Exercise 19-25 (Algorithmic) (LO. 4, 10)

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 $44,400 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying Aleshia a $44,400 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 $44,400 dividend because after taxes she would have $ from the dividend and $ from the bonus.

b. Regarding taxes, which would benefit Rover Corporation the most? The $25,000 bonus because it would save Rover $ in taxes.

c. Considering the two parties together, which alternative would provide the most overall tax savings? The $44,400 bonus because when the overall effect to both the corporation and the shareholder are considered the net tax savings is $ .