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 Corporations 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, Roberts stock basis is $0. pp. 5-4, 5-9, and Examples 1 and 6 27. Sparrow Corporations 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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