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Z Corporation ("Z") is adomestic corpora­tion which has 120 shares of voting common stockoutstanding. In each of the following alternative situations,determine whether Z is eligible to elect S corporationstatus:

(a) Z has 99 unrelatedindividual shareholders, each of whom owns one share of Z stock.The remaining 21 shares are owned by A and his brother, B, as jointtenants with right of survivorship.

(b) Same as (a), above, exceptthat A and B are married and own 11 of the 21 shares as communityproperty. The remaining 10 shares are owned 5 by A as her separateproperty and 5 by B as his separate property.

(c) In (b), above, assume thatthe shareholders of Z elected S corporation status. What will bethe effect on Z's election if one year later A dies and bequeathsher interest in Z stock to F, her long-time friend?

(d) Same as (a), above, exceptthat the remaining 21 shares are held by a voting trust which hasthree beneficial owners.

(e) Same as (a), above, exceptthat the remaining 21 shares are owned by a revocable living trustcreated by an individual, the income of which is taxed to thegrantor under § 671.

(f) Same as (a), above, exceptthat the remaining 21 shares are owned by a testamentary trustunder which the surviving spouse has the right to income for herlife, with the remainder passing to her children. The trust is a"qualified terminable interest trust" (see §2056(b)(7)).

(g) Assume Z has 100 individualshareholders and forms a partnership with two other S corporations,each of which also has 100 individ­ual shareholders, for thepurposes of jointly operating a business. Z's one-third interest inthis partnership is its only asset.

(h) Z has 100 shares of Class Avoting common stock and 50 shares of Class B nonvoting common stockoutstanding. Apart from the differences in voting rights, the twoclasses of common stock have equal rights with regard to dividendsand liquidation distributions. Z also has an authorized butunissued class of nonvoting stock which would be limited andpreferred as to dividends. The Class A common stock is owned byfour individuals and the Class B common stock is owned by E and F(a married couple) as tenants-in-common.

(i) Same as (h), above,except that Z enters into a binding agreement with its shareholdersto make larger annual distributions to shareholders who bearheavier state income tax burdens. The amount of the distributionsis based on a formula that will give the sharehold­ers equalafter-tax distributions.

(j) Z has four individualshareholders each of whom own 100 shares of Z common stock forwhich each paid $10 per share. Each shareholder also owns $25,000of 15-year Z bonds. The bonds bear interest at 3% above the primelending rate established by the Chase Manhattan Bank, adjustedquarterly, and are subordinated to general creditors ofZ.

Answer: Eligible
Answer: x+ .25
Answer: That is a lot.

Question 3 (25 marks)

 

The balance sheets of Supermart Limited for the years ended 31/3/2022 and 31/3/2021 are given below:

 

 

31/3/2022

31/3/2021

Assets

$

$

Land

4,750,000

2,500,000

Building

4,000,000

3,750,000

Accumulated depreciation

 

-300,000

Plant and Equipment

2,085,000

1,841,250

Less Accumulated depreciation Plant & Equipment

-1,175,000

-975,000

Investment in Equity Instruments

1,875,000

1,125,000

Bank

18,750

12,500

Financial Assets Held for Trading

1,000,000

625,000

Dividends Receivable

80,000

37,500

Accounts receivable

1,500,000

1,587,500

Inventory

100,000

156,250

Total Assets

14,233,750

10,360,000

Liabilities

 

 

Accounts Payable

250,000

625,000

Dividend Payable

375,000

350,000

Accrued Expenses

500,000

125,000

Accrued Interest

187,500

53,750

Tax Payable

268,750

187,500

Long Term Loan Due within One Year

250,000

225,000

Long Term Loan

750,000

1,000,000

Total Liabilities

2,581,250

2,566,250

Net assets

11,652,500

7,793,750

Shareholders’ Equity

 

 

Contributed equity

8,750,000

6,525,000

Asset Revaluation Reserve

1,112,500

625,000

Fair Value Reserve

943,750

443,750

Retained profits

846,250

200,000

Total Shareholder equity

11,652,500

7,793,750

Question 3 continued

 

The Statement of Comprehensive Income of Supermart Limited for the year ended 31/3/2022 is given below:

 

 

$

Revenue

13,250,000

Other Income and Gains

650,000

Total Income

13,900,000

Less Cost of Goods Sold

-10,693,750

Gross Profit

3,206,250

Less: Operating Expenses

-1,943,750

Operating Profit

1,262,500

Less Interest Expense

-162,500

Profit Before Tax

1,100,000

Taxation

-268,750

Profit for the year

831,250

Other Comprehensive income:

 

Increase in Asset Revaluation Reserve

487,500

Fair Value Reserve

500,000

Total comprehensive income

1,818,750

 

Additional Information for year ended 31st March 2022:

Other Income and gains includes the following:

Dividend Income $312,500

Some items of plant and equipment were disposed on 1 April 2021. Gains from Disposal of Plant and equipment (Carrying Value = 112,500; Accumulated Depreciation $50,000) is $25,000.

Gains from Revaluation of financial assets held for trading $250,000

Interest Revenue $62,500

The balance in the Asset Revaluation Reserve Account is in relation to revaluation of land.

Land was acquired for cash considerations. There was no disposal of land during the year.

Building was revalued for the first time in 2022 and revaluation loss of $125,000 was included in operating expenses. Depreciation of building for the year ended 31st March 2022 is $75,000

Financial assets held for trading were acquired for cash considerations.

The company issued new shares for cash considerations.

Included in other income and gains is an amount $250,000 related to gain from revaluation of financial assets held for trading.

Included in operating expenses are accrued expenses of $437,500 and depreciation charges for building and plant and equipment.

Dividends were paid in July 2021.

 

Required

Prepare a Statement of Cash Flows for Supermart Limited. for the year ended 31st March 2022.

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