Problem 19-48 (Algorithmic) (LO. 4)

Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $264,500 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is considering substituting a dividend for the bonus.

Assume that the tax rates are 28% for Kristen and 34% for Egret Corporation. If an amount is zero, enter "0".

a. How much better off would Kristen be if she were paid a dividend rather than salary? If Kristen were paid a bonus, her after-tax effect would be $_____________________. If Kristen receives a dividend rather than salary, the after-tax effect would be $________________. Thus, she would be better off by receiving the ___________(Bonus/Dividend) .

b. How much better off would Egret Corporation be if it paid Kristen a salary rather than a dividend? The net after-tax cost of the bonus for Egret Corporation would be $_________________.

What amount of taxes does Egret Corporation save if the distribution is deemed a dividend? $____________________

Therefore, Egret would be better off by paying the _________________(BONUS/DIVIDEND) .

c. If Egret Corporation were to pay Kristen a salary bonus of $343,850 instead of a $264,500 dividend, Kristen would receive $______________ after tax. The bonus would cost Egret Corporation $_____________ after tax.

d. Should the $343,850 bonus be paid or the $264,500 dividend distributed?

Both Egret Corporation and Kristen are better off with the _____________(BONUS/DIVIDEND).