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Exercise 5-17 (Algorithmic) (LO. 4, 8)


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 $99,600 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying Aleshia a $99,600 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 $99,600 __________ because after taxes she would have $__________ from the dividend and $__________ from the bonus.


b. Regarding taxes, which would benefit Rover Corporation the most?

The $99,600 __________ because it would save Rover $__________ in taxes.


c. Considering the two parties together, which alternative would provide the most overall tax savings?

The $99,600 __________ because when the overall effect to both the corporation and the shareholder are considered the net tax savings is $__________.

Top Answer

a.The $99,600 dividends because after taxes she would have $79,680 from dividends and $75,696... View the full answer

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