Chapter 19 Solutions

Chapter 19 Solutions - PROBLEMS 30. Tammy and Mark each...

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PROBLEMS 30. Tammy and Mark each have dividend income of \$100,000 {[\$120,000 (accumulated E & P) + \$80,000 (current E & P)] ÷ 2}. The dividend income will be subject to the 15%/0% tax rates on dividends. The remaining \$20,000 of the \$220,000 distribution reduces the basis (\$10,000 each) in the shareholders’ stock with any excess treated as a capital gain. Thus, Tammy reduces her stock basis to zero and has a capital gain of \$6,000, while Mark reduces his stock basis from \$16,000 to \$6,000 and has no income tax consequences. Example 1 31. a. Indigo reports the \$300,000 dividend as taxable income but claims a dividends received deduction under § 243 of \$210,000 (70% × \$300,000). None of the other items affect taxable income. Thus, taxable income is \$690,000 (\$600,000 taxable income before dividends + \$300,000 dividend – \$210,000 dividends received deduction). b. Indigo Corporation’s E & P as of December 31 is \$1,120,000, computed as follows: \$200,000 (beginning balance in E & P) + \$690,000 (taxable income) + \$210,000 (dividends received deduction) + \$45,000 (tax- exempt interest) – \$25,000 (interest on indebtedness to purchase tax- exempt bonds). pp. 19-3 and 19-4 32. Oren reports a \$500,000 taxable dividend and a \$300,000 capital gain. The \$600,000 gain on the sale of the land increases current E & P. Current E & P before the distribution is \$500,000 [\$600,000 (gain on sale) – \$100,000 (current year deficit)]. The current E & P balance triggers dividend treatment for \$500,000 of the distribution. Of the remaining \$450,000 distributed, \$150,000 is a tax-free recovery of basis and \$300,000 is taxed as capital gain. After the distribution, Oren’s stock basis is \$0. pp. 19-4, 19-9, and Examples 1 and 6 33. Taxable income \$330,000 Federal income tax liability (112,000) Interest income from tax-exempts 5,000 Disallowed portion of meals and entertainment expenses (1,500) Life insurance premiums paid, net of increase in cash surrender value (\$3,500 – \$700) (2,800) Proceeds from life insurance policy, net of cash surrender value (\$130,000 – \$20,000) 110,000 Excess capital losses (13,000) depreciation (\$26,000 – \$16,000) 10,000 Allowable portion of 2009 § 179 expenses (20% × \$100,000) (20,000) Organizational expense amortization 933* Dividends received deduction (70% × \$25,000) 17,500 LIFO recapture adjustment 10,000 Installment sale gain (3,000 ) ** \$331,133 *[(\$14,000 organizational expenses/180 months) × 12 months]

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**{[(\$40,000 sales price – \$32,000 adjusted basis)/\$40,000 sales price] × \$15,000} Concept Summary 19.1 34. Taxable Income Increase (Decrease) (Decrease) a. \$20,000 No effect b. (\$36,000) \$33,900* c. No effect \$140,000 d. \$9,000 \$21,000** e. (\$60,000) \$60,000 f. (\$60,000) \$48,000*** g. No effect (\$12,000) h. (\$90,000) (\$10,000) †† i. No effect (\$50,000) *Although mining exploration costs are deductible in full under the income tax,
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This note was uploaded on 04/11/2011 for the course ACCT 422 taught by Professor Poliski during the Spring '11 term at Lake Superior State University.

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Chapter 19 Solutions - PROBLEMS 30. Tammy and Mark each...

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