HW4 - 1 Chapter C4:Corporate Nonliquidating Distributions...

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Unformatted text preview: 1 Chapter C4:Corporate Nonliquidating Distributions Homework Solution C4-28 a. Gross profit from operations $250,000 Dividends 20,000 Interest 10,000 Net capital gain ($8,000 - $1,200) 6,800 Gross income $286,800 Minus: Administrative expenses $110,000 Bad debt expense 5,000 Depreciation 86,000-201,000 85,800 Charitable contribution [lesser of $8,000 or 0.10 x ($85,800 - $40,000)]-4,580 $81,220 Dividends-received deduction (0.80 x $20,000)-16,000 NOL deduction-40,000 Taxable income $ 25,220 Earnings and profits: Taxable income 25,220 Plus: Municipal bond interest 12,000 Life insurance proceeds 100,000 Excess depreciation ($86,000 - $42,000) 44,000 NOL carryover 40,000 Dividends-received deduction 16,000 212,000 Minus: Excess charitable contribution ($8,000 - $4,580)-3,420 Penalties-450 Taxes ($25,220 x 0.15) 3,783-7,653 Current earnings and profits $229,567 C4-30 Beginning of 1996: ($10,000) (The $2,000 distribution is a return of capital and does not affect E&P.) Beginning of 1997: ($6,000) [($10,000) + ($8,000 - $4,000)] Beginning of 1998: ($11,000) [($6,000) + ($5,000)] Beginning of 1999: $2,000 [($11,000) + ($18,000 - $5,000)] Accumulated Current E&P E&P Stock Cash 1995 10,000 2,000 2,000 10,000 10,000 10,000 1996 8,000 4,000 4,000 4,000 4,000 6,000 1997 5,000 5,000 5,000 11,000 1998 18,000 5,000 5,000 13,000 13,000 2,000 2 C4-31 a. $60,000 dividend to Edna. DR Cash 60,000 CR Income 60,000 b. $25,000 is a dividend to Edna. $25,000 is a return of capital which reduces Edna's basis to zero; the excess $10,000 is taxable as a capital gain. DR Cash 60,000 CR Income 25,000 CR Stock 25,000 CR LTCG 10,000 c. Yellow's accumulated E&P as of March 1 (of a non-leap year) is $65,000 - [($36,500 / 365) x 59] = $59,100. Therefore, $59,100 is taxable as a dividend. $900 is a return of capital which reduces Edna's stock basis to $24,100. DR Cash 60,000 CR Income 59,100 CR Stock 900 d. $25,000 is a return of capital which reduces Edna's basis to zero; the excess $35,000 is taxable as a capital gain. DR Cash 60,000 CR Stock 25,000 CR LTCG 35,000 C4-32 a. Indiv. Date Amount Current E&P Accumulated E&P Dividend Return of Capital Charles Donald Total 3/1 9/1 $ 60,000 90,000 $150,000 $16,000 24,000 $40,000 $30,000 -0- $30,000 $46,000 24,000 $70,000 $14,000 66,000 $80,000 Thus, Charles has $46,000 of dividend income and a $14,000 return of capital which reduces his basis for the Pearl stock from $80,000 to $66,000. The basis reduction increases Charles's capital gain on the sale to $59,000 [$125,000 - ($80,000 - $14,000)]. Donald has a $24,000 dividend and a $66,000 return of capital which reduces his stock basis at year-end from $125,000 to $59,000. b. Indiv. Date Amount Current E&P Accumulated E&P Dividend Return of Capital Charles Donald Total 3/1 9/1 $ 60,000 90,000 $150,000 $ 40,000 60,000 $100,000 $ -0- -0- $ -0- $ 40,000 60,000 $100,000 $20,000 30,000 $50,000 The return of capital distributions reduce Charles' basis in his Pearl stock from $80,000 to $60,000 and Donald's basis from...
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This note was uploaded on 02/08/2009 for the course ACCOUNTING ACC 579 taught by Professor Smith during the Spring '08 term at University of Phoenix.

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HW4 - 1 Chapter C4:Corporate Nonliquidating Distributions...

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