American Corporation has two equal shareholders, Mr. Freedom and Brave, Incorporated. In addition to their investments in Americanstock, both shareholders have made substantial loans to American. During the current year, American paid $200,000 interest each toMr. Freedom and Brave, Incorporated. Assume that American and Brave have 21 percent tax rates, and Mr. Freedom's marginal tax rateon ordinary income is 37 percent.Required:a. Calculate American's tax savings from deduction of these interest payments and their after-tax cost.b. Calculate Brave's tax cost and after-tax earnings from its receipt of interest income from American.c. Calculate Mr. Freedom's tax cost and after-tax earnings from his receipt of interest income from American.e. Recalculate Brave's tax cost and after-tax earnings assuming its receipt of interest from American is treated as a constructivedividend.f. Recalculate Mr. Freedom's tax cost and after-tax earnings assuming his receipt of interest from American is treated as a constructivedividend. a. Tax savingsa. After-tax cost of interestb. Tax costb. After-tax earningsc. Tax costc. After-tax earningse. Tax coste. After-tax earningsf. Tax costf. After-tax earnings$$$$$$$$CAAmount84,000316,00042,000158,00074,000126,00014,700185,300

Dividends can be in the form of cash and non-cash such as stocks. However, a constructive dividend…

Answered: American Corporation has two equal…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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X Corp has $500 of book income. Included in the book income is $10 of dividends from a 10%-owned corporation and $20 of tax-exempt interest. What is the tax income reconciled to on Schedule M-1?
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