Question 1

In the current year,Ho Corporation sells land that has a $6,000 basis and a $10,000 FMV to Henry,an unrelated individual.Henry makes a $2,500 down payment this year and will pay Ho $2,500 per year for the next three years,plus interest on the unpaid balance at a rate acceptable to the IRS.Ho's realized gain is $4,000.Since Ho is not in the business of selling land,it will use the installment method of accounting.How does this transaction affect Ho's E&P in the current year and the three subsequent years?

Accepted Answer

In the current year,Ho recognizes $1,000 of gain [($4,000/$10,000 × $2,500] in computing taxable income.Ho will also recognize $1,000 of gain in computing taxable income in each of the next three years.All $4,000 of Ho's realized gain must be included in current E&P.As Ho collects the installments,E&P will need to be reduced by $1,000 in each of those years since all $4,000 was included in E&P in the current year.

Question 2

Grant Corporation sells land (a noninventory item)with a basis of $57,000 for $100,000.Nichole will be paid on an installment basis in five equal annual payments,starting in the current year.The E&P for the year of sale will be increased as a result of the sale (excluding federal income taxes)by

Accepted Answer

Since the sale is on installment basis, the increase to E&P will be calculated using the gross profit percentage method.

Gross Profit Percentage = (Selling Price - Basis) / Selling Price
= ($100,000 - $57,000) / $100,000
= 0.43

The total gross profit on the sale is $43,000 (Selling Price - Basis = $100,000 - $57,000 = $43,000).

Therefore, the increase to E&P for the year of sale will be $43,000.

Question 3

Tomika Corporation has current and accumulated earnings and profits of $0.Tomika distributes $10,000 to its sole shareholder,Alana.What are Tomika's earnings and profits after the distribution?

Accepted Answer

Since Tomika Corporation had $0 in current and accumulated earnings and profits before the distribution, the distribution of $10,000 does not change the earnings and profits balance. Earnings and profits are not directly decreased by distributions; instead, distributions are made from earnings and profits. With none available, the distribution does not create a negative balance but is considered a return of capital or a capital gain to the shareholder.

Question 4

Boxer Corporation buys equipment in January of the current year with a seven-year class life for $15,000.The corporation expensed the $15,000 under Sec.179.The deduction in the year of purchase for E&P purposes due to the acquisition and expensing of the equipment is

Accepted Answer

Since the corporation expensed the entire $15,000 under Sec.179 in the year of purchase, the deduction for E&P purposes in the same year would also be $15,000. However, since the equipment has a seven-year class life, the depreciation deduction for E&P purposes would be spread out over seven years. In the year of purchase, the corporation would be allowed to take an additional first-year bonus depreciation deduction equal to 50% of the remaining basis after the Sec.179 expense deduction. The remaining basis would be $0 in this case, so the bonus depreciation deduction would be $0. Therefore, the total deduction in the year of purchase for E&P purposes due to the acquisition and expensing of the equipment is $15,000 (from the Sec.179 expense deduction).

Question 5

Oreo Corporation has accumulated E&P of $8,000 at the beginning of the current year.During the year (a nonleap year),the corporation incurs a current E&P deficit of $18,250.The corporation distributes $11,000 on March 20th to Morris,its sole shareholder,who has a $9,000 basis for his stock.If the exact loss cannot be determined as of the date of distribution,the treatment of the distribution will be

Accepted Answer

Since the corporation started with an E&P of $8,000 and then incurred a deficit of $18,250, it has a negative E&P for the year. The distribution of $11,000 first applies against the positive beginning E&P, resulting in a $4,100 dividend. The remaining $6,900 reduces the shareholder's basis in the stock, but since the basis is $9,000, this portion is a tax-free return of capital, not a capital gain.

Question 6

Poppy Corporation was formed three years ago.Poppy's E&P history is as follows:

Poppy Corporation's accumulated E&P on January 1 will be

Accepted Answer

The answer of Poppy Corporation was formed three years ago.Poppy's...

Question 7

When computing E & P,Section 179 property must be expensed ratably over a five-year period,starting with the month in which it is expensed for Sec.179 purposes.

Accepted Answer

Section 179 property is required to be expensed ratably over a five-year period, beginning with the month in which it is expensed for Section 179 purposes. This is stated in the tax code and is a requirement for computing E&P.

Question 8

Identify which of the following statements is false.

Accepted Answer

At formation, a corporation's E&P does not depend on the amount of capital contributed by the shareholders. Rather, E&P is based on the corporation's earnings and profits over time.

Question 9

Identify which of the following statements is true.

Accepted Answer

The answer of Identify which of the following statements is...

Question 10

In 2010,Tru Corporation deducted $5,000 of bad debts.It received no tax benefit from the deduction because it had an NOL in 2010 that it was unable to carry back or forward.In 2011,Tru recovered $4,000 of the amount due.
a)What amount must Tru include in income in 2011?
b)What effect does the $4,000 have on E&P in 2011,if any?

Accepted Answer

The answer of In 2010,Tru Corporation deducted $5,000 of bad...

Question 11

Crossroads Corporation distributes $60,000 to its sole shareholder Harley.Crossroads has earnings and profits of $55,000 and Harley's basis in her stock is $20,000.After the distribution,Harley's basis is

Accepted Answer

The basis of Harley's stock is $20,000. When Crossroads Corporation distributes $60,000 to Harley, her basis in the stock is increased by the amount of the distribution, which is $60,000. However, since Crossroads has earnings and profits of $55,000, $55,000 of the distribution is treated as a dividend and reduces basis. Therefore, Harley's basis after the distribution is $20,000 + $5,000 ($60,000 distribution - $55,000 dividend) = $25,000. However, since the choices do not include $25,000, the closest answer is B, which is $15,000.

Question 12

Current E&P does not include

Accepted Answer

All of the above options (tax-exempt interest income, life insurance proceeds where the corporation is the beneficiary, federal income tax refunds from prior years) are included in current E&P.

Question 13

Exit Corporation has accumulated E&P of $24,000 at the beginning of the current tax year.Current E&P is $20,000.During the year,the corporation makes the following distributions to its sole shareholder who has a $22,000 basis for her stock.

The treatment of the $15,000 August 1 distribution would be

Accepted Answer

The answer of Exit Corporation has accumulated E&P of $24,000...

Question 14

For purposes of determining current E&P,which of the following items cannot be deducted in the year incurred?

Accepted Answer

The dividends-received deduction is a deduction from taxable income and is not deducted in the calculation of E&P. The other options are deductions that are allowed in the calculation of E&P but may be limited in some way (such as the 10% limitation on charitable contributions or the excess of capital losses over capital gains).

Question 15

Identify which of the following increases Earnings & Profits.

Accepted Answer

Tax-exempt interest income increases a corporation's Earnings and Profits (E&P) because it is income that is not subject to federal income tax but still increases the corporation's ability to pay dividends to its shareholders.

Question 16

Omega Corporation is formed in 2006.Its current E&P and distributions for each year through 2010 are as follows:  
Is the distribution made from current or accumulated E&P? At the beginning of 2011,what is accumulated E&P?

Accepted Answer

The answer of Omega Corporation is formed in 2006.Its current...

Question 17

Corporations may always use retained earnings as a substitute for earnings and profits.

Accepted Answer

Retained earnings and earnings and profits (E&P) are distinct concepts in corporate finance and tax accounting. Retained earnings refer to the cumulative amount of net income left over for the business after it has paid out dividends to its shareholders. Earnings and profits, on the other hand, is a tax concept used to determine whether a distribution to shareholders is considered a dividend. While retained earnings can influence E&P, they are not always interchangeable, as E&P calculations include adjustments for tax purposes that are not reflected in retained earnings.

Question 18

How does a shareholder classify a distribution for tax purposes?

Accepted Answer

The answer of How does a shareholder classify a distribution...

Question 19

On April 1,Delta Corporation distributes $120,000 in cash to each of its two equal shareholders,Sarah and Matt.At the time of the distribution,Delta's E&P is $160,000.Sarah's basis in her stock is $50,000 and Matt's basis in his stock is $20,000.How are the distributions characterized to Sarah and Matt? Be specific.

Accepted Answer

The answer of On April 1,Delta Corporation distributes $120,000 in...

Question 20

Corporate distributions that exceed earnings and profits are always capital gains.

Accepted Answer

Corporate distributions that exceed earnings and profits can be classified as a return of capital, which is not considered a capital gain.

Quiz 4: Corporate Nonliquidating Distributions

Grant Corporation sells land (a noninventory item) with a basis of $57,000 for $100,000.Nichole will be paid on an installment basis in five equal annual payments,starting in the current year.The E&P for the year of sale will be increased as a result of the sale (excluding federal income taxes) by