Abel, Baker and Cane decided to form the ABC Corporation. They contributed the f
ID: 2579999 • Letter: A
Question
Abel, Baker and Cane decided to form the ABC Corporation. They contributed the following assets on Jan 1, 2005. Abel contributed cash of $37,000 and some land which cost him $32000 and had a fair market value of $50000. The land had a mortgage attached of $12000 which was assumed by the corporation. Baker contributed services which were valued at $30,000 and some equipment which cost $52,000 but had a fair market value of $45000. Cane contributed inventory which had a fair market value of $58000 and had a cost basis of $23000 to Cane. He also contributed tools which had a basis of $28000 and fair market value of $24,000. Each shareholder received 100 shares of stock except Cane who also received $7000 of cash. The corporation started operations on January 1, 2005. The results of the year ended December 31, 2012 were as follows: Book income Sales $750000 Cost of Sales 485000 Salary expense 125000 Rent expense 32000 Utility expense 14250 Depreciation expense 43000 Interest expense 17500 Meal expense 11300 Insurance expense 8400 Capital gains 19700 Capital losses 14800 Charitable contributions 15400 Interest income 33000 Dividend income 47900 Maintenance expense 9400 Fines 6100 Tax depreciation consisted of a $12000 179 expense deduction and $24000 of regular depreciation using the half year convention. The interest expense included $4500 of interest on loans to buy the tax exempt securities. The insurance expense included $1500 of premiums to purchase key man life insurance. Of the $33000 of interest income $18200 was from tax exempt bonds. All of the dividend income came from corporations which ABC had less than a 10% stake. $1400 of dividend income came from a foreign corporation. During 2012 ABC made the following distributions to the shareholders. Abel received cash of $7000 and section 1231 property which had a basis of $4000 and a fair market value of $11000. Baker received a parcel of land which cost $32000 but had a fair market value of $37000. Attached to the land was a mortgage of $19000 assumed by Baker. Cane received cash of $18000. At the beginning of 2012 ABC had accumulated earnings and profits of $13000. How much taxable income did the ABC Corporation have during 2012? 3. How much is ABC’s income tax? 4. How much is the current earnings and profit for ABC for the year 2012? 5. What effect does the distribution have on Abel? Is it a dividend, return of capital or capital gain and how much? 6. What effect does the distribution have on Baker? Is it a dividend, return of capital or capital gain and how much? 7. What effect does the distribution have on Cane? Is it a dividend, return of capital or capital gain and how much? 8. What effect do the distributions have upon ABC’s earnings and profit? What is the amount of earnings and profit at the end of 2012?
Explanation / Answer
3)
NET INCOME
15650
ADD BACK
43000
LESS ALLOWED DEP
-12179
DEPN HALF YEAR
-24000
INTEREST EXOENSE
+4500
INSURANCE
+1500
INT INCOME
-18200
DIV INCOME
+1400
TAXABLE INCOME
11671
35%
4085
4)
$
$
SALES
750000
COS
485000
GP
265000
INTEREST INCOME
33000
TOTAL GROSS INCOME
298000
LESS: EXPENSES
RENT
32000
SALARY
125,000
UTILITY
14250
DEP
43000
INTEREST
17500
MEALS
11300
INSURANCE
8400
CHARITY CONTRIBUTION
15400
MAINTENANCE
9400
FINES
6100
(282350)
NET INCOME
15650
5) 6) 7) RETURN OF CAPITAL $18000 EACH
8)
WILL HAVE NO EFFECT ON INCOME
9)
$
$
SALES
750000
COS
485000
GP
265000
INTEREST INCOME
33000
TOTAL GROSS INCOME
298000
LESS: EXPENSES
RENT
32000
SALARY
125,000
UTILITY
14250
DEP
43000
INTEREST
17500
MEALS
11300
INSURANCE
8400
CHARITY CONTRIBUTION
15400
MAINTENANCE
9400
FINES
6100
(282350)
NET INCOME
15650
RETAINED B/F
13000
C/F
28650
NET INCOME
15650
ADD BACK
43000
LESS ALLOWED DEP
-12179
DEPN HALF YEAR
-24000
INTEREST EXOENSE
+4500
INSURANCE
+1500
INT INCOME
-18200
DIV INCOME
+1400
TAXABLE INCOME
11671
35%
4085
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