Chapter 5 Problems for Tax

Chapter 5 Problems for Tax - CHAPTER 5 PROBLEMS (solutions)...

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CHAPTER 5 PROBLEMS (solutions) 24. 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 25. 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. 5-3 and 5-4 26. 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. 5-4, 5-9, and Examples 1 and 6 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] **{[($40,000 sales price – $32,000 adjusted basis)/$40,000 sales price] × $15,000}
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Concept Summary 5.1 28. 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, they are
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This note was uploaded on 05/16/2011 for the course MBA 778 taught by Professor Waynetanna during the Spring '10 term at Chaminade University.

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Chapter 5 Problems for Tax - CHAPTER 5 PROBLEMS (solutions)...

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