You are on page 1of 6

Chapter 10 Homework

Page 1 of 6

Student: ALYSHA PRUITT

Assignment: Chapter 10 Homework

Take Details
Assignment score: 100% Total Time spent: 13 hours, 27 minutes, 40 seconds Score for selected take: 100% (45/45) Time spent on selected take:

1. Correct answer: a reduction gain a reduction Your answer:

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

Problem 10-1 Amount of Dividend Income (LO. 1, 3) At the start of the current year, Blue Corporation (a calendar year taxpayer) holds accumulated E & P of $100,000. Blue's current E & P is $60,000. At the end of the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon. Their basis in the stock is $11,000 for Pam and $26,000 for Jon. How is the distribution treated for tax purposes? If an amount is zero, enter "0". Each shareholder has dividend income of $ 80000 . In addition, Pam has a reduction in stock basis to $ 0 and a capital gain of $ 9000 . Jon has a reduction in stock basis to $ 6000 .

http://cvg.cengagenow.com/ilrn/takeAssignment/viewAssignmentPrintableMain.do?takeI... 11/24/2013

Chapter 10 Homework

Page 2 of 6

2. Correct answer: 2014 Taxable income is increased Taxable income is reduced Taxable income is increased Taxable income is reduced Taxable income is reduced Taxable income is increased Your answer:

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

Problem 10-5 Effect of Selected Transactions in Adjusting Taxable Income (for Determining E & P) (LO. 2) In determining Blue Corporation's current earnings and profits (E & P) for 2013, how should taxable income be adjusted as a result of the following transactions? Select "Taxable income is increased", "Taxable income is reduced" or "No adjustment required" for each of the following. a. b. c. d. e. f. A capital loss carryover from 2013, fully used in 2014. Nondeductible meal expenses in 2013. Interest on municipal bonds received in 2013. Nondeductible lobbying expenses in 2013. Loss on a sale between related parties in 2013. Federal income tax refund received in 2013. 2014 Taxable income is increased Taxable income is reduced Taxable income is increased Taxable income is reduced Taxable income is reduced Taxable income is increased

3. Correct answer:

Your answer:

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

Problem 10-6 Amount of Dividend Income; Deficit in Current E & P with Positive Balance in Accumulated E & P (LO. 1, 3) Sparrow Corporation is a calendar year taxpayer. At the beginning of the current year, Sparrow has 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? Taxable dividend income in the amount of $ 10000 . Tax-free recovery of basis in the amount of $ 4000 . Capital gains in the amount of $ 6000 .

http://cvg.cengagenow.com/ilrn/takeAssignment/viewAssignmentPrintableMain.do?takeI... 11/24/2013

Chapter 10 Homework

Page 3 of 6

4. Correct answer:

Your answer:

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

Problem 10-12 Dividend Distribution; Effect on E & P (LO. 1, 3) Green Corporation (a calendar year taxpayer) had a deficit in accumulated E & P of $250,000 at the beginning of the current year. Its net profit for the period January 1 through July 30 was $300,000, but its E & P for the entire taxable year was only $40,000. If Green made a distribution of $60,000 to its sole shareholder on August 1, how will the shareholder be taxed? Assume the shareholder has a basis in the stock of $ 25,000. If an amount is zero, enter "0". The shareholder has dividend income of $ 40000 , return of capital of $ 20000 and capital gains of $ 0 .

5. Correct answer:

the entire reduced deficit ; Your answer:

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

Problem 10-13 Dividend Distribution; Effect on E & P (LO. 1, 3) Black Corporation and Tom each own 50% of Tan Corporation's common stock. On January 1, Tan holds a deficit in accumulated E & P of $200,000. Its current E & P is $90,000. During the year, Tan makes cash distributions of $40,000 each to Black and Tom. a. Black Corporation has dividend income of $ 40000 , of which only $ 8000 is taxed. Tom has dividend income of $ 40000 , for which he pays tax on the entire dividend at the reduced tax rates on dividends available. b. Tan's accumulated E & P deficit balance at the end of the year is $ 190000 .

http://cvg.cengagenow.com/ilrn/takeAssignment/viewAssignmentPrintableMain.do?takeI... 11/24/2013

Chapter 10 Homework

Page 4 of 6

6. Correct answer: does not ; Your answer:

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

Problem 10-15 Tax Treatment to Individual Shareholder and to Distributing Corporation of Property Subject to a Liability (LO. 1, 4) Lime Corporation, with E & P of $500,000, distributes land worth $300,000, (adjusted basis of $350,000) to Harry, its sole shareholder. The land is subject to a liability of $120,000, which Harry assumes. What are the tax consequences to Lime and to Harry? Harry has a taxable dividend of $ 180000 , and his basis in the land is $ 300000 . Lime Corporation does not recognize a loss on the distribution and reduces its E & P by $ 230000 .

7. Correct answer: The $25,000 dividend The $25,000 bonus The $25,000 bonus Your answer:

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

Problem 10-20 Choice Between Dividend and Deductible Payment (LO. 5) Robin Corporation would like to transfer excess cash to its sole shareholder, Adam, who is also an employee. Adam is in the 28% tax bracket, and Robin is in the 34% bracket. Because Adam's contribution to Robin's profit is substantial, Robin believes that a $25,000 bonus in the current year is reasonable compensation and should be deductible in full. However, Robin is considering paying Adam a $25,000 dividend because Adam's tax rate on dividends is lower than his tax rate on compensation. a. Regarding taxes, which would benefit Adam the most? The $25,000 dividend b. Regarding taxes, which would benefit Robin Corporation the most? The $25,000 bonus c. Considering the two parties together, which alternative would provide the most overall tax savings? The $25,000 bonus

http://cvg.cengagenow.com/ilrn/takeAssignment/viewAssignmentPrintableMain.do?takeI... 11/24/2013

Chapter 10 Homework

Page 5 of 6

8. Correct answer: taxable on the date of receipt. Your answer:

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

Problem 10-22 Basis of Taxable Preferred Stock Dividend (LO. 6) Ken purchased 10,000 shares of Gold Corporation common stock six years ago for $160,000. In the current year, Ken received a preferred stock dividend of 800 shares, while the other holders of common stock received a common stock dividend. The preferred stock that Ken received is worth $80,000, and his common stock has a fair market value of $240,000. Assume that Gold holds ample E & P to cover any distributions made during the year. The distribution of preferred stock is taxable to Ken, and his basis in the newly acquired shares is $ 80000 . The holding period of the preferred stock begins on the date of receipt.

9. Correct answer: ; ; Your answer:

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

Problem 10-26 Comparison of Tax Treatment of Dividend Distribution and Qualifying Stock Redemption to Individual Shareholder (LO. 1, 7) Julio is in the 35% tax bracket. He acquired 1,000 shares of stock in Gray Corporation seven years ago at a cost of $250 per share. In the current year, Julio received a payment of $500,000 from Gray Corporation in exchange for 600 of his shares in Gray. Gray has E & P of $1,000,000. What tax liability would Julio incur on the $500,000 payment in each of the following situations? Assume that Julio has no capital losses. a. The stock redemption qualifies for sale or exchange treatment. The tax liability would be $ 52500 . b. The stock redemption does not qualify for sale or exchange treatment. The tax liability would be $ 75000 .

$500,000 (amount realized) $150,000 (basis in the 600 shares redeemed at $250 per share) = $350,000 (long-term capital gain) 15% = $52,500 (For individual taxpayers, the maximum tax rate for long- term capital gains is currently 15 percent; 0 percent for taxpayers in the 10 or 15 percent marginal tax bracket) b. The payment does not qualify for stock redemption ( i. e., sale or exchange treatment is not applicable) treatment. Julios tax liability would be $75,000, computed as follows: $500,000 (dividend) 15% = $75,000

http://cvg.cengagenow.com/ilrn/takeAssignment/viewAssignmentPrintableMain.do?takeI... 11/24/2013

Chapter 10 Homework

Page 6 of 6

10. Correct answer: ; ; Your answer:

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

eBook

Problem 10-27 Comparison of Tax Treatment of Dividend Distribution and Qualifying Stock Redemption to Corporate Shareholder (LO. 1, 7) Julio is in the 34% tax bracket. He acquired 1,000 shares of stock in Gray Corporation seven years ago at a cost of $250 per share. In the current year, Julio received a payment of $500,000 from Gray Corporation in exchange for 600 of his shares in Gray. Gray has E & P of $1,000,000. Assume that Julio has no capital losses. What tax liability would Julio incur on the $500,000 payment in each of the following situations? If Julio were a corporate shareholder (in the 34% tax bracket) rather than an individual shareholder and the stock ownership in Gray Corporation represented a 15% interest? a. The payment qualifies for stock redemption (i.e., sale or exchange) treatment. $ 119000 b. The payment does not qualify for stock redemption (i.e., sale or exchange treatment is not applicable) treatment. $ 51000

$500,000 (dividend) 15% = $75,000. Example 1 40. How would your answer to Problem 39 differ if Julio were a corporate shareholder (in the 34% tax bracket) rather than an individual shareholder, and the stock ownership in Gray Corporation represented a 15% interest? (LO. 1) a. Tax liability for a corporate shareholder would be $119,000, computed as follows: $500,000 (amount realized) $150,000 (basis in the stock) = $350,000 (long-term capital gain) 34% = $119,000. Corporations do not receive a preferential tax rate on long-term capital gains. b. Tax liability for a corporate shareholder on a $500,000 dividend from a corporation in which it has a 15% interest would be $51,000, computed as follows: $500,000 (dividend) $350,000 [70% ( **dividends received deduction) $500,000] = $150,000 34% = $51,000.

http://cvg.cengagenow.com/ilrn/takeAssignment/viewAssignmentPrintableMain.do?takeI... 11/24/2013