- Son, Inc., and Clef, Inc., are both taxable domestic C corporations.
Using the information in the below, enter either the correct amount or holding period (in number of months) for each item in the below Table.
| Adjusted Basis as of August 31, 2019, Immediately before the distribution | ||
| Asset | Clef’s Adjusted Basis | Date of Purchase |
| Building* | $250,000 | 31-Aug-15 |
| Computer | 30,000 | 31-Aug-15 |
| Piano | 10,000 | 31-Aug-15 |
| Keyboard | 4,000 | 31-Aug-15 |
*Subject to a 175,000 mortgage. Clef has claimed allowable depreciation on the building using the straight-line method.
Fair Market Value as of August 31, 2019, Immediately before the distribution
| Asset | Fair Market Value |
| Building | $550,000 |
| Computer | 25,000 |
| Piano | 15,000 |
| Keyboard | 3,000 |
The following balances are as of January 01, 2019
| Party | # of Clef Shares Owned | Basis in Clef shares | Accumulated Earnings and Profits |
| Son, Inc. | 800 | $200,000 | – |
| Dawn* | 200 | $50,000 | – |
| Clef, Inc. | – | – | $10,000 |
*Dawn owned none of the outstanding shares of Son.
Note: Please show calculation.
3. Basis of the building = Fair market value-adjusted value=550000-25000=300,000
Son basis of the building =300000-mortgage=300000-175000
=125,000
5. ownership can be apportioned based on shares. Thus, the total share contribution is $250,000. Son and dawn can be said to have ownership ratio of 4: 1
If the total to be distributed $593,000 ech should receive 0.8*593000=474,400 an Dawn to receive 0.2*593,000=118600
Dwan received piano, keyboard and cash =15,000+3000+82000=$100,000. There loss suffered =118600-100000=18600
For each item, enter the appropriate amounts in the associated cells. If the amount is zero, enter a zero (0).
| Item | Answer |
| Loss recognized by Clef, Inc., on the distribution of the computer =$25,000-$30,000=-$5,000 | |
| Gain recognized by Clef, Inc., on the distribution of the concert piano =$15,000-$10,000 = $5,000 | |
| Son, Inc.’s basis in the building =$550,000-$250,000 =$300,000 Less the mortgage =$300,000-$175000 =$125,000 | |
| Son, Inc.’s basis in the computer =$25,000-$30,000 =$5,000 | |
| Dawn’s gain or loss recognized on the distribution of the piano, keyboard, and cash Total share contribution=$200,000+$50,000=$250,000Total assets to be distributed at market value=550,000+25000+15000+3000=593,0000Share in the ratio of share =4:1Dawn was to receive=593000*1/5=118,600Amount received=15000+3000+82000=100,000=$100,000-$118,600=-$18,600 | |
| Dawn’s holding period for the piano on December 31, 2019 Holding period =number of years *months=4*12=48months | |
| Dawn’s holding period for the keyboard on December 31, 2019 Holding period =number of years *months=4*12=48months |
2-
Quest, Inc., is a calendar-year, accrual-basis C corporation engaged in manufacturing. The Year 2 transactions from Quest’s financial statements and tax records are provided. Enter the amounts to be reflected on Schedule M-1, Reconciliation of Income (Loss) per Books with Income per Return, as an adjustment to calculate federal taxable income in the associated cells below. Each transaction should be considered independently of the others. Enter increases to net income per books as positive, whole values and decreases to net income per books as negative, whole values using a leading minus (-) sign. If the amount is zero, enter a zero (0).
Year 2 net income per books = $632,000
Note: please show the calculation
| Year 2 transactions | Adjustment to calculate federal taxable income |
| 1.MACRS depreciation $224,000 Sec. 179 deduction 16,000Book depreciation 200,000=224000-200,000=24,000-16000=+8000 | |
| 2. Quest declared and paid a $40,000 cash dividend in June, Year 2, and declared a $30,000 cash dividend in December, Year 2, payable in January, Year 3.Reason: Dividend paid from net income does not negate the fact that the firm made profit.It is an indication of the how it wishes to share the profit and since it is not a must to issue dividends, they are returns and goodwill to investors. Dividend in preferred stock are deducted since they are required to be paid. | |
| 3. $30,000 of cash contributions were paid in Year 2, and $10,000 of charitable contributions (approved by the board of directors) to qualifying organizations were accrued at the end of Year 2 and paid on the extended tax return filing date.Reason: contribution to charitable organization is deducted thus does not affect the net taxable amount | |
| 4. Ordinary gain on the sale of fully depreciated office equipment to a 60% shareholder:Gain recorded per books $8,000 Gain calculated for tax purposes 2,000 Reason; Sale of asset to shareholder is allowed and should match the market value.This gain from the sale of fully depreciated asset act as income to the company thus needto be added back for tax purposes | |
| 5. Gains (losses) on sales of investments in public companies recorded for book and tax purposes:May 1 $(4,000)June 2 7,000 Sept 4 (8,000)Reason :Just as gain has effect to the net income so is a loss on a asset at a loss. It has the effect of lowering the amount to be taxed overall.=-4000+7000-8000=-5000 | |
| 6. Ordinary gains (losses) on sales of property to a 25% shareholder recorded for book and tax purposes:Jan 15 $ 6,000 May 15 (4,000)July 16 (8,000)Sept 25 2,000 =+6000+-4000+-8000+2000=-4000The total transaction will result to loss of -4000 from the sales to shareholder. The net effect to the taxable amount is that it will reduce by-4000. Loss in disposing asset lowers taxable amount | -4000 |
3
For each item below, use the option list provided to indicate (1) whether the following items will adjust net income per books to compute taxable income and (2) whether any adjustment will be an increase or decrease in net income per books. Select “N/A” if there is no adjustment. Each choice may be used once, more than once, or not at all.
Note: Please show calculation and fill the cells.
| Item | Adjustment? | Increase/Decrease |
| $87,000 of straight-line depreciation on a corporation’s books. Depreciation reported on their tax return was $74,000.Reason: Net income to decrease with 13000 less tax | Adjust | Decrease |
| 2. Interest income from Treasury and commercial bonds. | Adjust | increase |
| 3. A corporation had $56,000 of capital losses and $63,000 of capital gains. | Adjust | Increase |
| 4. Charitable contributions equal to $33,000. Taxable income without regard to the contributions was $299,000. | N/A | N/A |
| 5. Federal income tax paid. | Adjust | Decrease |
| 6. Life insurance proceeds received upon the death of key personnel. The amount received was less than the premiums paid on the insurance policy. | N/A | N/A |
4. For each of the following transactions, determine the amount and character of the gain or loss. For each item, enter the appropriate amount in the associated cell in the amount column. If the amount is zero, enter a zero (0). Then, select from the option list provided the character of the gain or loss. Each choice may be used once, more than once, or not at all.
Note: Please show the calculation.
| Transaction | Amount | Character |
| 1. Sale of 1,000 shares of XYZ common stock purchased on 10/15/18 for $20,000 and sold on 2/15/19 for $23,000. | gain | |
| 2. Sale of 2,000 shares of ABC common stock purchased on 3/23/19 for $125,000 and sold on 12/31/19 for $139,000. | gain | |
| 3. Sale of van purchased on 1/25/18 for $10,000 and sold on 6/03/19 for $9,000. | loss | |
| 4. Sale of land purchased on 06/30/03 for $110,000 and sold on 7/04/19 for $169,000. | Gain | |
| 5. $45,000 of insurance recovery received from a 5-year-old building that was destroyed in a fire. The building was used in a business, had a FMV of $65,000, and an adjusted basis of $50,000. | $5,000 | Loss |
- Gain
Shares 1,000 puchased for $20,000=
Ssold for 23,000
Gain 3,000
- 2000
Purchase price 125,000
Sold for 139,000
- Sale of van
Purchased at $10,000
Less selling price 9,000
Loss $1,000
- Sale of land
Purchase price $110,000
Less from Selling price $165,000
gain $55,000
- Fair market value $65,000
Insurance cover $45,000
Adjustment basis $50,000
Loss $45,000-5,000
$5,000
5
In Year 4, Alaska is a C corporation. Accumulated earnings and profits (acc. E&P) at the end of Year 3 were $61,000. Current earnings and profits (E&P) for Year 4 are $24,000. During Year 4, Alaska made two distributions on the dates indicated in the first half of the table below. Allocate the distributions indicated in the second column among current E&P, accumulated E&P at 12/31/Year 3, and excess distribution.
Underwood, a 20% shareholder in Alaska, has a stock basis of $700 at the beginning of Year 4. Complete the second half of the table to indicate the characterization of the Alaska distributions to Underwood during Year 4.
For each item, enter the appropriate amounts in the associated cells. If the amount is zero, enter a zero (0) or leave the cell blank. If no amount is required, enter a zero (0). Round answers to the nearest dollar.
Note: Please show your calculation
| Distribution Dates | Distribution Amounts | Current E&P | Accumulated E&P at 12/31/Year 3 | Excess Distribution |
| 3/31/Year 4 | $58,000 | |||
| 9/30/Year 4 | $33,000 | |||
| Totals | $91,000 | $61,000.00 | $6,000.00 | |
| $24,000.00 | ||||
| Underwood’s Total Distribution | Underwood’s Dividend Income | Underwood’s Return of Capital | Underwood’s Capital Gain | |
| ?? |
Please let me know if you need more information.
Accumulated earnings at 31/12/ year 3 = $61,000
Accumulated earnings at 31/12/ year 4 = $24,000
Distribution made on 3/31 / year 4 $58,000
The amount remaining $61,000 – $58,000 = $$3,000
Underwood total dividend income 58,000×20/100 + 24,000 x 20/100= $16,400
Retun on capital – 16,400 /700 = 23,42
