Corporations: Introduction and Operating Rules 2-7
CHAPTER 2
CORPORATIONS: INTRODUCTION AND OPERATING RULES
SOLUTIONS TO PROBLEM MATERIALS
/ Status: / Q/P /Question/ / Present / in Prior /
/ Problem / Topic / Edition / Edition /
1 / LO 1 / Choice of entity: tax and nontax / Unchanged / 1
factors in entity selection
2 / LO 1 / Corporation versus partnership: / Unchanged / 2
treatment of income; no distributions
3 / LO 1, 8 / Corporation versus proprietorship: / Unchanged / 3
treatment of losses
4 / LO 1, 2 / Corporation versus LLC: treatment of / Modified / 4
losses
5 / LO 1 / Corporation versus LLC and S corporation / Modified / 5
6 / LO 1, 8 / Closely held corporations: shareholder / Unchanged / 6
transactions
7 / LO 1 / Closely held corporations: shareholder / New
transactions
8 / LO 1 / Choice of entity: nontax considerations / New
9 / LO 1 / LLC: classification rules / Unchanged / 9
10 / LO 1 / LLC: benefits of sole member / Unchanged / 10
11 / LO 2 / Accounting periods: limitation on fiscal / Unchanged / 11
year
12 / LO 2 / Accounting methods: limitation on cash / Modified / 12
method
13 / LO 2 / Accounting methods: limitation on / Modified / 13
accrual of expenses to cash basis
related party
14 / LO 2 / Net capital gain: corporation and / Unchanged / 14
individual contrasted
15 / LO 2 / Net capital loss: corporation and / New
individual contrasted
16 / LO 2 / Passive loss rules: closely held C / Modified / 16
corporations and PSCs contrasted
Instructor: For difficulty, timing, and assessment information about each item, see p. 2-5.
/ Status: / Q/P /Question/ / Learning / Present / in Prior /
Problem / Objective / Topic / Edition / Edition /
17 LO 2 Passive loss rules: closely held C Unchanged 17
corporation
18 LO 2 Charitable contributions: year of New
deduction for accrual basis
corporation
19 LO 2 Charitable contributions: corporate Unchanged 19
contribution of inventory
20 LO 2, 8 Charitable contributions: year-end Unchanged 20
planning issues with carryover
21 LO 2 Domestic production activities Unchanged 21
deduction: limitations
22 LO 2, 3, 8 NOL, dividends, and LTCL issues Unchanged 22
23 LO 1, 3 Dividends received deduction: Modified 23
corporate versus individual treatment
24 LO 3 Dividends received deduction: 45-day New
holding period
25 LO 3 Organizational expenditures Unchanged 24
26 LO 3 Organizational and startup expenditures New
contrasted
27 LO 4 Corporate income tax rates: New
PSC exception
28 LO 5 Tax liability of related corporations New
29 LO 6 Schedule M-1: adjustments Unchanged 27
30 LO 6 Schedule M-3: objective of schedule Unchanged 28
31 LO 6 Schedule M-3: reconciliation of New
expense item
32 LO 7 Financial accounting considerations: Unchanged 30
FAS 109 deferred tax assets and
liabilities
33 LO 7 Financial accounting considerations: Unchanged 31
FIN 48 applicable entities
34 LO 1 Compare LTCL treatment for regular Modified 32
corporations and S corporations
35 LO 1 Tax treatment of income and Modified 33
distributions from partnership, S and
C corporations
36 LO 1, 8 Corporation versus proprietorship: with Unchanged 34
distributions
37 LO 1, 2 Corporation versus single member LLC: Unchanged 35
ordinary and capital losses
*38 LO 1 Corporation versus proprietorship: after- Modified 36
tax comparison
39 LO 2 Comparison of deduction for casualty Modified 37
loss for individual and corporate
taxpayers
*40 LO 1, 4 Tax liability determination as Modified 38
proprietorship or corporation
41 LO 2, 4 Personal service corporation: salary Unchanged 39
requirements for use of fiscal year and
tax rate
Instructor: For difficulty, timing, and assessment information about each item, see p. 2-5.
[
/ Status: / Q/P // Question/ / Learning / Present / in Prior /
/ Problem / Objective / Topic / Edition / Edition /
42 LO 2 Accounting methods: related party Unchanged 40
expense; cash versus accrual
43 LO 2, 4 Capital gains and losses: tax rate on Unchanged 41
LTCG for corporation versus
individual
44 LO 2 Net capital loss of corporation Modified 42
45 LO 2 Comparison of treatment of capital Unchanged 43
losses for individual and corporate
taxpayers
46 LO 2 Capital gains and losses of a Modified 44
corporation; carryback/carryover
47 LO 2 Passive loss of closely held corporation; Unchanged 45
PSC
48 LO 2 Charitable contribution of inventory Unchanged 46
by corporation
49 LO 2, 8 Corporate charitable contribution: tax Unchanged 47
planning
50 LO 2 Charitable contributions of corporation; Unchanged 48
carryover
51 LO 2, 8 Timing of charitable contributions Modified 49
deduction: taxable income limit
52 LO 2 Domestic production activities Modified 50
*53 LO 2, 3, Net operating loss: computed with Unchanged 51
8 dividends received deduction
*54 LO 3 Dividends received deduction Unchanged 52
55 LO 3, 8 Organizational expenses Modified 53
*56 LO 3 Organizational expenses Unchanged 54
*57 LO 4 Determine corporate income tax liability Modified 55
*58 LO 6 Schedule M-1, Form 1120 New
59 LO 6 Schedule M-1, Form 1120 Unchanged 57
60 LO 6 Schedule M-3, Form 1120 Unchanged 58
61 LO 6 Schedule M-3, Form 1120 Unchanged 59
62 LO 6 Schedule M-3, Form 1120 Unchanged 60
63 LO 6 Schedule M-3, Form 1120 Unchanged 61
64 LO 7 Financial accounting considerations: Unchanged 62
FIN 48 recognition and measurement
65 LO 2, 3, 8 Tax issues involved in starting a new Unchanged 63
business in the corporate form
*The solution to this problem is available on a transparency master.
Instructor: For difficulty, timing, and assessment information about each item, see p. 2-5.
Tax / Status: / Q/P /Return / Present / in Prior /
Problem / Topic / Edition / Edition /
1 Corporation income tax (Form 1120) New
2 Corporation income tax (Form 1120) Modified 2
`
Research / Present / in Prior /
/ Problem / Topic / Edition / Edition /
1 Member’s personal liability for unpaid Unchanged 1
employment taxes of single-member LLC
2 Dividends received deduction Unchanged 2
3 Expenditures incurred on behalf of New
corporation
4 Internet activity New
5 Internet activity Unchanged 5
6 Internet activity Unchanged 6
/ Est'd / Assessment Information /Question/ / completion / AICPA* / AACSB* /
Problem / Difficulty / time / Core Comp / Core Comp /
1 / Medium / 15 / FN-Reporting / Analytic | Reflective Thinking
2 / Easy / 5 / FN-Reporting / Analytic
3 / Medium / 10 / FN-Reporting / Analytic | Reflective Thinking
4 / Easy / 10 / FN-Reporting / Analytic
5 / Medium / 10 / FN-Reporting / Analytic
6 / Medium / 10 / FN-Reporting / Analytic | Reflective Thinking
7 / Easy / 5 / FN-Reporting / Analytic
8 / Easy / 5 / FN-Reporting / Analytic
9 / Easy / 5 / FN-Reporting / Analytic
10 / Easy / 5 / FN-Reporting / Analytic
11 / Easy / 5 / FN-Reporting / Analytic
12 / Easy / 5 / FN-Reporting / Analytic
13 / Easy / 5 / FN-Reporting / Analytic
14 / Easy / 5 / FN-Reporting / Analytic
15 / Easy / 5 / FN-Measurement | FN-Reporting / Analytic
16 / Easy / 5 / FN-Measurement | FN-Reporting / Analytic
17 / Easy / 5 / FN-Measurement | FN-Reporting / Analytic
18 / Easy / 5 / FN-Reporting / Analytic
19 / Easy / 5 / FN-Measurement / Analytic
20 / Medium / 10 / FN-Measurement | FN-Reporting / Analytic | Reflective Thinking
21 / Easy / 5 / FN-Measurement / Analytic
22 / Medium / 10 / FN-Measurement | FN-Reporting / Analytic | Reflective Thinking
23 / Easy / 5 / FN-Measurement | FN-Reporting / Analytic
24 / Easy / 5 / FN-Measurement / Analytic
25 / Easy / 10 / FN-Reporting / Analytic
26 / Easy / 10 / FN-Reporting / Analytic
27 / Easy / 5 / FN-Reporting / Analytic
28 / Easy / 5 / FN-Reporting / Analytic
29 / Easy / 10 / FN-Reporting / Analytic
30 / Easy / 5 / FN-Reporting / Analytic
31 / Easy / 5 / FN-Reporting / Analytic
32 / Easy / 5 / FN-Reporting / Analytic
33 / Easy / 5 / FN-Reporting / Analytic
34 / Easy / 5 / FN-Reporting / Analytic
35 / Easy / 10 / FN-Reporting / Analytic
*Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment.
36 / Medium / 10 / FN-Measurement | FN-Reporting / Analytic | Reflective Thinking
37 / Medium / 10 / FN-Measurement | FN-Reporting / Analytic
38 / Hard / 15 / FN-Measurement | FN-Reporting / Analytic
39 / Easy / 5 / FN-Measurement / Analytic
40 / Hard / 20 / FN-Measurement | FN-Reporting / Communication | Analytic
41 / Medium / 10 / FN-Measurement | FN-Reporting / Analytic
42 / Medium / 10 / FN-Measurement | FN-Reporting / Analytic
43 / Easy / 5 / FN-Measurement / Analytic
44 / Easy / 5 / FN-Measurement | FN-Reporting / Analytic
45 / Easy / 10 / FN-Measurement | FN-Reporting / Analytic
46 / Medium / 10 / FN-Measurement | FN-Reporting / Analytic
47 / Easy / 5 / FN-Measurement | FN-Reporting / Analytic
48 / Medium / 10 / FN-Measurement / Analytic
49 / Medium / 15 / FN-Measurement / Communication | Analytic
50 / Easy / 10 / FN-Measurement | FN-Reporting / Analytic
51 / Medium / 15 / FN-Measurement | FN-Reporting / Communication | Analytic
52 / Easy / 5 / FN-Measurement / Analytic
53 / Easy / 10 / FN-Measurement | FN-Reporting / Analytic
54 / Easy / 10 / FN-Measurement / Analytic
55 / Medium / 10 / FN-Measurement | FN-Reporting / Analytic
56 / Easy / 10 / FN-Measurement / Analytic
57 / Easy / 10 / FN-Measurement / Analytic
58 / Medium / 10 / FN-Measurement | FN-Reporting / Analytic
59 / Medium / 10 / FN-Measurement | FN-Reporting / Analytic
60 / Easy / 10 / FN-Reporting / Analytic
61 / Easy / 10 / FN-Reporting / Analytic
62 / Easy / 10 / FN-Reporting / Analytic
63 / Medium / 10 / FN-Reporting / Analytic
*Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment.
64 / Medium / 10 / FN-Reporting | FN-Risk Analysis / Analytic
65 / Medium / 15 / FN-Measurement | FN-Reporting / Analytic | Reflective Thinking
*Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment.
CHECK FIGURES
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Corporations: Introduction and Operating Rules 2-7
34.a. Andrew will report profit $80,000 and long-term capital loss $10,000.
34.b. Andrew’s income is not increased.
35.a. Each partner reports $75,000 net profit and tax-exempt interest of $10,000.
35.b. Same as a.
35.c. Corporation reports $150,000 income. Shareholder reports $50,000 dividend income.
37.a. Losses not passed through to shareholder.
37.b. Deduct $153,000.
38.a. After-tax income $91,698.
38.b. After-tax income $80,360.
38.c. After-tax income $71,325.
39.a. $17,500 itemized deduction.
39.b. $30,000.
40.a. $50,750.
40.b. $40,250.
40.c. $39,800.
40.d. $47,188.
41.a. $60,000.
41.b. $24,500.
42.a. $0.
42.b. $110,000.
43.a. $22,250.
43.b. $15,000.
44.a. $45,000.
44.b. $50,000.
45.a. $18,000 deducted 2009; $6,000 carried forward to 2010.
45.b. $15,000 deducted 2009; $9,000 carried back to 2006, then 2007, etc.
46.a. Offset short-term capital gain of $120,000 against net long-term capital loss of $365,000. The $245,000 net capital loss is carried back 3 years and forward 5 years.
46.b. Total carryback $210,000.
46.c. $35,000; carry forward to 2010, etc.
46.d. Deduct $123,000 in 2009, $242,000 carried forward indefinitely.
47. Offset $80,000 of passive loss against active income. No offset if a PSC.
48.a. $30,000.
48.b. $50,000.
48.c. $60,000.
50.a. $29,000.
50.b. Excess $6,000 carried forward.
51. 2009.
52.a. $27,600.
52.b. $40,000.
53.a. $116,000.
53.b. Carryback 2 then forward 20.
54. Green $70,000; Orange $140,000; Yellow $112,000.
55.a. $5,500.
55.b. $7,267.
55.c. $5,500.
55.d. $7,267.
56. $3,700.
57. Purple $11,250; Azul $65,150; Pink $113,900; Turquoise $1,734,000; Teal $6,825,000.
58. Taxable income of $150,000.
59. Taxable income of $195,000.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Corporations: Introduction and Operating Rules 2-7
DISCUSSION QUESTIONS
1. You should ask questions that will enable you to assess both tax and nontax factors that will affect the entity choice. Some relevant questions are addressed in the following table, although there are many additional possibilities.
Question / Reason for the questionWhat type of business are you going to operate? / This question will provide information that may affect the need for limited liability, ability to raise capital, ease of transferring interests in the business, how long the business will continue, and how the business will be managed.
What amount and type of income (loss) do you expect from the business?
What is the amount and type of income (loss) that you expect from other sources? / Income from a business will eventually be reported on the tax returns of the owners.
For example, income (loss) from a partnership, S corporation, or LLC will ‘‘flow through” to the owners. Dividends from a C corporation must be reported on the tax returns of the shareholders. Any income (loss) from other sources will also be reported on the returns of the owners. Thus, for planning purposes, it is important to know all sources and types of income (loss) that the owners will have.
Do you expect to have losses in the early years of the business? / Losses of partnerships, S corporations, and LLCs flow through to the owners and represent potential deductions on their individual returns. Losses of a C corporation do not flow through.
Will you withdraw profits from the business or leave them in the business so it can grow? / Profits from a partnership, S corporation, or LLC will ‘‘flow through” to the owners, and will be subject to taxation on their individual tax returns. Profits of a C corporation must be reported on the tax returns of the shareholders only if such profits are paid out to shareholders as dividends. Thus, in the case of a partnership, S corporation, or LLC, owners must pay tax on profits before plowing funds back into the business. In the case of a C corporation, the corporation must pay tax on its profits.
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