,000 \
\text { Interest paid on debt to shareholders } & ( 75,000 ) \
\text { Dividend distributions: } & \
\quad \text { Mr. Longwood } & ( 50,000 ) \
\text { Mrs. Kennett } & ( 50,000 )
\end{array}$$ 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 39.6 percent marginal tax rate on ordinary income. LK's financial records show the following: $$\begin{array} { l l } 
\text { Gross income from sales } & \$ 875,000 \
\text { Operating expenses } & 420,000 \
\text { Interest paid on debt to shareholders } & ( 75,000 ) \
\text { Dividend distributions: } & \
\quad \text { Mr. Longwood } & ( 50,000 ) \
\text { Mrs. Kennett } & ( 50,000 )
\end{array}$$ 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 A Compute the Combined Tax Cost for LK, Mr