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BUSI 355 Practice Examination Chapters 5, 6, & 7
Question 1 –This will be a good final examination review question; this material will not be on the midterm. Edith Cleaver earns income in excess of $200,000 each year. She is married to Paul Smith and has two children, Michael, age 20, and Judy, age 14. Edith has heard about income splitting and is thinking of transferring shares of RW Ltd., a public corporation, to her husband and children so that dividends may be paid to them in the future. She acquired 100 common shares of RW Ltd. in 2000 for $ 10,000. She wants to give 35 shares to her husband and 20 shares each to her two children. The FMV of the 100 shares is currently $ 2,000,000. Required (15 marks) Explain to Edith the tax consequences for herself, her husband, and her children, of the gift of the shares to each member of her family. State the immediate tax consequences and what the tax consequences would be when dividends are paid on the shares, and when the shares are eventually sold by Judy, Michael, and Paul. Show all your calculations. Question 2 The following information is taken from the financial statements and audit working papers of Eastside Environmental Solutions Inc. (“EESI”) for its fiscal year ended December 31, 2019. Eastside Environmental Solutions Inc. Condensed Unaudited Income Statement For the Year Ended December 31, 2019 Sales $16,650,000 Cost of goods sold (14,050,000) Gross profit $2,600,000 Selling expenses $975,000 General and administrative expenses 195,000 (1,170,000) Net income before provision for income taxes $1,430,000 Provision for income taxes —current $220,000 —future 310,000 (530,000) Net income after tax $900,000 Included in sales for the year is a deposit of $8,200 received from a customer for goods that will be delivered next year.