Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of ordinary shares:
A) The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax.
B) Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible.
C) A corporation must pay tax on the sales price of shares issued, but is not taxed on the amount received when bonds are issued.
D) Both interest and dividends paid are deductible in computing taxable income, but since interest must be paid annually, the corporation usually gets a larger tax deduction over the life of the bonds payable.

Question

Quizplus · Accepted Answer

Bonds offer a tax advantage because interest payments are deductible in determining income subject to corporate income tax; whereas, dividends are not deductible. This means that the corporation can reduce its taxable income by deducting the interest paid on bonds, leading to lower tax liabilities.

Choose the Statement That Correctly Summarizes the Tax Advantage of Raising