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ACC331, Examination 2, Chapters 17-20 April 2013




Question;Instructions: All eight problems are required for a point value of 12 points each. Thisis an open book/open notes examination, but must be completed on an individual basis(no group work). You must use your computers in completing this examination. Pleasebe sure to show supporting calculations in order to receive partial credit for incorrectanswers. Do not use any external sources in completing this exam other than your textbook or your class notes. Any other source used to complete your exam will render yourexam not acceptable, resulting in a failure exam grade. Therefore, do not use any online sources of information, templates, answer keys, etc. in completing this exam. Thisexam must be completed and returned to me at our next class on Monday, April 8, 2013 inorder to avoid a 10 point penalty reduction in exam grade for each day received late.Please highlight final answersProblems:1. During the current year, Coyote Corporation (a calendar year C corporation) has the following transactions:Income from operationsExpenses from operationsDividends received from Roadrunner Corporation$260,000285,000115,000a.Coyote owns 5% of Roadrunner Corporations stock. How much is Coyote Corporations tax able income (loss) for the year?b.Would your answer change if Coyote owned 25% of Roadrunner Corporations stock?2. Heron Corporation, a calendar year, accrual basis taxpayer, provides the following information for this yearand asks you to prepare Schedule M-1:Net income per books (after-tax)Taxable incomeFederal income tax liabilityInterest income from tax-exempt bondsInterest paid on loan incurred to purchase tax-exempt bondsLife insurance proceeds received as a result of death of Herons presidentPremiums paid on policy on life of Herons presidentExcess of capital losses over capital gainsRetained earnings at beginning of year$239,700195,00059,3005,0002,000100,0004,5002,000375,000Cash dividends paidTax depreciation in excess of book depreciation3. Nancy, Guy, and Rod form Goldfinch Corporation with the following consideration.AdjustedBasis90,0007,500Fair MarketValueFrom NancyCashInventoryFrom GuyLand and building$120,000 $120,00090,000 130,000120,000 250,000From RodLegal and accounting services to incorporate0 50,000Goldfinch issues its 500 shares of stock as follows: 250 to Nancy, 200 to Guy, and 50 to Rod. In addition,Guy gets $50,000 in cash.a.Does Nancy, Guy, or Rod recognize gain (or income)?b.What basis does Guy have in the Goldfinch stock?c.What basis does Goldfinch Corporation have in the inventory? In the land and building?d.What basis does Rod have in the Goldfinch stock?4. In 2005, Donna transferred assets (basis of $300,000 and fair market value of $250,000) to Egret Corporationin return for 200 shares of 1244 stock. Due to 351, the transfer was nontaxable, therefore, Donnas basisin the Egret stock is $300,000. In 2006, Donna sells 100 of these shares to Walter (a family friend) for$100,000. In 2012, Egret Corporation files for bankruptcy, and its stock becomes worthless.a.How much loss may Donna recognize in 2006 and 2012? What is the nature of this loss?[Note: Donna is married and always files a joint return.]b.How much loss may Walter (a single taxpayer) recognize in 2012, and what is the nature ofsuch loss?5. On January 1, Gold Corporation (a calendar year taxpayer) has E & P of $30,000 and generates no additionalE & P during the year. On March 31, the corporation distributes $40,000 to its sole shareholder, Wyatt (basisin stock of $8,000). Determine the effect of the distribution on Wyatts taxable income and stock basis.6. Daisy Corporation is the sole shareholder of Ostrich Corporation, which it hopes to sell within the next threeyears. The Ostrich stock (basis of $25 million) is currently worth $30 million, but Daisy believes that it wouldbe easier to find a buyer if it was worth less. To lower the value of its stock, Ostrich distributes $4 millioncash to Daisy (sufficient E & P exists to cover the distribution). At a later date, Daisy sells Ostrich for $26million.a.What are the tax consequences to Daisy on the sale?b.What would be the tax consequences if Ostrich had not first distributed the $4 million in cashand Daisy sold the Ostrich stock for $30 million?7. Brown Corporation, an accrual basis corporation, has taxable income of $150,000 in the current year. In cluded in its determination of taxable income are the following transactions.Brown incurred a $65,000 capital loss from the sale of stock. Because Brown had no capitalgains this year, none of the loss is deductible.The corporations Federal income tax liability is $41,750.Brown incurred $18,000 in nondeductible meal and entertainment expenses.Brown uses the LIFO method when accounting for inventory. This year, the companys LIFOrecapture amount increased by $3,000.Brown claimed a domestic production activities deduction under 199 of $1,500.What is Browns current E & P for the year?8. The stock in Camel Corporation is owned by Albert and Tomoko, who are unrelated. Albert owns 30% andTomoko owns 70% of the stock in Camel Corporation. All of Camel Corporations assets were acquired bypurchase. The following assets are to be distributed in complete liquidation of Camel Corporation:CashInventoryAdjustedFair MarketBasisValue$400,000 $400,00080,000 100,000EquipmentLand230,000390,000200,000300,000a.What gain or loss would Camel Corporation recognize if it distributes the land to Albert andthe cash, inventory, and equipment to Tomoko?b.What gain or loss would Camel Corporation recognize if it distributes the inventory and equip ment to Albert and the cash and land to Tomoko?


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