ACC 4302 Chapter 5 Solutions Fall 2016 - PROBLEMS 24(LO 1 4 Jon and Pam each have dividend income of \$80,000 cfw[\$100,000(accumulated E P

# ACC 4302 Chapter 5 Solutions Fall 2016 - PROBLEMS 24(LO 1 4...

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PROBLEMS 24.(LO 1, 4) Jon and Pam each have dividend income of \$80,000 {[\$100,000 (accumulated E & P) +\$60,000 (current E & P)] ÷ 2}. The dividend income will be subject to the reduced tax rate ondividends available to all individuals. The remaining \$40,000 of the \$200,000 distributionreduces the basis (\$20,000 each) in the shareholders’ stock with any excess treated as a capitalgain. Pam has a reduction in stock basis from \$11,000 to zero and a capital gain of \$9,000. Jonhas a reduction in stock basis from \$26,000 to \$6,000 (and no capital gain). 25.(LO 1, 2) 26.(LO 1, 2, 3) Sam reports a \$550,000 taxable dividend and a \$150,000 capital gain. The \$600,000gain on the sale of the land increases E & P by that amount. Although Silver Corporation’s totalE & P balance prior to the \$900,000 distribution is \$250,000 [\$600,000 (gain on sale) – \$300,000(accumulated deficit) – \$50,000 (current year deficit)], current E & P must be examined first.Current E & P before the distribution is \$550,000 [\$600,000 (gain on sale) – \$50,000 (currentyear deficit)]. This current E & P balance triggers dividend treatment for \$550,000 of thedistribution. Of the remaining \$350,000 distributed, \$200,000 is a tax-free recovery of capital and\$150,000 is taxed as capital gain (assuming Sam holds the Silver Corporation stock as aninvestment). As a result of the distribution, Sam’s stock basis is reduced to zero. The \$300,000deficit in accumulated E & P carries over to the beginning of the next tax year.27.(LO 2) Sparrow Corporation’s current E & P is computed as follows:Taxable income\$330,000Federal income tax liability paid(112,000)Tax-exempt interest income5,000Disallowed portion of meals and entertainment expenses (1,500)Life insurance premiums paid, net of increase incash surrender value (\$3,500 – \$700)(2,800)Proceeds from life insurance policy, net of cashsurrender value (\$130,000 – \$20,000)110,000Excess capital losses (\$ 13,000)Excess of MACRS depreciation over E & P (ADS)depreciation (\$26,000 – \$16,000)10,000Allowable portion of 2015 § 179 expenses (20% \$25,000)(5,000)Dividends received deduction (70% \$25,000) 17,500LIFO recapture adjustment10,000Installment sale gain(3,000)* continued