Question: Castle and Dorabella formed an S corporation;

> USCo owns 65% of the voting stock of LandCo, a Country X corporation. Terra, an unrelated Country Y corporation, owns the other 35% of LandCo. LandCo owns 100% of the voting stock of OceanCo, a Country Z corporation. Assuming that USCo is a U.S. sharehol

> Food, Inc., a domestic corporation, owns 70% of the stock of Drink, Inc., a foreign corporation. For the current year, Food receives a dividend of $20,000 from Drink. Drink’s E & P (after taxes) and foreign taxes are $6 million and $800,000, respectively

> Dorcas incurs the following research expenditures. In-house wages………………………………. $60,000 In-house supplies ………………………………. 5,000 Paid to ABC, Inc., for research……………. 80,000 a. Determine the amount of qualified research expenditures. b. Assuming that the b

> Fleming, Inc., a domestic corporation, operates in both Canada and the United States. This year, the business generated taxable income of $400,000 from foreign sources and $300,000 from U.S. sources. All of Fleming’s foreign-source income is in the gener

> USCo, a domestic corporation, reports worldwide taxable income of $1.5 mil- lion, including a $400,000 dividend from ForCo, a wholly owned foreign corporation. ForCo’s undistributed E & P totals $16 million, and it has paid $10 million of foreign income

> ABC, Inc., a domestic corporation, reports $50 million of taxable income, including $15 million of general limitation foreign-source taxable income, on which ABC paid $5 million in foreign income taxes. The U.S. tax rate is 35%. What is ABC’s foreign tax

> Klein, a domestic corporation, receives a $10,000 dividend from ForCo, a wholly owned foreign corporation. The deemed-paid (indirect) foreign tax credit associated with this dividend is $3,000. What is the total gross income included in Klein’s tax retur

> QuinnCo could not claim all of the income taxes it paid to Japan as a foreign tax credit (FTC) this year. What computational limit probably kept QuinnCo from taking its full FTC? Explain.

> USCo incurred $100,000 in interest expense for the current year. The tax book value of USCo’s assets generating foreign-source income is $5 million. The tax book value of USCo’s assets generating U.S.-source income is $45 million. How much of the interes

> Willa, a U.S. corporation, owns the rights to a patent related to a medical de- vice. Willa licenses the rights to use the patent to IrishCo, which uses the patent in its manufacturing facility located in Ireland. What is the source of the $1 million roy

> Chock, a U.S. corporation, purchases inventory for resale from distributors within the United States and resells this inventory at a $1 million profit to customers outside the United States. Title to the goods passes outside the United States. What is th

> BlueCo, a domestic corporation, incorporates GreenCo, a new wholly owned entity in Germany. Under both German and U.S. legal principles, this entity is a corporation. BlueCo faces a 35% U.S. tax rate. GreenCo earns $1,500,000 in net profits from its Ger

> Janda and Kelsey contributed $1 million each to the JKL LLC in exchange for 45% capital and profits interests in the entity. Lilli will contribute no cash, but has agreed to manage the LLC’s business operations in exchange for an $80,000 annual salary an

> During 2015, Lincoln Company hires seven individuals who are certified to be members of a qualifying targeted group. Each employee works in excess of 600 hours and is paid wages of $7,500 during the year. Determine the amount of Lincoln’s work opportunit

> The Sparrow Partnership plans to distribute $200,000 cash to its partners at the end of the year. Marjorie is a 40% partner and would receive $80,000. Her basis in the partnership is only $10,000, however, so she would recognize a $70,000 gain if she rec

> Continue with the facts presented in Problem 30, except that Suz-Anna was formed as an LLC instead of a general partnership. a. How would Suz-Anna’s ending liabilities be treated? b. How would Suzy’s basis and amount at risk be different? Explain. Data

> Suzy contributed assets valued at $360,000 (basis of $200,000) in exchange for her 40% interest in Suz- Anna GP (a general partnership). Anna contributed land and a building valued at $640,000 (basis of $380,000) in exchange for the remaining interest. A

> At the beginning of the tax year, Melodie’s basis in the MIP LLC was $60,000, including Melodie’s $40,000 share of the LLC’s liabilities. At the end of the year, MIP distributed to Melodie cash of $10,000 and inventory (basis of $6,000, fair market value

> In each of the following independent cases in which the partnership owns no hot assets, indicate the following. All of the partners received proportionate distributions. • Whether the partner recognizes gain or loss. • Whether the partnership recognize

> Mona and Denise, mother and daughter, operate a local restaurant as an LLC. The MD LLC earned a profit of $200,000 in the current year. Denise’s equal LLC interest was acquired by gift from Mona. Assume that capital is a material income-producing factor

> Burgundy, Inc., and Violet Gomez are equal partners in the calendar year BV LLC. Burgundy uses a fiscal year ending April 30, and Violet uses a calendar year. Burgundy receives an annual guaranteed payment of $100,000 for use of capital contributed by Bu

> Four GRRLs Partnership is owned by four unrelated friends. Lacy holds a 40% interest; each of the others owns 20%. Lacy sells investment property to the partnership for its fair market value of $200,000. Her tax basis in the property was $250,000. a. Ho

> The Pelican Partnership was formed on August 1 of the current year and admitted Morlan and Merriman as equal partners on that date. The partners both contributed $300,000 of cash to establish a children’s clothing store in the local mall. The partners s

> The BCD Partnership plans to distribute cash of $20,000 to partner Barb at the end of the tax year. The partnership reported a loss for the year, and Barb’s share of the loss is $10,000. Barb holds a basis of $15,000 in the partnership interest, includin

> Emily spent $135,000 to rehabilitate a building (adjusted basis of $90,000) that originally had been placed in service in 1935. a. What is Emily’s rehabilitation expenditures tax credit? b. What would be your answer if the building was a historic structu

> Assume the same facts as in Problem 21, except that the property contributed by Lee has a fair market value of $27,500 and is subject to a nonrecourse mortgage of $20,000. a. What is Lee’s basis in his partnership interest? b. How much gain must Lee re

> Lee, Brad, and Rick form the LBR Partnership on January 1 of the current year. In return for a 25% interest, Lee transfers property (basis of $15,000, fair market value of $17,500) subject to a nonrecourse liability of $10,000. The liability is assumed b

> The JM Partnership was formed to acquire land and subdivide it as residential housing lots. On March 1, 2015, Jessica contributed land valued at $600,000 to the partnership in exchange for a 50% interest. She had purchased the land in 2007 for $420,000

> Cerulean, Inc., Coral, Inc., and Crimson, Inc., form the Three Cs Partnership on January 1 of the current year. Cerulean is a 50% partner, and Crimson and Coral are 25% partners. For reporting purposes, Crimson uses a fiscal year with an October 31 year-

> Continue with the same facts of Problem 16. Consider Amy’s tax-basis capital account. a. What is Amy’s capital account at the beginning of the year? b. What is Amy’s capital account at the end of the year? c. How do the capital account balances differ fr

> Assume the same facts as in Problem 16. What income, gains, losses, and deductions does Amy report on her income tax return? Based on the information provided, what other calculations is she required to make?

> Amy and Mitchell are equal partners in the accrual basis AM Partnership. At the beginning of the current tax year, Amy’s capital account has a balance of $300,000, and the partnership has recourse debts of $200,000 payable to unrelated parties. All partn

> Phoebe and Parker are equal members of Phoenix Investors LLC. They are real estate investors who formed the entity several years ago with equal cash contributions. Phoenix then purchased a parcel of land. On January 1 of the current year, to acquire a on

> On July 1 of the current year, the R&R Partnership was formed to operate a bed-and-breakfast inn. The partnership paid $3,000 in legal fees for drafting the partnership agreement and $5,000 for accounting fees related to organizing the entity. It also pa

> Continue with the facts presented in Problem 12. At the end of the first year, SD distributes $100,000 cash to Sam. No distribution is made to Drew. a. How does Sam treat the payment? b. How much income or gain would Sam recognize as a result of the paym

> Nicholas owns business equipment with a $155,000 adjusted basis; he paid $200,000 for the equipment, and it is currently worth $173,000. Nicholas dies suddenly, and his son Alvin inherits the property. What is Alvin’s basis for the property? What happens

> Sam and Drew are equal members of the SD LLC, formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2007. Sam’s uncle purchased the land in 1982 for $30,000. The land was worth $100,000 when Sam’s uncle died. The

> Liz and John formed the equal LJ Partnership on January 1 of the current year. Liz contributed $80,000 of cash and land with a fair market value of $90,000 and an adjusted basis of $75,000. John contributed equipment with a fair market value of $170,000

> Kenisha and Shawna form the equal KS LLC with a cash contribution of $360,000 from Kenisha and a property contribution (adjusted basis of $380,000, fair market value of $360,000) from Shawna. a. How much gain or loss, if any, does Shawna realize on the

> Emma and Laine form the equal EL Partnership. Emma contributes cash of $100,000. Laine contributes property with an adjusted basis of $40,000 and a fair market value of $100,000. a. How much gain, if any, must Emma recognize on the transfer? Must Laine r

> Dove Corporation, a calendar year C corporation, had the following information for 2015: Net income per books (after-tax)………………………………………………… $386,250 Taxable income …………………………………………………………………………….120,000 Federal income tax per books ………………………………………………………

> Assume in Problem 28 that Jane receives the 50 shares of Osprey Corporation stock in consideration for the appreciated property and for the provision of accounting services in organizing the corporation. The value of Jane’s services is $35,000. a. What

> Can a sole proprietor form as a single-member limited liability company (LLC)? If so, how would such an LLC be taxed?

> During the current year, Gnatcatcher, Inc. (E & P of $1 million), distributed $200,000 each to Brandi and Yuen in redemption of some of their Gnat- catcher stock. The two shareholders are not related; they acquired their shares five years ago. Brandi and

> Fargo Corporation holds $5 million in accumulated E & P. It distributes to Leilei, one of its shareholders, land worth $310,000; basis of the land to Fargo is $260,000. Determine the Federal income tax consequences of the distribution to Fargo.

> Global Corporation distributed property with an $850,000 fair market value and a $415,000 adjusted basis to Kang, one of its shareholders. The property was subject to a $230,000 mortgage, which Kang assumed. Global’s accumulated E & P totals $3 million.

> Carla was the owner of vacant land that she was holding for investment. She paid $2 million for the land in 2013. Raymond was an investor in vacant land. He thought Carla’s land might be the site of an exit ramp from a new freeway. Raymond gave Carla $83

> On January 1 of the current year, Rhondell Corporation holds accumulated E & P of $13,000. Current E & P for the year is $84,000, earned evenly through- out the year. Elizabeth and Jonathan are the sole equal shareholders of Rhondell from January

> At the beginning of the year, Myrna Corporation (a calendar year taxpayer) holds E & P of $32,000. The corporation generates no additional E & P during the year. On December 31, the corporation distributes $50,000 to its sole share- holder, Abby, whose s

> Mira and Lemma are equal owners of a business entity. Each contributed $25,000 cash to the business. Then the entity acquired a $100,000 loan from a bank. This year, operating profits totaled $30,000. Determine Lemma’s interest basis at the end of the ta

> Roscoe contributes a personal-use asset, adjusted basis $15,000 and fair market value $28,000, to a new business in which he is an owner. Determine Roscoe’s recognized gain on the transfer, and the basis of the asset to the business, if the new operation

> Julio is in the 33% tax bracket. He acquired 2,000 shares of stock in Gray Corporation seven years ago at a cost of $50 per share. In the current year, Julio received a payment of $150,000 from Gray Corporation in exchange for 1,000 of his shares in Gray

> When Bruno’s basis in his interest in the MNO LLC is $150,000, he receives cash of $55,000, a proportionate share of inventory, and land in a distribution that liquidates MNO and his interest in the LLC. The inventory has a basis to the entity of $45,000

> Franco owns a 60% interest in the Dulera LLC. On December 31 of the current tax year, his basis in the LLC interest is $128,000. The fair market value of the interest is $140,000. Dulera then distributes to Franco $30,000 cash and equipment with an adjus

> Enerico contributes $100,000 cash in exchange for a 40% interest in the cal- endar year ABC LLC. This year, ABC generates $80,000 of ordinary taxable income. Enerico withdraws $10,000 cash from the partnership at the end of the tax year. a. Compute Ener

> Ten years ago, Vogel Inc., an S corporation, purchased a plot of investment land for $45,000. This year, Vogel distributed the land, now worth $120,000, to Jamari, its majority shareholder. a. Determine the effects of the distribution on the gross incom

> Larry is the sole proprietor of a trampoline shop. During 2015, the following transactions occurred. • Unimproved land adjacent to the store was condemned by the city on February 1. The condemnation proceeds were $15,000. The land, acquired in 1986, had

> Holbrook, a calendar year S corporation, distributes $15,000 cash to its only shareholder, Cody, on December 31. Cody’s basis in his stock is $20,000, Holbrook’s AAA balance is $8,000, and Holbrook holds $2,500 AEP bef

> Dion, a shareholder, owned 20% of MeadowBrook’s stock for 292 days and 25% for the remaining 73 days in the year. Using the per-day allocation method, compute Dion’s share of the following S corporation items. Sch

> Kaiwan, Inc., a calendar year S corporation, is partly owned by Sharrod, whose beginning stock basis is $32,000. During the year, Sharrod’s share of a Kaiwan long-term capital gain (LTCG) is $5,000, and his share of an ordinary loss is $18,000. Sharrod t

> Dove Corporation (E & P of $800,000) has 1,000 shares of stock outstanding. The shares are owned as follows: Julia, 600 shares; Maxine (Julia’s sister), 300 shares; and Janine (Julia’s daughter), 100 shares. Dove owns land (basis $300,000, fair market va

> Compare the tax treatment of liquidating and redemption distributions in terms of the following. a. Recognition of gain or loss by the shareholder. b. Basis of property received by the shareholder.

> For the last 11 years, Lime Corporation has owned and operated four different trades or businesses. Lime also owns stock in several corporations that it purchased for investment purposes. The stock of Lime is held equally by Sultan, an individual, and by

> Broadbill Corporation (E & P $650,000) has 1,000 shares of common stock outstanding. The shares are owned by the following individuals: Tammy, 300 shares; Yvette, 400 shares; and Jeremy, 300 shares. Each of the shareholders paid $50 per share for the Bro

> Shonda owns 1,000 of the 1,500 shares outstanding in Rook Corporation (E & P of $1 million). Shonda paid $50 per share for the stock seven years ago. The remaining stock in Rook is owned by unrelated individuals. What are the tax consequences to Shonda i

> Silver Corporation has 2,000 shares of common stock outstanding. Howard owns 600 shares, Howard’s grandfather owns 300 shares, Howard’s mother owns 300 shares, and Howard’s son owns 100 shares. In addition, Maroon Corporation owns 500 shares. Howard owns

> How would your answer to parts (a) and (b) of Problem 36 differ if Julio were a corporate shareholder (in the 34% tax bracket) rather than an individual shareholder and the stock ownership in Gray Corporation represented a 25% interest?

> On December 1, 2013, Lavender Manufacturing Company (a corporation) purchased another company’s assets, including a patent. The patent was used in Lavender’s manufacturing operations; $49,500 was allocated to the patent, and it was amortized at the rate

> Rosalie owns 50% of the outstanding stock of Salmon Corporation. In a qualifying stock redemption, Salmon distributes $80,000 to Rosalie in exchange for one-half of her shares, which have a basis of $100,000. Compute Rosalie’s recognized loss, if any, on

> The balance sheet for the Heir Jordan Corporation follows. Based on this information and the income statement in the previous problem, supply the missing information using the percentage of sales approach. Assume that accounts payable vary with sales, wh

> Consider the following income statement for the Heir Jordan Corporation: A 20 percent growth rate in sales is projected. Prepare a pro forma income statement assuming costs vary with sales and the dividend payout ratio is constant. What is the projecte

> The most recent financial statements for Throwing Copper Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant debt–equity ratio. What is the m

> For the company in the previous problem, what is the sustainable growth rate?

> After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning for next year’s sales. The company had historically used little planning for investment needs. As a result, the compan

> Testaburger, Inc., uses no external financing and maintains a positive retention ratio. When sales grow by 15 percent, the firm has a negative projected EFN. What does this tell you about the firm’s internal growth rate? How about the sustainable growth

> The firm actually priced its product to be about 20 percent less than that of competitors, even though the Grandmother calendar was more detailed. In retrospect, was this a wise choice?

> What are some of the actions that a small company like The Grandmother Calendar Company can take if it finds itself in a situation in which growth in sales outstrips production capacity and available financial resources? What other options (besides expan

> If Roten Rooters, Inc., has an equity multiplier of 2.80, total asset turnover of 1.15, and a profit margin of 5.5 percent, what is its ROE?

> Ortiz Lumber Yard has a current accounts receivable balance of $431,287. Credit sales for the year just ended were $3,943,709. What is the receivables turnover? The days’ sales in receivables? How long did it take on average for credit customers to pay o

> Suppose you were the financial manager of a not-for-profit business (a not-for-profit hospital, perhaps). What kinds of goals do you think would be appropriate?

> For the year just ended, Ypsilanti Yak Yogurt shows an increase in its net fixed assets account of $835. The company took $148 in depreciation expense for the year. How much did the company spend on new fixed assets? Is this a source or use of cash?

> Braam Fire Prevention Corp. has a profit margin of 6.80 percent, total asset turnover of 1.95, and ROE of 18.27 percent. What is this firm’s debt–equity ratio?

> Organic Chicken Company has a debt–equity ratio of .65. Return on assets is 8.5 percent, and total equity is $540,000. What is the equity multiplier? Return on equity? Net income? Just Dew It Corporation reports the following balance sh

> Tortoise, Inc., had a cost of goods sold of $28,834. At the end of the year, the accounts payable balance was $6,105. How long on average did it take the company to pay off its suppliers during the year? What might a large value for this ratio imply?

> Based only on the following information for Bennington Corp., did cash go up or down? By how much? Classify each event as a source or use of cash. Decrease in inventory ………………………….$375 Decrease in accounts payable …………………190 Increase in notes payable ……

> Bach Corp. had additions to retained earnings for the year just ended of $430,000. The firm paid out $175,000 in cash dividends, and it has ending total equity of $5.3 million. If the company currently has 210,000 shares of common stock outstanding, what

> Crystal Lake, Inc., has a total debt ratio of .63. What is its debt–equity ratio? What is its equity multiplier?

> The Blue Moon Corporation has ending inventory of $407,534, and cost of goods sold for the year just ended was $4,105,612. What is the inventory turnover? The days’ sales in inventory? How long on average did a unit of inventory sit on the shelf before i

> Wakers, Inc., has sales of $29 million, total assets of $17.5 million, and total debt of $6.3 million. If the profit margin is 8 percent, what is net income? What is ROA? What is ROE?

> SDJ, Inc., has net working capital of $1,370, current liabilities of $3,720, and inventory of $1,950. What is the current ratio? What is the quick ratio?

> What does it mean when we say the New York Stock Exchange is an auction market? How are auction markets different from dealer markets? What kind of market is NASDAQ?

> What is Tobin’s Q for Smolira Golf? What assumptions are you making about the book value of debt and the market value of debt? What about the book value of assets and the market value of assets? Are these assumptions realistic? Why or w

> Smolira Golf Corp. has 25,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2009 was $43. What is the price–earnings ratio? What are the dividends per share? What is the market-to-book ratio

> Prepare the 2009 statement of cash flows for Smolira Golf Corp. SMOLIRA GOLF 2008 and 2009 Balance Sheets Assets Liabilities and Owners' Equity 2008 2009 2008 2009 Current assets Current liabilities Cash $21,860 $ 22,050 Accounts payable $ 19,320 $

> Construct the Du Pont identity for Smolira Golf Corp. SMOLIRA GOLF 2008 and 2009 Balance Sheets Assets Liabilities and Owners' Equity 2008 2009 2008 2009 Current assets Current liabilities Cash $21,860 $ 22,050 Accounts payable $ 19,320 $ 22,850 Acco

> Find the following financial ratios for Smolira Golf Corp. (use year-end figures rather than average values where appropriate): Short-term solvency ratios: a. Current ratio ________________ b. Quick ratio

> Prince Albert Canning PLC had a net loss of £13,482 on sales of £138,793 (both in thousands of pounds). What was the company’s profit margin? Does the fact that these figures are quoted in a foreign currency make any difference? Why? In dollars, sales we

> Holliman Corp. has current liabilities of $365,000, a quick ratio of .85, inventory turnover of 5.8, and a current ratio of 1.4. What is the cost of goods sold for the company?

> Sherwood Inc.’s net income for the most recent year was $13,168. The tax rate was 34 percent. The firm paid $3,605 in total interest expense and deducted $2,382 in depreciation expense. What was the cash coverage ratio for the year?

> Firm A and firm B have debt–total asset ratios of 35% and 30% and returns on total assets of 12% and 11%, respectively. Which firm has a greater return on equity?