ACCT 730 – Week 1 Problem Set
Revenues, expenses, gains, and losses of an S corporation flow through to the
shareholders. Consequently, Andrew reports the $80,000 net profit and $10,000 long-
term capital loss on his individual tax return.
Shareholders of a C corporation are required to report the entity’s income only to the
extent of dividends received. Therefore, Andrew does not report Emu’s net profit or
capital loss on his individual return.
pp. 2-3 and 2-4
Azure Company, as a C corporation, has taxable income of $550,000 ($500,000
net operating income + $50,000 LTCG), and corporate income tax of $187,000
[$550,000 × 34% (see Exhibit 2.1)].
C corporations do not receive a preferential
tax rate with respect to LTCGs.
Since Sasha received no dividends or salary from
Azure during the year, she is not currently taxed on any the corporation’s income.
Since dividend distributions are not deductible, the income tax consequences to
Azure Company, a C corporation, are the same as in a. above (i.e., corporate
income tax of $187,000).
Sasha incurs income tax of $15,000 ($100,000 × 15%)
with respect to the dividends she received during the year.
The salary paid to Sasha is deducible by Azure Company, resulting in taxable
income of $450,000 ($400,000 net operating income + $50,000 LTCG), and
corporate income tax of $153,000 [$450,000 × 34% (see Exhibit 2.1)].
incurs income tax of $35,000 ($100,000 × 35%) with respect to the salary she