Question 1

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
​
-Charitable contribution carryforward deducted in the current year.

Accepted Answer

Charitable contribution carryforwards deducted in the current year would increase current Earnings and Profits (E&P) because they are added back to taxable income in the computation of E&P. This adjustment is necessary because these contributions, while deductible for taxable income purposes in the year they are carried forward to, do not reduce E&P in the year of the carryforward.

Question 2

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
-Gain realized, but not recognized, in a like-kind exchange transaction in 2017.

Accepted Answer

Like-kind exchange transactions do not result in recognized gain or loss for tax purposes, but they do affect a corporation's E & P. The gain realized will increase E & P, but since it is not recognized, it will not have any effect on taxable income, so there will be no adjustment needed. Therefore, the answer is C, no effect.

Question 3

Finch Corporation (E & P of $400,000) distributed machinery ($10,000 adjusted basis, $150,000 fair market value) to its sole shareholder, Kathleen.The property is subject to a $50,000 mortgage, which Kathleen assumed.How much dividend income does Kathleen recognize as a result of the distribution and what is her basis in the machinery?

Accepted Answer

The answer of Finch Corporation (E & P of $400,000)...

Question 4

On January 1, Gold Corporation (a calendar year taxpayer) has E & P of $30,000 and generates no additional E & P during the year.On March 31, the corporation distributes $40,000 to its sole shareholder, Wyatt (basis in stock of $8,000).Determine the effect of the distribution on Wyatt's taxable income and stock basis.

Accepted Answer

The answer of On January 1, Gold Corporation (a calendar...

Question 5

On January 1, Tulip Corporation (a calendar year taxpayer) has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year, Tulip distributes $600,000 ($300,000 each) to its equal shareholders, Anne and Tom.Anne has a basis in her stock of $65,000, while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

Accepted Answer

The answer of On January 1, Tulip Corporation (a calendar...

Question 6

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
​
-Penalties paid to state government for failure to comply with state law.

Accepted Answer

Penalties paid to state government for failure to comply with state law are deductible expenses that reduce taxable income, therefore decreasing current E&P.

Question 7

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
-Domestic production activities deduction claimed in 2017.

Accepted Answer

The domestic production activities deduction, while reducing taxable income, must be added back to taxable income to calculate current Earnings and Profits (E&P), resulting in an increase in E&P for the year it's claimed.

Question 8

Ashley, the sole shareholder of Hawk Corporation, has a stock basis of $200,000 at the beginning of the year.On July 1, she sells all of her stock to Matt for $1 million.On January 1, Hawk has accumulated E & P of $90,000 and during the year, current E & P of $160,000.Hawk makes the following cash distributions: $270,000 to Ashley on March 31 and $90,000 to Matt on December 1.How are the distributions taxed to Ashley and Matt? What is Ashley's recognized gain on the sale to Matt?

Accepted Answer

The answer of Ashley, the sole shareholder of Hawk Corporation,...

Question 9

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
​
-Gain realized (but not recognized) on a like-kind exchange.

Accepted Answer

Like-kind exchange rules only defer the recognition of gain, so the gain is not included in current E&P until a taxable transaction occurs. Therefore, the adjustment has no effect on current E&P.

Question 10

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
​
-Dividends received deduction.

Accepted Answer

The dividends received deduction is added back to taxable income to arrive at current E&P because it is a deduction taken to arrive at taxable income that does not reduce cash.

Question 11

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
-Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2017.

Accepted Answer

The answer of Matching
Using the legend provided, classify each statement...

Question 12

Sylvia owns 25% of Cormorant Corporation.Cormorant sells diamonds to retail jewelry businesses.While Cormorant has a deficit in accumulated E & P of $56,000 at the beginning of the year, its current E & P is $500,000.Since the company had a successful year, Cormorant pays a $36,000 distribution to each of the company's four shareholders on December 15.Three shareholders receive cash, but Cormorant distributes a diamond (adjusted basis of $40,000 and a fair market value of $36,000) to Sylvia in lieu of cash.Determine the effect of distributing the diamond on Cormorant's and on Sylvia's taxable income.What is Sylvia's basis in the diamond? Was the distribution good tax planning on the part of Cormorant? Why or why not?

Accepted Answer

The answer of Sylvia owns 25% of Cormorant Corporation.Cormorant sells...

Question 13

Brown Corporation, an accrual basis corporation, has taxable income of $150,000 in the current year.Included 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 capital gains this year, none of the loss is deductible.
? The corporation's 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 company's LIFO recapture amount increased by $3,000.
? Brown claimed a domestic production activities deduction under § 199 of $1,500.
?
What is Brown's current E & P for the year?

Accepted Answer

The answer of Brown Corporation, an accrual basis corporation, has...

Question 14

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
​
-Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value).

Accepted Answer

Proceeds of life insurance received upon the death of a key employee, where the company is the beneficiary and the policy had no cash surrender value, are generally not taxable. However, for E&P calculations, these proceeds are added back to taxable income, resulting in an increase to current E&P.

Question 15

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
​
-State income tax paid in the current year.

Accepted Answer

The answer of Using the legend provided, classify each statement...

Question 16

Matching
Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
-Section 179 expense in second year following election.

Accepted Answer

When Section 179 expense is taken in a year, it usually results in a decrease in current E&P for that year. However, in the second year following the election, the opposite happens and there is a corresponding increase in current E&P. Therefore, the correct choice is B.

Question 17

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
​
-A decrease in the LIFO recapture amount during the year.

Accepted Answer

A decrease in the LIFO recapture amount during the year would decrease current E&P.

Question 18

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
​
-Excess capital loss in year incurred.

Accepted Answer

The answer of Using the legend provided, classify each statement...

Question 19

Thrush, Inc., is a calendar year, accrual basis corporation with Henry as its sole shareholder (basis in his stock is $90,000).On January 1 of the current year, Thrush Corporation has accumulated E & P of $200,000.Before considering the effect of the distribution described below, the corporation's current E & P is $50,000.On November 1, Thrush distributes an office building to Henry.The office building has an adjusted basis of $80,000 (fair market value of $100,000) and is subject to a mortgage of $110,000.Assume that the building has been depreciated using the ADS method for both income tax and E & P purposes.What are the tax consequences of the distribution to Thrush and to Henry? (In your answer, be sure to describe the effects on taxable income for both Thrush and Henry, the impact of the distribution on Thrush's E & P, and Henry's basis in the building.)

Accepted Answer

The answer of Thrush, Inc., is a calendar year, accrual...

Question 20

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017.
​
-Intangible drilling costs deducted currently.

Accepted Answer

Intangible drilling costs that are deducted currently for tax purposes would need to be added back to taxable income to arrive at current E&P, resulting in an increase. This is because for E&P calculations, these costs are typically capitalized and amortized over time, rather than deducted immediately.

Quiz 13: Earnings Profits and Distributions

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Charitable contribution carryforward deducted in the current year.

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Gain realized, but not recognized, in a like-kind exchange transaction in 2017.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Penalties paid to state government for failure to comply with state law.

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Domestic production activities deduction claimed in 2017.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Gain realized (but not recognized) on a like-kind exchange.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Dividends received deduction.

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2017.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value) .

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -State income tax paid in the current year.

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Section 179 expense in second year following election.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -A decrease in the LIFO recapture amount during the year.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Excess capital loss in year incurred.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Intangible drilling costs deducted currently.

Quiz 13: Earnings Profits and Distributions

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. ​ -Charitable contribution carryforward deducted in the current year.

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Gain realized, but not recognized, in a like-kind exchange transaction in 2017.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. ​ -Penalties paid to state government for failure to comply with state law.

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Domestic production activities deduction claimed in 2017.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. ​ -Gain realized (but not recognized) on a like-kind exchange.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. ​ -Dividends received deduction.

Matching Using the legend provided, classify each statement accordingly.In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. -Premiums paid on key employee life insurance policy (assume no increase in cash surrender value of policy) in 2017.

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. ​ -Proceeds of life insurance received upon the death of a key employee (policy had no cash surrender value) .

Using the legend provided, classify each statement accordingly.In All cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. ​ -State income tax paid in the current year.