Week 5 ACCT 429 Practice Problems – Flashcards
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7. LO.2, 4 Seth, Pete, Cara, and Jen form Kingfisher Corporation with the following consideration: Consideration Transferred Basis to Transferor Fair Market Value Number of Shares Issued From Seth— Inventory $30,000 $96,000 30* From Pete— Equipment ($30,000 of depreciation taken by Pete in prior years) 45,000 99,000 30** From Cara— Proprietary process 15,000 90,000 30 From Jen— Cash 30,000 30,000 10 * Seth receives $6,000 in cash in addition to the 30 shares. ** Pete receives $9,000 in cash in addition to the 30 shares. Assume that the value of each share of Kingfisher stock is $3,000. As to these transactions, provide the following information: a. Seth's recognized gain or loss. Identify the nature of any such gain or loss. b. Seth's basis in the Kingfisher Corporation stock. c. Kingfisher Corporation's basis in the inventory. d. Pete's recognized gain or loss. Identify the nature of any such gain or loss. e. Pete's basis in the Kingfisher Corporation stock. f. Kingfisher Corporation's basis in the equipment. g. Cara's recognized gain or loss. h. Cara's basis in the Kingfisher Corporation stock. i. Kingfisher Corporation's basis in the proprietary process. j. Jen's recognized gain or loss. k. Jen's basis in the Kingfisher stock.
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7. a. $6,000 of ordinary gain. b. $30,000 [$30,000 (basis of inventory) + $6,000 (gain recognized) - $6,000 (boot received)]. c. $36,000 [$30,000 (basis of inventory) + $6,000 (gain recognized)]. d. Pete recognizes gain of $9,000 (the amount of cash received). The gain is ordinary income because of the § 1245 depreciation recapture provisions. e. Pete has a basis of $45,000 in the Kingfisher Corporation stock, computed as follows: $45,000 (basis in the equipment) + $9,000 (gain recognized) - $9,000 (boot received). f. Kingfisher Corporation has a basis of $54,000 in the equipment, computed as follows: $45,000 (basis of the equipment to Pete) + $9,000 (gain recognized by Pete). g. Cara has no recognized gain or loss. A proprietary process is property for purposes of § 351. h. Cara has a basis of $15,000 in the Kingfisher Corporation stock. i. Kingfisher Corporation has a basis of $15,000 in the proprietary process. j. Jen has no gain or loss on the transfer. k. Jen has a basis of $30,000 in the Kingfisher Corporation stock.
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13. LO.2, 4 Ann and Bob form Robin Corporation. Ann transfers property worth $420,000 (basis of $150,000) for 70 shares in Robin Corporation. Bob receives 30 shares for property worth $165,000 (basis of $30,000) and for legal services (worth $15,000) in organizing the corporation. a. What gain or income, if any, will the parties recognize on the transfer? b. What basis do Ann and Bob have in the stock in Robin Corporation? c. What is Robin Corporation's basis in the property and services it received from Ann and Bob?
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13. a. Ann does not recognize a gain. Bob recognizes ordinary income of $15,000, the value of the services he rendered to the corporation. Bob does not recognize gain on the transfer of property to the corporation. b. Ann has a basis of $150,000 in her stock, while Bob has a basis of $45,000 in his stock [$30,000 (basis in property transferred) + $15,000 (income recognized)]. c. Robin Corporation has a basis of $150,000 in the property Ann transferred and a basis of $30,000 in property Bob transferred. Robin Corporation capitalizes $15,000 as organizational expenditures.
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28. LO.7 In each of the following independent situations, determine the dividends received deduction. Assume that none of the corporate shareholders owns 20% or more of the stock in the corporations paying the dividends. (1)Almond Corporation (2)Blond Corporation (3)Cherry Corporation Income from operations (1)$ 700,000 (2)$ 800,000 (3)$ 900,000 Expenses from operations (1)(600,000) (2)(850,000) (3)(910,000) Qualifying dividends (1)100,000 (2)100,000 (3)100,000
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28. Following the procedure used in Example 25 in the text, proceed as follows: Almond Blond Cherry Corporation Corporation Corporation Step 1 (1)70% × $100,000 (dividend received) $70,000 (2)70% × $100,000 (dividend received) $70,000 (3)70% × $100,000 (dividend received) $70,000 Step 2 (1)70% × $200,000 (taxable income before DRD) $140,000 (2)70% × $50,000 (taxable income before DRD) $35,000 (3)70% × $90,000 (taxable income before DRD) $63,000 Step 3 Lesser of Step 1 or Step 2 (1)$70,000 (3)$63,000 Generates a net operating loss (use Step 1) (2)$70,000 Consequently, the dividends received deduction for Almond Corporation is $70,000 under the general rule. Blond Corporation also claims a dividends received deduction of $70,000 because a net operating loss results when the Step 1 amount ($70,000) is subtracted from 100% of taxable income before DRD ($50,000). Cherry Corporation, however, is subject to the taxable income limitation and is allowed only $63,000 as a dividends received deduction.
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36. LO.10 Dove Corporation, a calendar year C corporation, had the following information for 2014: Net income per books (after-tax) $386,250 Taxable income 120,000 Federal income tax per books 30,050 Cash dividend distributions 150,000 Unappropriated retained earnings as of January 1, 2014 796,010 Based on the above information, use Schedule M-2 of Form 1120 (see Example 50 in the text) to determine Dove's unappropriated retained earnings balance as of December 31, 2014.
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36. Dove's unappropriated retained earnings per books, as of December 31, 2014, is determined as follows: Balance at beginning of year $ 796,010 Plus: Net income (loss) per books 386,250 Subtotal $1,182,260 Minus: Cash dividend distributions (150,000) Balance at end of year $1,032,260
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37. LO.10 In the current year, Pelican, Inc., incurs $50,000 of nondeductible fines and penalties. Its depreciation expense is $245,000 for financial statement purposes and $310,000 for tax purposes. How is this information reported on Schedule M-3?
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37. Pelican, Inc., reports the fines and penalties on line 12, Part III as follows: book expense of $50,000 in column (a), permanent difference of ($50,000) in column (c), and tax return deduction of $0 in column (d). Further, PGW reports the depreciation on line 31, Part III as follows: book expense of $245,000 in column (a), temporary difference of $65,000 in column (b), and tax return deduction of $310,000 in column (d). This problem illustrates the Schedule M-3 reporting when book expenses are both more than and less than tax return deductions. It also illustrates the reporting of both temporary and permanent differences.
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6. LO.1, 3 Sparrow Corporation is a calendar year taxpayer. At the beginning of the current year, Sparrow holds accumulated E & P of $33,000. The corporation incurs a deficit in current E & P of $46,000 that accrues ratably throughout the year. On June 30, Sparrow distributes $20,000 to its sole shareholder, Libby. If Libby's stock has a basis of $4,000, how is she taxed on the distribution?
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6. Dividend income is $10,000, tax-free recovery of basis is $4,000, and capital gain is $6,000. To determine the amount of dividend income, the balances of both accumulated and current E & P as of June 30 must be netted because of the deficit in current E & P. As one-half of the loss (or $23,000) is deemed to have occurred through June 30, the $33,000 in accumulated E & P is reduced by the current E & P deficit through June 30 ($23,000). The $10,000 balance in E & P triggers dividend income for this portion of the distribution. The remaining $10,000 of the distribution is first a recovery of capital (reducing Libby's stock basis from $4,000 to zero) and then a $6,000 capital gain.
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7. LO.1, 3 Complete the following schedule for each case. Unless otherwise indicated, assume that the shareholders have ample basis in the stock investment. All taxpayers use a calendar tax year. Accumulated E & P Beginning of Year, Current E & P, Cash Distributions (All on Last Day of Year), Dividend Income, Return of Capital a. ($200,000) $ 70,000 $130,000 $________ $________ b. 150,000 (120,000) 210,000 ________ ________ c. 90,000 70,000 150,000 ________ ________ d. 120,000 (60,000) 130,000 ________ ________ e. Same as (d), except that the distribution of $130,000 is made on June 30. ________ ________
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7. Dividend Income, Return of Capital a. $ 70,000 $ 60,000 Taxed to the extent of current E & P. b. $ 30,000 $180,000 Accumulated E & P and current E & P netted on the date of distribution. c. $150,000 $ -0- Taxed to the extent of current and accumulated E & P. d. $ 60,000 $ 70,000 Accumulated E & P and current E & P are netted on the date of distribution. There is a dividend to the extent of any positive balance. e. $ 90,000 $ 40,000 When the result in current E & P is a deficit for the year, the deficit is allocated on a pro rata basis to distributions made during the year. On June 30, E & P is $90,000 [current E & P is a deficit of $30,000 (i.e., 1/2 of $60,000) netted with accumulated E & P of $120,000].
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11. LO.1, 3 At the beginning of the year, Teal Corporation held E & P of $225,000. On March 30, Teal sold an asset at a loss of $225,000. For the calendar year, Teal incurred a deficit in current E & P of $305,000, which includes the $225,000 loss on the sale of the asset. If Teal made a distribution of $50,000 to its sole shareholder on April 1, how is the shareholder taxed?
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11. The shareholder has a return of capital of $50,000. The $50,000 reduces the basis in the Teal Corporation stock; any excess over basis is capital gain. There is no dividend income because of the absence of E & P. On the date of the sale, E & P is a negative $20,000 [$225,000 (beginning balance in accumulated E & P) - $225,000 (existing deficit in current E & P from sale of the asset) - $20,000 (one-fourth of the $80,000 negative E & P not related to asset sale)]. Thus, the $50,000 distribution constitutes a return of capital. Generally, deficits are allocated pro rata throughout the year unless the parties can prove otherwise. Here the shareholder can prove otherwise. Note: If the $305,000 deficit in E & P were prorated throughout the year, there would have been a taxable dividend of $50,000 because E & P would have a positive balance of $148,750 at the date of distribution [$225,000 (beginning balance in accumulated E & P) - $76,250 (one-fourth the $305,000 deficit for the year)].
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19. LO.5 Parrot Corporation is a closely held company with accumulated E & P of $300,000 and current E & P of $350,000. Tom and Jerry are brothers; each owns a 50% share in Parrot, and they share management responsibilities equally. What are the tax consequences of each of the following independent transactions involving Parrot, Tom, and Jerry? How does each transaction affect Parrot's E & P? a. Parrot sells an office building (adjusted basis of $350,000; fair market value of $300,000) to Tom for $275,000. b. Parrot lends Jerry $250,000 on March 31 of this year. The loan is evidenced by a note that is payable on demand. No interest is charged on the loan (the current applicable Federal interest rate is 7%). c. Parrot owns an airplane that it leases to others for a specified rental rate. Tom and Jerry also use the airplane for personal use and pay no rent. During the year, Tom used the airplane for 120 hours, and Jerry used it for 160 hours. The rental value of the airplane is $350 per hour, and its maintenance costs average $80 per hour. d. Tom leases equipment to Parrot for $20,000 per year. The same equipment can be leased from another company for $9,000 per year.
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19. a. The result of this transaction is a realized loss of $50,000 (the difference between basis of $350,000 and fair market value of $300,000) and a constructive dividend of $25,000 (the difference between the $300,000 fair market value and the $275,000 paid for the office building). Due to the application of § 267, Parrot cannot recognize the realized loss but it does reduce E & P. The constructive dividend also reduces E & P. Thus, E & P is reduced by $75,000 (the sum of the $50,000 disallowed loss and the $25,000 constructive dividend). b. The loan to Jerry generates imputed interest since no interest was charged. The amount of imputed interest is $13,125 ($250,000 × 7% × 3/4 year) and that amount is deemed paid as interest to the corporation. The deductibility of the interest by Jerry depends on how the loan proceeds are used. Parrot has taxable interest income of $13,125 and is deemed to pay a dividend to Jerry equal to the amount of interest. Parrot's E & P is increased by the amount of interest income and reduced by the amount of deemed dividend payment. c. Bargain rentals create constructive dividends to shareholders. In the present case, the amount of constructive dividends to both Tom and Jerry equals the fair rental value of the airplane. Thus, Tom has $42,000 (120 hours × $350 hourly rental rate) of dividend income and Jerry has dividend income of $56,000 (160 hours × $350 hourly rental rate). Parrot's E & P is reduced by the same amounts. d. The $11,000 excess amount ($20,000 - $9,000) paid to Tom by Parrot over the fair rental value of the equipment is treated as a constructive dividend taxable to Tom and reduces Parrot's E & P.
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1. LO.2 Charles has a tentative general business credit of $42,000 for the current year. His net regular tax liability before the general business credit is $107,000, and his tentative minimum tax is $88,000. Compute Charles's allowable general business credit for the year.
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1. Charles's allowable general business credit for the year is limited to $19,000, determined as follows: Net income tax $107,000* Less: The greater of: $88,000 (tentative minimum tax) $20,500 [25% × ($107,000 ? $25,000)] (88,000) Amount of general business credit allowed $ 19,000 *Net income tax = $107,000 (regular tax liability) + $0 [alternative minimum tax ($88,000 tentative minimum tax ? $107,000 regular tax liability)] ? $0 (nonrefundable credits).
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2. LO.2 Oak Corporation holds the following general business credit carryovers. 2010 $ 5,000 2011 15,000 2012 6,000 2013 19,000 Total carryovers $45,000 If the general business credit generated by activities during 2014 equals $36,000 and the total credit allowed during the current year is $60,000 (based on tax liability), what amounts of the current general business credit and carryovers are utilized against the 2014 income tax liability? What is the amount of the unused credit carried forward to 2015?
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2. 2014 general business credit $36,000 Total credit allowed (based on tax liability) $60,000 Less: Utilization of carryovers on FIFO basis 2010 (5,000) 2011 (15,000) 2012 (6,000) 2013 (19,000) Remaining credit allowed $15,000 Applied against 2014 general business credit (15,000) 2014 unused amount carried forward to 2015 $21,000 Therefore, the sources of the $60,000 general business credit allowed in 2014 are the carryovers of $45,000 from the four previous years and $15,000 of the $36,000 general business credit generated in 2014. Because unused credits may be carried over for up to 20 years, the carryovers from each of the four previous years may be utilized.
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4. LO.2 In January 2013, Iris Corporation purchased and placed into service a 1933 building that houses retail businesses. The cost was $300,000, of which $25,000 applied to the land. In modernizing the facility, Iris Corporation incurred $312,000 of renovation costs of the type that qualify for the rehabilitation credit. These improvements were placed into service in October 2014. a. Compute Iris Corporation's rehabilitation tax credit for 2014. b. Calculate the cost recovery deductions for the building and the renovation costs for 2014.
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4. a. The rehabilitation expenditures credit is 10% of $312,000, or $31,200. b. Cost recovery of building [$300,000 - $25,000 (land)] × 2.564% $7,051 Plus: Cost recovery of improvements Cost of improvements $312,000 Less: Rehabilitation expenditures credit (31,200) Depreciable basis $280,800 Cost of recovery of improvements ($280,800 × 0.535%) 1,502 Total cost recovery for the year $8,553
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9. LO.2 Tom, a calendar year taxpayer, informs you that during the year, he incurs expenditures of $40,000 that qualify for the incremental research activities credit. In addition, it is determined that his research-credit base amount for the year is $32,800. a. Determine Tom's incremental research activities credit for the year. b. Tom is in the 25% tax bracket. Determine which approach to the research expenditures and the research activities credit (other than capitalization and subsequent amortization) would provide the greater tax benefit to Tom.
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9. a. Qualified research expenditures for the year $40,000 Less: Base amount (32,800) Incremental research expenditures $7,200 Tax credit rate × 20% Incremental research activities credit $1,440 b. The tax benefit of Tom's choices is determined as follows: Choice 1: Reduce the deduction by 100% of the credit and claim the full credit. $40,000 (qualified expenditures) ? $1,440 (credit) $38,560 Tax rate × 25% Tax benefit of reduced deduction $ 9,640 Plus: Allowed credit 1,440 Total tax benefit of Choice 1 $11,080 Choice 2: Claim the full deduction and reduce the credit by the product of 100% of the credit times 35% (the maximum corporate rate). Deduction (qualified expenditures) 40,000 Tax rate × 25% Tax benefit of full deduction $10,000 Plus: Reduced credit: $1,440 ? [(100% × $1,440) × 35%] 936 Total tax benefit of Choice 2 $10,936 Thus, Choice 1 provides Tom a greater tax benefit of $144 ($11,080 ? $10,936).
