- Description
ACC 455 Week 2 MyAccountingLab, Week 2
Access the MyAccountingLab software and complete this week’s assignments
| C:2.4-7 |
Identify which of the following statements is true.
A.
The exchange of stock for services rendered is not a taxable transaction.
B.
Section 351 was enacted to allow taxpayers to incorporate without incurring adverse tax consequences.
C.
The repeal of Sec. 351 would result in more existing businesses being incorporated.
D.
All of the above are false.
| C:2.4-9 |
For Sec. 351 purposes, the term “property” does not include
A.
cash.
B.
accounts receivable.
C.
inventory.
D.
services rendered.
| C:2.4-12 |
Jermaine owns all 200 shares of Peach Corporation stock valued at $50,000. Kenya, a new shareholder, receives 200 newly issued shares from Peach Corporation in exchange for inventory with an adjusted basis of $40,000 and an FMV of $50,000. Which of the following statements is correct?
A.
Kenya may defer the recognition of any tax until the stock is sold.
B.
The transaction results in $10,000 of capital gain for Kenya.
C.
The transaction results in $10,000 of ordinary income for Kenya.
D.
No gain will be recognized by Kenya.
| C:2.4-14 |
Barry, Dan, and Edith together form a new corporation; Barry and Dan each contribute property in exchange for stock. Within two weeks after the formation, the corporation issues additional stock to Edith in exchange for property. Barry and Dan each hold 10,000 shares and Edith will receive 9,000 shares. Which transactions will qualify for nonrecognition?
A.
Only the first transaction will qualify for nonrecognition.
B.
Only the second transaction will qualify for nonrecognition.
C.
Because of the step transaction doctrine, neither transaction will qualify.
D.
Both transactions will qualify under Sec. 351 if they are part of the same plan of incorporation.
| QC:3-1 (book/static) |
High Corporation incorporates on May 1 and begins business on May 10 of the current year. What alternative tax years can High elect to report its initial year’s income?
A.
Unless High Corporation is an S corporation or a personal service corporation, High can select a tax year ending on the last day of any month.
B.
High Corporation cannot select its tax year. The IRS must determine the company’s tax year. Therefore, High Corporation must wait for the IRS’s written statement that is mailed after incorporation takes place.
C.
High Corporation can only select May 31 as its tax year since that is the month of incorporation, or December 31.
D.
Unless High Corporation is a personal service corporation, High can select May 31 or December 31 as a tax year.
| QC:3-4 (book/static) |
Compare the tax treatment of capital gains and losses by a corporation and by an individual.
A.
Corporations and individuals compute capital gains and losses the same way. However, corporations cannot deduct capital losses from ordinary income, and instead carry a capital loss back three years and forward five years to offset capital gains. Individuals carry losses forward for an indefinite period.
B.
Corporations and individuals compute capital gains and losses the same way. However, corporations have a preferential tax rate for net capital gains that is lower than the ordinary income rate of corporations, so more corporations invest for gains.
C.
Capital gains are computed the same way for corporations and individuals. However, capital losses are treated as a carry back of 5 years and a carry forward of 20 years for corporations. Individuals can only take capital losses in the year they are incurred.
D.
Corporations can net capital losses with ordinary income since they are taxed at the same rate. However, individuals can only carry losses forward for an indefinite period.
| QC:3-6 (book/static) |
What are start-up expenditures? How are they treated for tax purposes?
A.
Start-up expenditures are ordinary and necessary business expenses paid or incurred to investigate the creation or acquisition of an active trade or business, to create an active trade or business, or to conduct an activity engaged in for profit or the production of income before the time the activity becomes an active trade or business. A corporation can elect to deduct the first $5,000 of the expenditures and amortize the remainder over a period of 180 months starting with the month in which an active trade or business begins.
B.
Start-up expenditures are outlays incident to the creation of a corporation, chargeable to the corporation’s capital account, and of a character that would be amortizable if the corporation had a limited life. A corporation can elect to deduct the first $500 of the expenditures and amortize the remainder over a period of 72 months starting with the month in which the corporation begins business operations.
C.
Start-up expenditures are outlays incident to the creation of a corporation, chargeable to the corporation’s capital account, and of a character that would be amortizable if the corporation had a limited life. A corporation can elect to deduct the first $5,000 of the expenditures and amortize the remainder over a period of 180 months starting with the month in which the corporation begins business operations.
D.
Start-up expenditures are ordinary and necessary business expenses paid or incurred to investigate the creation or acquisition of an active trade or business, to create an active trade or business, or to conduct an activity engaged in for profit or the production of income before the time the activity becomes an active trade or business. A corporation can elect to deduct the first $500 of the expenditures and amortize the remainder over a period of 72 months starting with the month in which an active trade or business begins.
| QC:3-10 (book/static) |
Why are corporations allowed a dividends-received deduction? What dividends qualify for this special deduction?
A.
Corporations are allowed a dividends-received deduction to partially or fully mitigate the effects of multiple taxation of corporate earnings. Dividends received by a domestic corporation from another domestic corporation (other than S corporations) qualify for the special 60%, 70%, or 80% deduction. Distributions that receive capital gain treatment, most dividends from foreign corporations, dividends on stock held 45 days or less, and dividends on debt financed stock are eligible.
B.
Corporations are allowed a dividends-received deduction to prevent abuse in situations where a corporation is closely held. Dividends received by a domestic corporation from another domestic corporation (other than S corporations) qualify for the special 60%, 70%, or 80% deduction. Distributions that receive capital gain treatment, most dividends from foreign corporations, dividends on stock held 45 days or less, and dividends on debt financed stock are eligible.
C.
Corporations are allowed a dividends-received deduction to prevent abuse in situations where a corporation is closely held. Dividends received by a domestic corporation from another domestic corporation (other than S corporations) qualify for the special 70%, 80%, or 100% deduction. Distributions that receive capital gain treatment, most dividends from foreign corporations, dividends on stock held 45 days or less, and dividends on debt financed stock are not eligible.
D.
Corporations are allowed a dividends-received deduction to partially or fully mitigate the effects of multiple taxation of corporate earnings. Dividends received by a domestic corporation from another domestic corporation (other than S corporations) qualify for the special 70%, 80%, or 100% deduction. Distributions that receive capital gain treatment, most dividends from foreign corporations, dividends on stock held 45 days or less, and dividends on debt financed stock are not eligible.
| PC:3-34 (similar to) |
Fayette Corporation incorporates on January 7, begins business on July 10, and elects to have its initial tax year end on August 31.
Fayette incurs the following expenses between January and August related to its organization during the current year:
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(Click on the icon to view list of expenses.)
Requirement
| a. | What alternative treatments are available for Fayette’s expenditures? |
| b. | What amount of organizational expenditures can Fayette Corporation deduct on its first tax return for the fiscal year ending August 31? |
| c. | What amount of start-up costs can Fayette Corporation deduct on its first tax return? |
Requirement a. What alternative treatments are available for Fayette’s expenditures?
Select the tax treatment for each expenditure. Begin with the expenditures incurred through June 1. Then, complete the table for the expenditures through July 15.
| Date | Expenditure | Amount | Treatment | |
| January 30 | Travel to investigate potential business site | $4,000 | ||
| May 15 | Legal expenses to draft corporate charter | 2,500 | ||
| May 30 | Commissions to stockbroker for issuing and selling stock | 4,500 | ||
| May 30 | Temporary directors’ fees | 1,100 | ||
| June 1 | Expense of transferring building to Fayette | 3,000 |
| June 5 | Accounting fees to set up corporate books | 5,000 | ||
| June 10 | Training expenses for employees | 6,000 | ||
| June 15 | Rent expense for June | 1,300 | ||
| July 15 | Rent expense for July | 1,300 |
| Fayette Corporation can elect to deduct $ | of organizational expenditures under | and amortize the remainder | ||||||||||
| over | months. Fayette also can elect to deduct $ | of start-up expenditures under | and amortize the | |||||||||
| remainder over | months. These elections are deemed automatic under temporary Treasury Regulations. | |||||||||||
Requirement b. What amount of organizational expenditures can Fayette
Corporation deduct on its first tax return for the fiscal year ending August 31?
(Do not round intermediary calculations. Only round the amount you input in the cells to the nearest dollar.)
| Organizational expenditures total $ | , and Fayette can deduct $ | in the first fiscal year. |
Requirement c. What amount of start-up costs can
FayetteFayette
Corporation deduct on its first tax return? (Do not round intermediary calculations. Only round the amount you input in the cells to the nearest dollar.)
| Start-up expenditures total $ | , and Fayette can deduct $ | in the first fiscal year. |
| ||||||
| PC:3-39 (similar to) | Question Help
| |||||
Zeto Corporation reports the following results for the current year:
Requirement a. What is Zeto’s taxable income for the current year, assuming qualified production activities income is $1,000?
(If a box is not used in the table, leave the box empty; do not enter a zero. Use parentheses or a minus sign for a NOL.)
| Part a | |
| Gross profit on sales | |
| Dividends | |
| Gross income | |
| Minus: Operating expenses | |
| Taxable income before dividends-received deduction | |
| Dividends-received deduction | |
| U.S. production activities deduction | |
| Taxable income (NOL) |
Requirement b. How would your answer to Part a change if Zeto’s
operating expenses are instead $208,000,
assuming qualified production activities income is zero or negative? (If a box is not used in the table, leave the box empty; do not enter a zero. Use parentheses or a minus sign for a NOL.)
| Part b | |
| Gross profit on sales | |
| Dividends | |
| Gross income | |
| Minus: Operating expenses | |
| Taxable income before dividends-received deduction | |
| Dividends-received deduction | |
| U.S. production activities deduction | |
| Taxable income (NOL) |
Requirement c. How would your answer to Part a change if Zeto’s
operating expenses are instead $287,000,
assuming qualified production activities income is zero or negative? (If a box is not used in the table, leave the box empty; do not enter a zero. Use parentheses or a minus sign for a NOL.)
| Part c | |
| Gross profit on sales | |
| Dividends | |
| Gross income | |
| Minus: Operating expenses | |
| Taxable income before dividends-received deduction | |
| Dividends-received deduction | |
| U.S. production activities deduction | |
| Taxable income (NOL) |
Requirement d. How would your answers to Parts a, b, and c change if
Zeto received $120,000 of the dividends from a 20%-owned corporation and the remaining $40,000
from a less-than-20%-owned corporation?
Begin by re-calculating taxable income (NOL) for Part a assuming Zeto received $120,000
of the dividends from a 20%-owned corporation and the remaining $40,000
from a less-than-20%-owned corporation. Then re-calculate Part b and finally, Part c. (If a box is not used in the table, leave the box empty; do not enter a zero. Use parentheses or a minus sign for a NOL.)
Review your calculations in Requirement a, b, and c above.
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| Part a | |
| Taxable income before dividends-received deduction | |
| Dividends-received deduction from 20%-owned corporation | |
| Dividends-received deduction from less than 20%-owned corporation | |
| U.S. production activities deduction | |
| Taxable income (NOL) |
| Part b |
| Part c |
| ||||||
| PC:3-43 (similar to) | Question Help
| |||||
Kappa Corporation reports the following results for the current year:
In addition, Kappa has a $52,000 NOL carryover from the preceding tax year, and its qualified production activities income is $120,000.
Requirements
| a. | What is Kappa’sKappa’s taxable income for the current year? |
| b. | What carrybacks or carryovers are available to other tax years? |
Requirement a. What is Kappa’s taxable income for the current year? Begin by computing Kappa’s
taxable income before special deductions. (Enter the special deductions in the specific sequence dictated by the tax rules.)
| Gross income | ||
| Minus: | ||
| Taxable income before special deductions | ||
| Minus: | ||
| Taxable income before U.S. production activities deduction | ||
| Taxable income | ||
Requirement b. What carrybacks or carryovers are available to other tax years? (If a box is not used in the table, leave the box empty; do not select a label or enter a zero.)
| Type of carryback/carryover | Amount |
| Charitable contribution deduction carryover to the next five years | |
| PC:3-33 (similar to) |
Omega Corporation sold the following property on March 3 of the current year:
Aside from these transactions, Omega had $750,000 of operating net income during the current year.
Omega has a $15,000 nonrecaptured Sec. 1231 loss from prior years.
Requirement
Determine the character of the gains and losses, and calculate the corporation’s taxable income. Ignore the U.S. production activities deduction.
Begin by calculating the total depreciation recapture, if any. (If a box is not used in the table, leave the box empty; do not select a label or enter a zero.)
| Total depreciation recapture |
Next, calculate the remaining net Sec. 1231 gain, if any. (If a box is not used in the table, leave the box empty; do not select a label or enter a zero. Use parentheses or a minus sign to enter loss and recapture amounts.)
| Remaining net Sec. 1231 gain |
Finally, indicate the character of the gains and losses and calculate the corporation’s taxable income. (If a box is not used in the table, leave the box empty; do not select a label or enter a zero.)
| Income from operations | ||
| Income from recapture | ||
| Gain/Loss on sale of property | ||
| Taxable income |
| PC:3-37 (similar to) |
Zahra Corporation reports the following results for Year 1 and Year 2:
| Year 1 | Year 2 | ||
| Adjusted taxable income | $110,000 | $280,000 | |
| Charitable contributions (cash) | 16,500 | 23,500 |
The adjusted taxable income is before Zahra
claims any charitable contributions deduction, NOL or capital loss carryback, dividends-received deduction, or U.S. production activities deduction.
Read the
requirements
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.
Requirement a. How much is Zahra’s
charitable contributions deduction in Year 1? In Year 2?
| Zahra’s charitable contributions deduction in Year 1 is $ | . |
| Zahra’s charitable contributions deduction in Year 2 is $ | . |
Requirement b. What is
Zahra’s contribution carryover to Year 3, if any? (If there is no charitable contributions carryover, enter “0”.)
| Zahra’s contribution carryover to Year 3 is $ | . |
| PC:3-41 (similar to) |
Light Corporation purchased for $400,000 shares of Beer Corporation common stock (less than 5% of the outstanding Beer stock) at the beginning of the current year. It used $120,000 of borrowed money and $280,000 of its own cash to make this purchase. Light paid $12,000 of interest on the debt this year.
Light received a $25,000 cash dividend on the Beer stock on September 1 of the current year.
Requirements
| a. | What amount can Light deduct for the interest paid on the loan? |
| b. | What dividends-received deduction can Light claim with respect to the dividend? |
Requirement a. What amount can Light deduct for the interest paid on the loan?Light may deduct all the interest paid on the loan.
Requirement b. What dividends-received deduction can Light
claim with respect to the dividend?
| Light must include | of the $25,000 dividends received from Beer in its income. The dividends-received deduction for | ||
| Light is $ | . | ||
| PC:3-43 (similar to) |
Kappa Corporation reports the following results for the current year:
In addition, Kappa has a $48,000 NOL carryover from the preceding tax year, and its qualified production activities income is $60,000.
Requirements
| a. | What is Kappa’s taxable income for the current year? |
| b. | What carrybacks or carryovers are available to other tax years? |
Requirement a. What is Kappa’s taxable income for the current year?Begin by computing Kappa’s
taxable income before special deductions. (Enter the special deductions in the specific sequence dictated by the tax rules.)
| Gross income from operations | ||
| Dividends received | ||
| Gross income | ||
| Minus: | ||
| Taxable income before special deductions | ||
| Minus: | ||
| Taxable income before U.S. production activities deduction | ||
| Taxable income | ||
Requirement b. What carrybacks or carryovers are available to other tax years? (If a box is not used in the table, leave the box empty; do not select a label or enter a zero.)
| Type of carryback/carryover | Amount |
| PC:3-44 (similar to) |
Steel Corporation sells a truck for $24,000 to Jenny, who owns 5555% of its stock. The truck has a $31,000 adjusted basis on the sale date. Jenny sells the truck to an unrelated party, Manny, for $32,000 two years later after claiming $10,000 in depreciation.
Requirements
| a. | What is Steel’s realized and recognized gain or loss on selling the truck? |
| b. | What is Jenny’s realized and recognized gain or loss on selling the truck to Manny? |
| c. | How would your answers to Part b change if Jenny instead sold the truck for $6,000? |
Requirement a. What is Steel’s realized and recognized gain or loss on selling the truck?
Begin by computing the realized gain or loss. (Use parentheses or a minus sign for a loss.)
| – | = | Realized gain (loss) | ||
| – | = |
Steel does not recognize the
Loss because
Jenny is the controlling shareholder of the corporation.
Requirement b. What is Jenny’s realized and recognized gain or loss on selling the truck to Manny?
Begin by computing the realized gain or loss. (Use parentheses or a minus sign for a loss.)
| – | = | Realized gain (loss) | ||
| – | = |
| Jenny’s recognized | is $ | . |
Requirement c. How would your answers to Part b change if
JennyJenny
instead sold the truck for
$ 6 comma 000$6,000?
Begin by computing the realized gain or loss. (Use parentheses or a minus sign for a loss.)
| – | = | Realized gain (loss) | ||
| – | = |
| Jenny’s recognized | is $ | . |
| PC:2-34 (similar to) |
Cam, Mike, and Carson form Comptrol Corporation and transfer the following items to Comptrol:
Requirements
| a. | Is the exchange nontaxable under Sec. 351? Explain the tax consequences of the exchange to Cam, Mike, Carson, and Comptrol. |
| b. | How would your answer to Part a change if Mike instead had received 300 shares of common stock and 300 shares of preferred stock? |
| c. | How would your answer to Part a change if Carson instead had contributed $1,100 cash as well as services worth $6,500? |
Requirement a. Is the exchange nontaxable under Sec. 351? Explain the tax consequences of the exchange to Cam, Mike, Carson, and Comptrol.
| as nontaxable under Sec. 351. |
| PC:2-34 (similar to) |
Cam, Mike, and Carsonform Comptrol Corporation and transfer the following items to Comptrol:
Requirements
| a. | Is the exchange nontaxable under Sec. 351? Explain the tax consequences of the exchange to Cam, Mike, Carson, and Comptrol. |
| b. | How would your answer to Part a change if Mike instead had received 300 shares of common stock and 300 shares of preferred stock? |
| c. | How would your answer to Part a change if Carson instead had contributed $1,100 cash as well as services worth $6,500? |
Requirement a. Is the exchange nontaxable under Sec. 351? Explain the tax consequences of the exchange to Cam, Mike, Carson, and Comptrol.
| as nontaxable under Sec. 351. |
| Cam recognizes | $ | on the transfer of the patent. | Cam’s basis in his Comptrol stock is | $ | . |
| Mike recognizes | Mike’s basis in the preferred stock is | $ | . |
| Carson recognizes | Carson’s basis in his Comptrol stock is | $ | . |
| Comptrol recognizes | on the exchange. Comptrol’s basis for the assets are: | |
Requirement b. How would your answer to Part a change if Mike instead had received 300 shares of common stock and 300 shares of preferred stock?
| as nontaxable under Sec. 351. |
| Cam recognizes | Cam’s basis in his Comptrol stock is |
| Mike recognizes | Mike’s basis in his Comptrol stock is | $ |
| Carson recognizes | Carson’s basis in his Comptrol stock is | $ | . |
| Comptrol recognizes | no gain or loss. | on the exchange. Comptrol’s basis for the assets are: |
| cash, $24,000; patent, zero; and services, $7,600. | ||
Requirement c. How would your answer to Part a change if Carson instead had contributed $1,100
cash as well as services worth $6,500?
| as nontaxable under Sec. 351. |
| Cam recognizes | Cam’s basis in his Comptrol stock is |
| Mike recognizes | Mike’s basis in his Comptrol stock is | $ | . |
| Carson recognizes | Carson’s basis in his Comptrol stock is | $ | . |
| Comptrol recognizes | on the exchange. Comptrol’s basis for the assets are: | |
| PC:2-41 (similar to) |
Naomi transfers to Spindle Corporation depreciable machinery originally costing $15,000 and now having a(n) $10,000 adjusted basis. In exchange, Naomi receives all 150 shares of Spindle stock having a(n) $22,000
FMV and a three-year Spindle note having a(n) $8,000 FMV.
Requirements
| a. | What are the amount and character of Naomi’s recognized gain or loss? |
| b. | What are Naomi’s bases in the Spindlestock and note? |
| c. | What is Spindle’s basis in the machinery? |
Requirement a. What are the amount and character of Naomi’s recognized gain or loss?
| Naomi realizes a(n) | $ | and recognizes a(n) | $ |
| Of the amount recognized, | $ | is ordinary in character and | $ | is capital in character. |
Requirement b. What are
Naomi’s
bases in the
Spindle
stock and note?
| Naomi’s basis in the note is | $ | and the basis in the stock is | $ | . |
Requirement c. What is
Spindle’s basis in the machinery?
| Spindle corporation’s basis in the machinery is | $ |