Tom and Bob Are Equal Shareholders of a Profitable Company

question 7

Multiple Choice

Tom and Bob are equal shareholders of a profitable company which earns only active business income. The company is growing and dividend payouts are increasing. The two men have heard that 'holding corporations' might suit their needs. Which of the following would apply if they each created a holding corporation, each of which owned 50% of the company?

• A) Dividends received by the holding corporations from the operating company must be invested in the same ventures.
• B)The holding corporations would receive the dividends from the operating company, free of tax, to be invested in Tom's and Bob's separate choices.
• C) The establishment of holding corporations would allow Tom and Bob to access the profits of the operating company for personal use without paying a second level of tax.
• D) Dividends would flow from the operating company to Tom and Bob, and then to the holding corporations.

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Definitions:

Other Comprehensive Income

Components of comprehensive income that are not part of net income, including items that have not yet been realized as cash, such as unrealized gains or losses on investments.

Amortized Cost

Amortized cost refers to the accounting practice of gradually writing off the initial cost of an asset over its useful life or the repayment period of a loan.

Equity Securities

Equity securities are financial instruments that signify an ownership interest in a company or entity and may provide income through dividends or the potential for capital gains.