Mike and Nancy are equal shareholders in MN Corporation, an S corporation

C:11-37 Determination of Pass-Throughs and Stock Basis Adjustments

Mike and Nancy are equal shareholders in MN Corporation, an S corporation. The corporation, Mike, and Nancy are calendar year taxpayers. The corporation has been an S corporation during its entire existence and thus has no accumulated E&P. The shareholders have no loans to the corporation. The corporation incurred the following items in the current year:

Sales $300,000
Cost of goods sold 140,000
Dividends on corporate investments 10,000
Tax-exempt interest income 3,000
Section 1245 gain (recapture) on equipment sale 22,000
Section 1231 gain on equipment sale 12,000
Long-term capital gain on stock sale 8,000
Long-term capital loss on stock sale 7,000
Short-term capital loss on stock sale 6,000
Depreciation 18,000
Salary to Nancy 20,000
Meals and entertainment expenses 7,800
Interest expense on loans allocable to:
Business debt 32,000
Stock investments 6,400
Tax-exempt bonds 1,800
Principal payment on business loan 9,000
Charitable contributions 2,000
Distributions to shareholders ($15,000 each) 30,000

a. Compute the S corporation’s ordinary income and separately stated items.
b. Show Mike’s and Nancy’s shares of the items in Part a.
c. Compute Mike’s and Nancy’s ending stock bases assuming their beginning balances are $100,000 each. When making basis adjustments, apply the adjustments in the order outlined on pages C:11-24 and C:11-25 of the text.


Click here for the solution: Mike and Nancy are equal shareholders in MN Corporation, an S corporation

Barry and Kurt are equal partners in the BK Partnership

52. Barry and Kurt are equal partners in the BK Partnership. Barry receives a guaranteed payment of $55,000. In addition to the guaranteed payment, Barry withdraws $10,000 from the partnership. The partnership has $24,000 in ordinary income during the year.

a. how mush income must Barry report from BK Partnership?
b. what is the effect on Barry’s partnership basis?


Click here for the solution: Barry and Kurt are equal partners in the BK Partnership

Bailey is one of four equal unrelated shareholders of Checker Corporation

C:4-52 Comparison of Dividends and Redemptions. Bailey is one of four equal unrelated shareholders of Checker Corporation. Bailey has held Checker stock for four years and has a basis in her stock of $40,000. Checker has $280,000 of current and accumulated E&P and distributes $100,000 to Bailey.
a. What are the tax consequences to Checker and to Bailey if Bailey is an individual and the distribution is treated as a dividend?
b. In Part a, what would be the tax consequences if Bailey were a corporation?
c. What are the tax consequences to Checker and to Bailey (an individual) if Bailey surrenders all her stock in a redemption qualifying for sale treatment?
d. In Part c, what would be the tax consequences if Bailey were a corporation?
e. Which treatment would Bailey prefer if Bailey were an individual? Which treatment would Bailey Corporation prefer?

Click here for the solution: Bailey is one of four equal unrelated shareholders of Checker Corporation

Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity

Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table.

Project A Project B
Initial Investment(CF) $80,000 $50,000
Year Cash Inflows(CF)
1 15,000 15,000
2 20,000 15,000
3 25,000 15,000
4 30,000 15,000
5 35,000 15,000

a. Calculate each project's payback period
b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.

Click here for the solution: Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity

The Heron Partnership was formed on July 1 of the current year and admitted Carl and Megan as equal partners on that date

The Heron Partnership was formed on July 1 of the current year and admitted Carl and Megan as equal partners on that date. The partners each contributed $ 200,000 of cash to establish a children’s clothing store in a local shopping mall. The partners spent July and August buying inventory, equipment, supplies, and advertising for their "Grand Opening" on October 1. Following are some of the costs the partnership incurred during its first year of operations:

Legal fees to form partnership 2,000
Advertising for "Grand Opening" 15,000
Advertising after opening 10,000
Consulting fees for establishing accounting system 5,000
Rent, six months at $ 2,000/ month 12,000
Utilities at $ 600 per month 3 3,600
Salaries to sales clerks 30,000
Payments to Carl and Megan for services ($ 5,000/ month each for three months, beginning in October) 30,000
Tax return preparation expense 5,000

In addition, the partnership purchased all of the assets of Granny Newcombs, Inc. Of the total purchase price for these assets, $ 60,000 was allocated to the trade name and logo.

Determine how each of the above costs is treated by the partnership, and identify the period over which the costs can be deducted, if any.

Click here for the solution: The Heron Partnership was formed on July 1 of the current year and admitted Carl and Megan as equal partners on that date