Question

3)Regarding the tax treatment of payments to securities holders; which of the following statements is completely true? The question is aimed at the PAYER of interest and/or dividends, not the recipient.

		interest paid is NOT tax-deductible; cash dividends paid to common stockholders are tax-deductible.
		interest paid is tax-deductible; cash dividends paid to common stockholders are also tax-deductible.
		interest paid is NOT tax-deductible; cash dividends paid to common stockholders are also NOT tax-deductible.
		interest paid is tax-deductible; but cash dividends paid to common stockholders are NOT tax-deductible.

4)Which of the following is a STRENGTH of the corporate form of organization? You are identifying a strength, not a weakness.

		Profits are subject to one level of taxation.
		Profits are subject to multiple levels of taxation.
		Owner faces LIMITED liability.
		Owner faces UNLIMITED liability.

Answer 1

ANSWER - 3

Correct Option: Option (d) : interest paid is tax-deductible; but cash dividends paid to common stockholders are NOT tax-deductible.

Explanation:

A borrowing cost on debt is a tax-deductable expense whioch means it is a Profit and Loss item which is shopwn as expense and hence the profits are reduced by the amount of interest expense. This saves the tax on the amount of Interest.

However, on the other hand, the cash dividends paid to stockholders is a profit and loss appropriation item and is not an expense for the company. Hence, there is no tax saving on such amount.

ANSWER-4

Correct Option: Option (c): Owners faces LIMITED liability

Explanation:

The reason is that the status of a corporation is different from its owners, in the eyes of law. Thos means that the corporation is a separate legal entity. Hence, sue to this, the liability of its owners are limited and the corporation is itself liable for all the contracts entered in its name.