ACC 317 Week 1 Homework

Benton company (BC) has one owner, who is
in the 33% Federal income tax bracket. BC’s gross income is $395,000 and its
ordinary trade or business deductions are $245,000. Compute the Federal income
tax liability on BC’s income for the current year under the following
assumptions:
a. BC is operated as a proprietorship, and the owner withdraws $100,000 for
personal use.
b. BC is operated as a corporation, pays out $100,000 as salary to its
shareholder, and pays out the remainder of its earnings as dividends.
c. BC is operated as a corporation and pays out no salary or dividends to its
shareholder.
d. BC is operated as a corporation, pays out $100,000 as salary to its
shareholder, and pays the remainder of its earnings as dividends.
e. Assume that Robert Benton of 1121 Monroe Street, Ironton, OH 45638 is the
owner of BC , which was operated as a proprietorship. Robert is thinking about
incorporating the business for next year and asks your advice. He expects about
the same amount of income and expenses and plans to take $100,000 per year out
of the company whether he incorporates or not. Write a letter to Robert [based
on your analysis in (a) and (b)] containing your recommendations.

During the current year,
Swallow corporation, a calendar year C corporation, has the following
transactions:
income from operations $660,000
Expenses from operations $720,000
Dividends received from Brown Corp $240,000
a. Swallow
Corporation owns 12% of Brown Corporation’s stock. How much is Swallow’s taxable income or NOL
for the year?
b. Assume
instead that Swallow Corporation owns 26% of Brown Corporation’s stock. How
much is Swallow’s taxable income or NOL for the year?
The following information
for 2014 relates to Sparrow Corporation, a calendar year, accrual method
taxpayer.
Net income per books (after tax) $174,100
Federal income tax expense per books $86,000
Tax-exempt interest income $4,500
MACRS Depreciation in excess of straight-line depreciation
used for financial statement purposes $7,200
Excess of capital loss over capital gains $9,400
Nondeductible meals and entertainment $5,500
Interest on loan to purchase tax-exempt bonds $1,100
based on the above information, use schedule M-1 of Form 1120, which is
available on the IRS website, to determine Sparrow’s taxable income for 2014.
Cynthia, a sole proprietor, was engaged in
a service business and reported her income on the cash basis. On February 1,
2014, she incorporates her business as Dove Corporation and transfers the
assets of the business to the corporation in return for all of the stock in
addition to the corporation’s assumption of her proprietorship’s liabilities.
All of the receivables and the unpaid trade payables are transferred to the
newly formed corporation. The balance sheet of the corporation immediately
after its formation is as follows:
Dove Corporation
Balance Sheet
February 1, 2014
Assets
Basis to Dove Fair Market Value
Cash $ 80,000 $ 80,000
Accounts receivable –0– 240,000
Equipment (cost $180,000; depreciation
previously claimed $60,000) 120,000 320,000
Building (straight-line depreciation) 160,000
400,000
Land 40,000 160,000
Total $400,000 $1,200,000
Liabilities and Stockholder’s Equity
Liabilities:
Accounts payable—trade $ 120,000
Notes payable—bank 360,000
Stockholder’s equity:
Common stock 720,000
Total $1,200,000
Discuss the tax consequences of the
incorporation of the business to Cynthia and to Dove Corporation.
Frank, Cora, and Mitch are equal shareholders in
Purple Corporation. The corporation’s assets have a tax basis of $50,000 and a
fair market value of $600,000. In the current year, Frank and Cora each loan
Purple Corporation $150,000. The notes to Frank and Cora bear interest of 8%
per annum. Mitch leases equipment to Purple Corporation for an annual rental of
$12,000. Discuss whether the shareholder loans from Frank and Cora might be
reclassified as equity. Consider in your discussion whether Purple Corporation
has an acceptable debt-equity ratio.