AFM362 Lecture Notes - Lecture 19: Basis Of Accounting, Double Taxation, Property Income

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reddeer171

22 Apr 2017

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM362

Professor

Ken Klassen

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Document Summary

If choose to get cash at end of maturity, add previous interest payments not received (ex. If semi- annual and no payment in june received add to december to be prorated) for the next interest payment. They must consider the interest income that they would be getting and report it even if they haven"t received it yet. Income for the year = property income + income from pup + income from lpp. Property income = dividends income, bonds, equity, interest income: dividend income. Dividend can be cash or dividend in kind (ie. something other than cash like stock dividend) When calculating income from dividends include both stock dividends and cash dividends! Integration remove advantages/disadvantages of one organization over another, attempt to impose the same amount of tax on income earned regardless of business structure. The gross up represents an estimation of the taxes paid by the corporation.

Related Questions

Grand Canyon University

Complete the following problems from the textbook: Chapter 1, P1-2 Chapter 2, P2-4, P2-6, and Integrative Case 1 Follow these instructions for completing and submitting your assignment: Do all work in Excel. Do not submit Word files or *.pdf files. Submit a single spreadsheet file for this assignment. Do not submit multiple files. Place each problem on a separate spreadsheet tab. Label all inputs and outputs and highlight your final answer. Follow the directions in "Guidelines for Developing Spreadsheets."

P1â2 Accrual income versus cash flow for a period Thomas Book Sales, Inc., supplies

textbooks to college and university bookstores. The books are shipped with a proviso

that they must be paid for within 30 days but can be returned for a full refund

credit within 90 days. In 2014, Thomas shipped and billed book titles totaling

$760,000. Collections, net of return credits, during the year totaled $690,000. The

company spent $300,000 acquiring the books that it shipped.

a. Using accrual accounting and the preceding values, show the firmâs net profit for

the past year.

b. Using cash accounting and the preceding values, show the firmâs net cash flow

for the past year.

c. Which of these statements is more useful to the financial manager? Why?

P2â4 Interest versus dividend income During the year just ended, Shering Distributors,

Inc., had pretax earnings from operations of $490,000. In addition, during the year

it received $20,000 in income from interest on bonds it held in Zig Manufacturing

and received $20,000 in income from dividends on its 5% common stock holding in

Tank Industries, Inc. Shering is in the 40% tax bracket and is eligible for a 70% dividend

exclusion on its Tank Industries stock.

a. Calculate the firmâs tax on its operating earnings only.

b. Find the tax and the after-tax amount attributable to the interest income from

Zig Manufacturing bonds.

c. Find the tax and the after-tax amount attributable to the dividend income from

the Tank Industries, Inc., common stock.

d. Compare, contrast, and discuss the after-tax amounts resulting from the interest

income and dividend income calculated in parts b and c.

e. What is the firmâs total tax liability for the year?

P2â6 Capital gains taxes Perkins Manufacturing is considering the sale of two nondepreciable

assets, X and Y. Asset X was purchased for $2,000 and will be sold today for

$2,250. Asset Y was purchased for $30,000 and will be sold today for $35,000. The

firm is subject to a 40% tax rate on capital gains.

a. Calculate the amount of capital gain, if any, realized on each of the assets.

b. Calculate the tax on the sale of each asset.

Merit Enterprise Corp.

Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her

presentation one last time before her upcoming meeting with the board of directors.

Meritâs business had been brisk for the last 2 years, and the companyâs CEO

was pushing for a dramatic expansion of Meritâs production capacity. Executing the

CEOâs plans would require $4 billion in capital in addition to $2 billion in excess

cash that the firm had built up. Saraâs immediate task was to brief the board on options

for raising the needed $4 billion.

Unlike most companies its size, Merit had maintained its status as a private

company, financing its growth by reinvesting profits and, when necessary, borrowing

from banks. Whether Merit could follow that same strategy to raise the $4 billion

necessary to expand at the pace envisioned by the firmâs CEO was uncertain,

although it seemed unlikely to Sara. She had identified the following two options for

the board to consider.

Option 1: Merit could approach JPMorgan Chase, a bank that had served Merit

well for many years with seasonal credit lines as well as medium-term loans. Lehn

believed that JPMorgan was unlikely to make a $4 billion loan to Merit on its own,

but it could probably gather a group of banks together to make a loan of this magnitude.

However, the banks would undoubtedly demand that Merit limit further borrowing

and provide JPMorgan with periodic financial disclosures so that it could

monitor Meritâs financial condition as Merit expanded its operations.

Option 2: Merit could convert to public ownership, issuing stock to the public

in the primary market. With Meritâs excellent financial performance in recent years,

Sara thought that its stock could command a high price in the market and that many

investors would want to participate in any stock offering that Merit conducted.

Becoming a public company would also allow Merit, for the first time, to offer

employees compensation in the form of stock or stock options, thereby creating

stronger incentives for employees to help the firm succeed. On the other hand, Sara

knew that public companies faced extensive disclosure requirements and other regulations

that Merit had never had to confront as a private firm. Furthermore, with

stock trading in the secondary market, who knew what kind of individuals or institutions

might wind up holding a large chunk of Merit stock?

TO DO

a. Discuss the pros and cons of option 1, and prioritize your thoughts. What are the

most positive aspects of this option, and what are the biggest drawbacks?

b. Do the same for option 2.

c. Which option do you think that Sara should recommend to the board, and why?

ssumptions: The stock of ChadCo is owned equally by twoshareholders: SecondCo (a corporation) and Arnold (an individual).ChadCo and SecondCo use the accrual method, Arnold uses the cashmethod. All use a calendar taxable year. Assume Â§ 1059 does notapply. Use a 34 percent corporate tax rate in this problem. Duringthe current year, ChadCo accrued income and expenses as follows:Gross income from business $500,000 Dividends on AT&T stock(consider Â§ 243) 100,000 Interest on municipal bonds (Â§ 103)100,000 Capital gain 100,000 Total $800,000 Deductible Â§ 162(a)(l)business expenses $430,000 Noncapital expenses not deductible underÂ§ 162(e) 90,000 Capital losses (see Â§ 1211(a)) 146,000 Total$666,000 Net $134,000 (1) On December 24 of the preceding year,SecondCo and Arnold incorporated ChadCo and capitalized ChadCo withcash of $100,000 each. On December 31 of that preceding year,SecondCo and Arnold received distributions from ChadCo of $5,000each; ChadCo did not earn any income for that year. In addition,SecondCo and Arnold received distributions of $5,000 each, in thecurrent year. Which distributions should be gross income toSecondCo and Arnold, in what amounts, and why? What does E&Phave to do with this? (2) Alternative: Arnold just bought theChadCo shares on December 30 of the current year from anothershareholder for FMV of $145,000, before the declaration and paymentof a $5,000 distribution to Arnold on December 31 of the currentyear. Should the distribution be taxable income to Arnold? Why? (3)Now assume that SecondCoâs basis in its ChadCo stock is $100,000and Arnoldâs basis in his ChadCo stock is $40,000. On January 2 ofthe current taxable year, ChadCo distributes $100,000 in cash toSecondCo and $100,000 in cash to Arnold. As of the end of thepreceding taxable year, ChadCoâs accumulated E&P was zero. Whatare the tax consequences of this distribution to ChadCo, SecondCo,and Arnold? [Hint: First compute ChadCoâs current-year taxableincome and then compute current-year E&P before reducing theE&P for the distribution (âinterim E&Pâ); after reducingfor the distribution, compute final accumulated E&P.] (4)Variation: Assume Arnoldâs shares were owned by a differentshareholder every quarter and $50,000 was distributed ratably toall shareholders quarterly? How much dividend would SecondCo andthe holders of Arnoldâs shares receive? (5) Suppose under the basicfacts in (3) above that ChadCo had an accumulated deficit of$100,000 in its E&P account as of December 31 of the precedingtaxable year. (6) If, on December 1 of the current year (thedeclaration date), ChadCoâs board of directors voted to pay the$200,000 distribution by mailing the checks on December 31 of thecurrent taxable year (the payment date, the identification of whichis a practice generally used only by widely held corporations) toshareholders of record on December l5 of the current taxable year(the record date), such checks actually being received by SecondCoand Arnold in the mail on January 2 of the next year? Assume thatSecondCo and Arnold are the public and that they are the onlyshareholders (as in the basic facts). How would your answer to (3)above change? (7) Suppose that SecondCo is an individual and thatChadCo has always been an S corporation. What is ChadCoâs E&Pâ?How is each shareholderâs personal income tax return affected forthe current year by the tax items of ChadCo? How will ChadCodistribution of $100,000 to each shareholder in the current yearaffect shareholders?

azureelk922

Question: Reading Federal Income Taxation of Corporations andShareholders Text: Study Chapters 7 & 8 o...

Reading

Federal Income Taxation of Corporations andShareholders

Text: Study Chapters 7 & 8of the Bittker & Eustice text.

Penalty Taxes on Undistributed CorporateIncome, Dividends and Other NonliquidatingDistributions

LESSON 6, PROBLEM #1

In not less than 1,000 words discuss "earnings and profits".Your discussion should include major differences between computingcurrent earnings and profits and current taxable income as well aswhy earnings and profits should be calculated before a corporationdecides to make a distribution to its shareholders.

LESSON 6, PROBLEM #2

Allan owns all of the stock of CadyCo. The stockâs basis is$100,000. CadyCo has a total of current and accumulated earningsand profits of $50,000. CadyCo distributes $200,000 cash to Allanâwith respect to his stockâ (i.e., as a state law âdividendâ). Howis the $200,000 taxed? What is Allanâs stock basis after thedistribution? Alternatively, CadyCo distributes to Allan his noteto CadyCo for $200,000 borrowed from CadyCo.

LESSON 6, PROBLEM #3

Assumptions: The stock of ChadCo is owned equally bytwo shareholders: SecondCo (a corporation) and Arnold (anindividual). ChadCo and SecondCo use the accrual method, Arnolduses the cash method. All use a calendar taxable year. Assume Â§1059 does not apply. Use a 34 percent corporate tax rate in thisproblem. During the current year, ChadCo accrued income andexpenses as follows:

Gross income from business	$500,000
Dividends on AT&T stock (consider Â§ 243)	100,000
Interest on municipal bonds (Â§ 103)	100,000
Capital gain	100,000
Total	$800,000
Deductible Â§ 162(a)(l) business expenses	$430,000
Noncapital expenses not deductible under Â§ 162(e)	90,000
Capital losses (see Â§ 1211(a))	146,000
Total	$666,000
Net	$134,000

(1) On December 24 of the preceding year, SecondCo and Arnoldincorporated ChadCo and capitalized ChadCo with cash of $100,000each. On December 31 of that preceding year, SecondCo and Arnoldreceived distributions from ChadCo of $5,000 each; ChadCo did notearn any income for that year. In addition, SecondCo and Arnoldreceived distributions of $5,000 each, in the current year.

Which distributions should be gross income to SecondCo andArnold, in what amounts, and why? What does E&P have to do withthis?

(2) Alternative: Arnold just bought the ChadCo shares onDecember 30 of the current year from another shareholder for FMV of$145,000, before the declaration and payment of a

$5,000 distribution to Arnold on December 31 of the currentyear.

Should the distribution be taxable income to Arnold?Why?

(3) Now assume that SecondCoâs basis in its ChadCo stock is$100,000 and Arnoldâs basis in his ChadCo stock is $40,000. OnJanuary 2 of the current taxable year, ChadCo distributes $100,000in cash to SecondCo and $100,000 in cash to Arnold. As of the endof the preceding taxable year, ChadCoâs accumulated E&P waszero.

What are the tax consequences of this distribution toChadCo, SecondCo, and Arnold? [Hint: First compute ChadCoâscurrent-year taxable income and then compute current- year E&Pbefore reducing the E&P for the distribution (âinterimE&Pâ); after reducing for the distribution, compute finalaccumulated E&P.]

(4) Variation: Assume Arnoldâs shares were owned by a differentshareholder every quarter and $50,000 was distributed ratably toall shareholders quarterly?

How much dividend would SecondCo and the holders of Arnoldâsshares receive?

(5) Suppose under the basic facts in (3) above that ChadCo hadan accumulated de?cit of

$100,000 in its E&P account as of December 31 of thepreceding taxable year.

(6) If, on December 1 of the current year (the declarationdate), ChadCoâs board of directors voted to pay the $200,000distribution by mailing the checks on December 31 of the currenttaxable year (the payment date, the identi?cation of which is apractice generally used only by widely held corporations) toshareholders of record on December l5 of the current taxable year(the record date), such checks actually being received by SecondCoand Arnold in the mail on January 2 of the next year? Assume thatSecondCo and Arnold are the public and that they are the onlyshareholders (as in the basic facts).

How would your answer to (3) above change?

(7) Suppose that SecondCo is an individual and that ChadCo hasalways been an S corporation.

What is ChadCoâs E&Pâ? How is each shareholderâspersonal income tax return affected for the current year by the taxitems ofChadCo? How will ChadCo distribution of

$100,000 to each shareholder in the current year affectshareholders?

AFM362 Lecture Notes - Lecture 19: Basis Of Accounting, Double Taxation, Property Income

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