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spring 07 solution - ACCOUNTANCY 321 Spring 2007 EXAM II...

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ACCOUNTANCY 321 Spring, 2007 EXAM II - Solution I. A. 1) Dividends-Received Deduction Based upon Howard’s 40% ownership of taxable domestic corporations, only 80% of dividends received will be deductible. Thus, $ 200,000 will be included in dividend income and $ 160,000 (80% of $ 200,000) will be the dividends-received deduction. 2) Charitable Contributions A “C” Corporation is allowed to deduct a maximum of 10% of taxable income before certain deductions (charitable contributions deduction, dividends-received deduction and net operating loss carrybacks and capital loss carrybacks) in a given tax year. Any excess is carried forward for up to five years. The appropriate tests of deductibility will be applied for the subsequent years. 3) Net capital loss A “C” corporation is not allowed to deduct a net capital loss. Instead, it must carry back for up to three years and offset the loss against capital gains in those years. If some net capital loss still remains, the corporation may carry forward the remainder for up to five years, again offsetting capital gains in those years. If a corporation does not have enough capital gains to offset the net capital loss within this eight year window, then any remaining net capital loss expires unused. Thus, Howard will be able to offset the $ 60,000 of short-term capital gains with $ 60,000 of long-term capital losses from 2006. The capital loss carryforward from 1995 has expired. 4) Dividends paid Dividends paid to shareholders are not deductible.
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B. Gross Profit on Sales $900,000 Dividend Income 200,000 Cash operating expenses (350,000) Depreciation expense (110,000) Long-term capital loss (85,000) Short-term capital gain 60,000 ----0---- TAXABLE INCOME BEFORE SPECIAL DEDUCTIONS $640,000 C.
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