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# chapter_5_solutions - 5-1Chapter 5 Solutions Corporations...

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Unformatted text preview: 5-1Chapter 5 Solutions Corporations: Earnings & Profits and Dividend Distributions (2012) updated: August 8, 2011 24. Sarah and Mason each have dividend income of \$200,000 {[\$240,000 (accumulated E & P) + \$160,000 (current E & P)] ÷ 2}. The dividend income will be subject to the reduced tax rate on dividends available to individuals. The remaining \$40,000 of the \$440,000 distribution reduces the basis (\$20,000 each) in the shareholders’ stock with any excess treated as a capital gain. Thus, Sarah reduces her \$8,000 stock basis to zero and has a capital gain of \$12,000, while Mason reduces his stock basis from \$32,000 to \$12,000 and has no income tax consequences. Example 1 25. a. Capon reports the \$600,000 dividend as gross income but claims a dividends received deduction under § 243 of \$420,000 (70% × \$600,000). None of the other items affect taxable income. Thus, taxable income is \$1,380,000 (\$1,200,000 taxable income before dividends + \$600,000 dividend – \$420,000 dividends received deduction). b. Capon Corporation’s E & P as of December 31 is \$2,240,000, computed as follows: \$400,000 (beginning balance in E & P) + \$1,380,000 (taxable income) + \$420,000 (dividends received deduction) + \$90,000 (tax-exempt interest) – \$50,000 (interest on indebtedness to purchase tax-exempt bonds). pp. 5-3 and 5-4 26. Robert 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, Robert’s stock basis is \$0. pp. 5-4, 5-9, and Examples 1 and 6 27. Sparrow Corporation’s current E & P is computed as follows: 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) Excess of MACRS depreciation over E & P depreciation (\$26,000 – \$16,000) 10,000 Allowable portion of 2010 § 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)** Current E & P \$331,133 *(\$14,000 organizational expenses/180 months) ×12 months **[(\$40,000 sales price – \$32,000 adjusted basis)/\$40,000 sales price] ×\$15,000 Concept Summary 5.1 5-228. Taxable Income E & P Increase 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...
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chapter_5_solutions - 5-1Chapter 5 Solutions Corporations...

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