ACCT 421 - CH 8 - Exam 2
Wildcat Corporation reportsa deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $100,000. Wildcat distributed $300,000 to its sole shareholder on December 31, 20X3. How much of the distribution is treated as a dividend in 20X3?
$0
Longhorn Company reports current E&P of $100,000 in 20X3 anda deficit of ($200,000) in accumulated E&P at the beginning of the year. Longhorn distributed $300,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $100,000. How is the distribution treated by the shareholder in 20X3?
$100,000 dividend, $100,000 tax-free return of basis, and $100,000 capital gain
Husker Corporation reportsa deficit in current E&P of ($200,000) in 20X3 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, 20X3. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in 20X3?
$100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain
Aztec Company reports current E&P of $200,000 in 20X3 anda deficit of ($100,000) in accumulated E&P at the beginning of the year. Aztec distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?
$200,000
Inca Company reportsa deficit in current E&P of ($100,000) in 20X3 and accumulated E&P at the beginning of the year of $200,000. Inca distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?
$200,000
Bruin Company reports current E&P of $200,000 in 20X3 and accumulated E&P at the beginning of the year of $100,000. Bruin distributed $400,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?
$300,000
Beaver Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in 20X3?
$300,000 dividend and $100,000 tax-free return of basis
Grand River Corporation reported taxable income of $500,000 in 20X3 and paid federal income taxes of $170,000. Not included in the computation was a disallowed meals and entertainment expense of $2,000, tax-exempt income of $1,000, and deferred gain on a current-year transaction treated as an installment sale of $25,000. The corporation's current E&P for 20X3 would be:
$354,000.
Madison Corporation reported taxable income of $400,000 in 20X3 and accrued federal income taxes of $136,000. Included in the computation of taxable income was regular depreciation of $200,000 (E&P depreciation is $60,000) and a net capital loss carryover of $20,000 from 20X2 utilized in 20X3. The corporation's current E&P for 20X3 would be:
$424,000.
Au Sable Corporation reported taxable income of $800,000 in 20X3 and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and a federal income tax refund from 20X2 of $50,000. Au Sable is an accrual-basis taxpayer. The corporation's current E&P for 20X3 would b
$603,000.
Packard Corporation reported taxable income of $1,000,000 in 20X3 and paid federal income taxes of $340,000. Included in the taxable income computation was a dividends received deduction of $5,000, a net capital loss carryover from 20X2 of $10,000 utilized in 20X3, and gain of $50,000 recognized on the collection of cash from an installment sale that took place in 20X1. The corporation's current E&P for 20X3 would be:
$625,000.
Oakland Corporation reported a net operating loss of $500,000 in 20X3 and elected to carry the loss forward to 20X4. Not included in the computation was a disallowed meals and entertainment expense of $20,000, tax-exempt income of $10,000, and deferred gain on a current-year transaction treated as an installment sale of $250,000. The corporation's current E&P for 20X3 would be:
($260,000).
Abbot Corporation reported a net operating loss of $400,000 in 20X3, which the corporation elected to carry forward to 20X4. Included in the computation of the taxable loss was regular depreciation of $100,000 (E&P depreciation is $40,000), first-year expensing under §179 of $50,000, and a dividends received deduction of $10,000. The corporation's current E&P for 20X3 would be:
($290,000).
Greenwich Corporation reported a net operating loss of $800,000 in 20X3, which the corporation elected to carry forward to 20X4. The computation of the loss did not include a disallowed fine of $50,000, life insurance proceeds of $500,000, and a current-year charitable contribution of $10,000 that will be carried forward to 20X4. The corporation's current E&P for 20X3 would be:
($360,000).
El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive one share of El Toro stock for each two shares of stock they already own. Raoul owns 300 shares of El Toro stock, with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?
A) $0 dividend income and a tax basis in the new stock of $100 per share. B) $0 dividend income and a tax basis in the new stock of $60 per share. C) $0 dividend income and a tax basis in the new stock of $40 per share. D) $15,000 dividend and a tax basis in the new stock of $100 per share. C
Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, 20X3. Shareholders will receive three shares of Wonder stock for each five shares of stock they already own. Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000). The fair market value of the Wonder stock was $180 per share on September 30, 20X3. What are the tax consequences of the stock distribution to Diana?
A) $0 dividend income and a tax basis in the new stock of $180 per share. B) $0 dividend income and a tax basis in the new stock of $67.50 per share. C) $0 dividend income and a tax basis in the new stock of $56.25 per share. D) $10,800 dividend and a tax basis in the new stock of $180 per share. C
Tar Heel Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, William Roy. The land's fair market value was $100,000 and its tax and E&P basis to Tar Heel was $25,000. William assumed a mortgage attached to the land of $10,000. The tax consequences of the distribution to William in 20X3 would be:
A) $100,000 dividend and a tax basis in the land of $100,000. B) $100,000 dividend and a tax basis in the land of $90,000. C) Dividend of $90,000 and a tax basis in the land of $100,000. D) Dividend of $90,000 and a tax basis in the land of $90,000. C
This year Truckit reported taxable income of $160,000 and received $20,000 of municipal interest. Truckit paid $55,000 in entertainment expenses and $15,000 in fines and penalties. Truckit had $50,000 of accumulated E&P at the beginning of the year. What is Truckit's current E&P?
A) $180,000 B) $142,200 C) $110,000 D) $76,400 D
Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Pam wants to reduce her ownership in the company, and it was decided that the company will redeem 50 of her shares for $1,000 per share on December 31, 20X3. Pam's income tax basis in each share is $500. Comet has total E&P of $250,000. What are the tax consequences to Pam because of the stock redemption?
A) $25,000 capital gain and a tax basis in each of her remaining shares of $500. B) $25,000 capital gain and a tax basis in each of her remaining shares of $100. C) $50,000 dividend and a tax basis in each of her remaining shares of $100. D) $50,000 dividend and a tax basis in each of her remaining shares of $50. A
Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock in the company on December 31, 20X3. Viking paid Sven $2,000 per share. His income tax basis in each share is $1,000. Viking has total E&P of $500,000. What are the tax consequences to Sven because of the stock redemption?
A) $75,000 capital gain and a tax basis in each of his remaining shares of $1,000. B) $75,000 capital gain and a tax basis in each of his remaining shares of $2,000. C) $150,000 dividend and a tax basis in each of his remaining shares of $1,000. D) $150,000 dividend and a tax basis in each of his remaining shares of $4,000. D
Beltway Company is owned equally by George, his brother Thomas, and a partnership owned 50 percent by George and his father, Abe. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Beltway stock is George deemed to own?
A) 100 B) 150 C) 200 D) 300 C
Corona Company is owned equally by Maria, her sister Carlita, her mother, Gabriella, and her grandmother Olivia, each of whom holds 100 shares in the company. Under the family attribution rules, how many shares of Corona stock is Maria deemed to own?
A) 100 B) 200 C) 300 D) 400 B
Panda Company is owned equally by Min, her husband, Bin, her sister Xiao, and her grandson, Han, each of whom holds 100 shares in the company. Under the family attribution rules, how many shares of Panda stock is Min deemed to own?
A) 100 B) 200 C) 300 D) 400 C
Lansing Company is owned equally by Jennifer, her husband, Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is Jennifer deemed to own?
A) 100. B) 200. C) 250. D) 300. C
Lansing Company is owned equally by Jennifer, her husband, Dan, and DeWitt Corporation, which is owned 50 percent by Jennifer and her sister Jane. Each of the three shareholders holds 100 shares in the company. Under the §318 stock attribution rules, how many shares of Lansing stock is DeWitt Corporation deemed to own?
A) 100. B) 200. C) 250. D) 300. D
Which of the following stock distributions would be tax-free to the shareholder?
A) A 2-for-1 stock split to all holders of common stock. B) A stock distribution where the shareholder could choose between cash and stock. C) A stock distribution to all holders of preferred stock. D) A 2-for-1 stock split to all holders of common stock and a stock distribution to all holders of preferred stock are tax-free to the shareholder. A
Tammy owns 100 shares in Star Struck Corporation. The other 100 shares are owned by her husband, Tommy. Which of the following statements is true?
A) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as an exchange for tax purposes. B) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as a dividend for tax purposes. C) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as an exchange if Tammy waives the family attribution rules and files an agreement with the IRS. D) A stock redemption that completely terminates Tammy's direct interest in a corporation will be treated as a dividend C
Which of the following statements is true?
A) All stock redemptions are treated as exchanges for tax purposes. B) A stock redemption not treated as an exchange will automatically be treated as a taxable dividend. C) All stock redemptions are treated as dividends if received by an individual. D) A stock redemption is treated as an exchange only if it meets one of three stock ownership tests described in the Internal Revenue Code. D
Sara owns 60 percent of the stock of Lea Corporation. Unrelated individuals own the remaining 40 percent. For a stock redemption of Sara's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Lea stock must Sara own after the redemption?
A) Any percentage less than 60 percent B) Any percentage less than 50 percent C) Any percentage less than 48 percent D) All stock redemptions involving individuals are treated as exchanges C
Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?
A) Any percentage less than 70 percent B) Any percentage less than 56 percent C) Any percentage less than 50 percent D) All stock redemptions involving individuals are treated as exchanges C
Which statement best describes the concept of the "double taxation" of corporation income?
A) Corporate income is subject to two levels of taxation: the regular tax and excess profits tax. B) Corporate income is taxed twice at the corporate level: first when earned and then a second time if appreciated property is distributed to a shareholder. C) Corporate income is taxed when earned by a C corporation and then a second time at the shareholder level when distributed as a dividend. D) Corporate income is subject to two levels of taxation: at the federal level and a second time at the state level. C
Which of the following forms of earnings distributions would not be subject to double taxation at the corporate and shareholder level?
A) Dividend B) Stock redemption C) Partial liquidation D) Compensation paid to a shareholder/employee of the corporation. D
Which of the following statements is not considered a timing difference due to separate accounting methods for taxable income and E&P?
A) Dividends received deduction B) Installment gain recognized in current year related to a sale in a prior year C) Gain on sale of depreciable assets with higher E&P basis D) Section 179 expense A
Which of the following are subtractions from taxable income in computing current E&P?
A) Federal income taxes paid B) Current charitable contributions in excess of 10 percent limitation C) Current-year net capital loss D) All of the choices are subtractions from taxable income in computing current E&P. D
General Inertia Corporation made a distribution of $50,000 to Henry Tiara in partial liquidation of the company on December 31, 20X3. Henry owns 500 shares (50 percent) of General Inertia. The distribution was in exchange for 250 shares of Henry's stock in the company. After the partial liquidation, Henry continued to own 50percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Henry's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What are the tax consequences to Henry because of the transaction?
A) Henry has dividend income of $50,000 and a tax basis in his remaining shares of $100 per share. B) Henry has capital gain of $25,000 and a tax basis in his remaining shares of $100 per share. C) Henry has dividend income of $50,000 and a tax basis in his remaining shares of $200 per share. D) Henry has capital gain of $25,000 and a tax basis in his remaining shares of $200 per share. B
Montclair Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Molly Pitcher. The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000. Molly assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Montclair in 20X3 would be:
A) No gain recognized and a reduction in E&P of $200,000. B) $150,000 gain recognized and a reduction in E&P of $200,000. C) $150,000 gain recognized and a reduction in E&P of $175,000. D) No gain recognized and a reduction in E&P of $175,000. C
Cavalier Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, Tom Jefferson. The land's fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000. The tax consequences of the distribution to Cavalier in 20X3 would be:
A) No gain recognized and a reduction in E&P of $200,000. B) $150,000 gain recognized and a reduction in E&P of $200,000. C) $150,000 gain recognized and a reduction in E&P of $50,000. D) No gain recognized and a reduction in E&P of $50,000. B
Paladin Corporation had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Maria Mendez. The land's fair market value was $200,000 and its tax and E&P basis to Paladin was $250,000. Maria assumed a liability of $25,000 attached to the land. The tax consequences of the distribution to Paladin in 20X3 would be:
A) No loss recognized and a reduction in E&P of $200,000. B) $50,000 loss recognized and a reduction in E&P of $200,000. C) $50,000 loss recognized and a reduction in E&P of $225,000. D) No loss recognized and a reduction in E&P of $225,000. D
Catamount Company had current and accumulated E&P of $500,000 at December 31, 20X3. On December 31, the company made a distribution of land to its sole shareholder, Caroline West. The land's fair market value was $200,000 and its tax and E&P basis to Catamount was $250,000. The tax consequences of the distribution to Catamount in 20X3 would be:
A) No loss recognized and a reduction in E&P of $250,000. B) $50,000 loss recognized and a reduction in E&P of $250,000. C) $50,000 loss recognized and a reduction in E&P of $150,000. D) No loss recognized and a reduction in E&P of $200,000. A
Viking Corporation is owned equally by Sven and his wife, Olga, each of whom holds 100 shares in the company. Viking redeemed 75 shares of Sven's stock for $2,000 per share on December 31, 20X3. Viking has total E&P of $500,000. What are the tax consequences to Viking because of the stock redemption?
A) No reduction in E&P because of the exchange. B) A reduction of $150,000 in E&P because of the exchange. C) A reduction of $187,500 in E&P because of the exchange. D) A reduction of $375,000 in E&P because of the exchange. B
Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $160,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?
A) No reduction in E&P because of the exchange. B) A reduction of $50,000 in E&P because of the exchange. C) A reduction of $40,000 in E&P because of the exchange. D) A reduction of $80,000 in E&P because of the exchange. C
Comet Company is owned equally by Pat and his sister Pam, each of whom holds 100 shares in the company. Comet redeems 50 of Pam's shares on December 31, 20X3, for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes. Comet has total E&P of $250,000 on December 31, 20X3. What are the tax consequences to Comet because of the stock redemption?
A) No reduction in E&P because of the exchange. B) A reduction of $50,000 in E&P because of the exchange. C) A reduction of $62,500 in E&P because of the exchange. D) A reduction of $125,000 in E&P because of the exchange. B
Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock redemption?
A) Parents B) Grandchildren C) Grandparents D) Spouse C
Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder?
A) The distribution is a dividend to the extent of the corporation's E&P, then a return of capital, and finally gain from sale of stock. B) The distribution is a return of capital, then a dividend to the extent of the corporation's E&P, and finally gain from sale of stock. C) The distribution is a return of capital, then gain from sale of stock, and finally a dividend to the extent of the corporation's E&P. D) The shareholder can elect to treat the distribution as either a dividend to the extent of the corporation's E&P or a return of capital, followed by gain from sale of stock. A
General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Incorporated in partial liquidation of the company on December 31, 20X3. Tiara, Incorporated owns 500 shares (50 percent) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50percent of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What amount of dividend or capital gain does Tiara recognize because of the transaction?
A) Tiara does not recognize any dividend income or capital gain. B) Tiara recognizes capital gain of $50,000. C) Tiara recognizes dividend income of $50,000. D) Tiara recognizes capital gain of $25,000. C
Which of the following statements best describes the role of current and accumulated E&P in determining if a distribution is a dividend?
At a minimum, some portion of the distribution will be a dividend if current E&P for the year is positive, even if accumulated E&P is negative.
Which of the following statements best describes current E&P?
Current E&P is an ill-defined tax concept in the Internal Revenue Code and represents a corporation's current-year economic income.
Which of these items is not an adjustment to taxable income or net loss to compute current E&P?
Refund of prior-year taxes for an accrual-method taxpayer.
A calendar-year corporation has positive current E&P of $500 and a deficit in accumulated E&P of ($1,200). The corporation makes a $400 distribution to its sole shareholder. Which of the following statements is true?
The distribution will be a dividend because current E&P is positive and exceeds the distribution.
A calendar-year corporation has deficit in current E&P of ($500) and positive accumulated E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is true?
Up to $600 of the distribution could be a dividend depending on net E&P (current plus accumulated E&P) on the date of the distribution.