1502. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #10
Swallow, Inc., is going to make a distribution of $550,000 to Marjean who is in
the 35% tax bracket.
a.
Determine
the tax liability to Marjean if the form of the distribution is a dividend.
b.
Determine
the tax liability to Marjean if the form of the distribution is a stock redemption.
Assume Marjeans adjusted basis for the stock redeemed is $400,000 and that
she has owned the stock for five years.
1503. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #11
Kirk is establishing a business in 2011 which could have potential environmental
liability problems. Therefore, he is trying to decide between the C corporation
form and the S corporation form. He projects that the business will generate
losses of approximately $100,000 each year for the first 3 years and then will
generate profits of at least $200,000 each year thereafter. All profits will be
reinvested in the growth of the business. Kirk projects he will be in the 35%
bracket in 2011 and thereafter. Advise Kirk on which tax form he should select.
1504. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #12
Melanie and Sonny form Bird Enterprises. Sonny contributes cash of $100,000 and
land worth $50,000 (adjusted basis of $30,000). Melanie contributes land and
building worth $280,000 (adjusted basis of $200,000) and performs services
worth $20,000 associated with the formation of the entity. Melanie receives a
two-thirds ownership interest and Sonny receives a one-third ownership
interest. Determine the tax consequences of the contributions to Melanie,
Sonny, and Bird if the business is:
a.
An S
corporation.
b.
A C
corporation
c.
A
partnership.
1505. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #13
Sam and Vera are going to establish a business.
Sam will contribute cash of $100,000 for a 50% interest, and Vera will
contribute land and a building worth $135,000 (adjusted basis of $65,000) for a
50% interest. The land and building is encumbered by a $35,000 mortgage which
the entity assumes. Determine the tax consequences of the contribution to Sam,
Vera, and the entity if the business is:
a.
An S
corporation.
b.
A
partnership.
c.
A C
corporation.
1506. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #14
Colin and Reed formed a business entity several years ago. At that date,
Colins basis for his ownership interest was $40,000 and Reeds basis for his
ownership interest was $50,000. Colins profit and loss percentage is 40% and
Reeds profit and loss percentage is 60%. During the intervening period, the
entity has reported profits of $200,000. At the beginning of the current year,
the entity had liabilities (all recourse) of $50,000. At the end of the current
year, the liabilities (all recourse) had increased to $70,000. Determine Colin
and Reeds basis for their ownership interest if the entity is:
a.
A partnership.
b.
A C
corporation.
c.
An S
corporation.
1507. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #15
Ashley contributes property to the TCA Partnership which was formed 7 years ago
by Clark and Tara. Ashleys basis for the property is $70,000 and the fair
market value is $150,000. Ashley receives a 25% interest for his contribution.
Because the TCA Partnership is unsuccessful in having the property rezoned from
agricultural to commercial, it sells the property 12 months later for $210,000.
a.
Determine
the tax consequences to Ashley and to the partnership on the contribution of
the property to the partnership.
b.
Determine
the tax consequences to Ashley and the other partners on the sale of the
property.
c.
Would the
tax consequences in b. differ if the entity were an S corporation?
1508. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #16
Alice has a 70% interest in a business entity. Her basis for her ownership
interest is $260,000. The net income of the business for the tax year is
$100,000 and the entity liabilities have increased by $50,000. Determine the
effect of the earnings and the liabilities on Alices basis for her ownership
interest if the business is:
a.
A C
corporation.
b.
An S
corporation.
c.
A
partnership.
1509. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #17
Wren, Inc. is owned by Alfred (30%) and Mabel (70%). Alfreds marginal tax rate
is 25% and Mabels marginal tax rate is 33%. Wrens taxable income for 2011 is
$400,000.
a.
Determine
the amount of the distribution that Wren would make to enable Alfred and
Mabel to pay their tax liabilities associated with Wrens $400,000 taxable
income if Wren is an S corporation.
b.
If Wren is a
C corporation.
1510. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #18
Eagle, Inc., a C corporation, distributes $250,000 to its shareholder, Jean,
and land worth $250,000 (adjusted basis of $190,000) to its shareholder, Pam.
Eagle has earnings and profits of $700,000. Determine the tax consequences to
Eagle, Jean, and Pam.
1511. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #19
Maurice purchases a bakery from Philip for $410,000. He spends an additional
$150,000 (financed with a nonrecourse loan) updating the bakery equipment.
During the first year of operations as a sole proprietorship, the bakery incurs
a loss of $125,000. Maurice has $300,000 of salary income as the chief
financial officer of a publicly-traded corporation. He has interest income of
$30,000 and dividend income of $50,000.
a.
What amount
can Maurice deduct for the loss if he is a material participant?
b.
What amount
can Maurice deduct for the loss if he is not a material participant?
1512. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #20
Lee owns all the stock of Vireo, Inc., a C corporation for which he has an
adjusted basis of $150,000. The assets of Vireo, Inc., are as follows:
Adjusted
Basis
FMV
Cash
$35,000
$35,000
Accounts
receivable
20,000
20,000
Inventory
22,000
25,000
Building
28,000
30,000
Land
40,000
90,000
Lee sells his stock to Katrina for $200,000.
a.
Determine
the tax consequences to Lee.
b.
Determine
the tax consequences to Katrina.
c.
Determine
the tax consequences to Vireo, Inc.
1513. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #21
Ralph owns all the stock of Silver, Inc., a C corporation for which his
adjusted basis is $225,000. Ralph founded Silver 12 years ago. The assets and
liabilities of Silver are as follows:
Assets
Basis
FMV
Cash
$ 15,000
$ 15,000
Accounts
receivable
0
25,000
Inventory
30,000
35,000
Machinery
and equipment*
70,000
90,000
Land
60,000
150,000
$175,000
$315,000
Liabilities
Basis
FMV
Accounts
payable
$ 5,000
$ 5,000
Notes
payable
10,000
10,000
$15,000
$15,000
*Accumulated depreciation of $55,000 has been deducted.
Ralph and the purchaser, Marilyn, have agreed to a purchase price of $350,000
less any outstanding liabilities. They are both in the 35% tax bracket, and
Silver is in the 34% tax bracket.
a.
Advise Ralph
on whether the form of the sales transaction should be a stock sale or an
asset sale.
b.
Advise
Marilyn on whether the form of the purchase transaction should be a stock
purchases or an asset purchase.
1514. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #1
Included among the factors that influence the choice of the form of a business
entity are the following:
Capital
formation.
Limited liability.
Estimated
life of the business.
Number of
owners and their roles in the management of the business.
Freedom of
choice in transferring ownership interest.
Organizational
formality including the related cost and extent of governmental regulations.
Evaluate the validity of the statement.
1515. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #2
Lisa is considering investing $25,000 in a limited partnership which is raising
additional capital. According to the prospectus, for the past 10-year period
the average earnings have been 15% and for the past 5-year period the average
earnings have been 8%. Lisa is in the 33% tax bracket.
a.
List some
factors Lisa should consider in making a decision on the potential
investment.
b.
Assuming the
partnership finances its activities with equity rather than debt, what is the
maximum cash flow benefit Lisa can receive if the partnership generates
losses?
1516. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #3
Which of the following business entity forms are subject to single taxation on
the profits and which are subject to double taxation?
a.
Sole
proprietorship.
b.
Partnership.
c.
C
corporation.
d.
S
corporation.
e.
LLC.
1517. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #4
List some techniques which can be used to avoid and/or reduce double taxation
for a C corporation.
1518. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #5
List some techniques for reducing and/or avoiding double taxation by making
distributions to the shareholders that are deductible to the corporation.
1519. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #6
What is the major pitfall associated with attempting to reduce and/or avoid
double taxation by a corporation not making distributions to shareholders?
1520. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #7
Why does stock redemption treatment for an individual shareholder produce more
favorable tax consequences than a dividend?
Correct
Answer:
Both a stock
redemption (assuming the holding period is long-term) and a dividend (assuming
the dividend is a qualified dividend) are taxed at beneficial tax rates (i.e.,
15%/0%). The full amount of a dividend is subject to taxation (i.e., included
in gross income). For a stock redemption, only the recognized gain (amount
realized basis) is subject to taxation (i.e., included in gross income).
1521. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #8
What special adjustment is required in calculating the AMT of a C corporation
that does not apply in calculating the AMT of an individual taxpayer?
1522. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #9
What tax rates apply for the AMT for an individual taxpayer and for a C
corporation?
1523. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #10
To which of the following entities does the AMT apply?
Sole
proprietorship.
Partnership.
LLC.
S
corporation.
C
corporation.
1524. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #11
How can double taxation be avoided or reduced by owning assets outside a C
corporation?
1525. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #12
Normally a C corporation shareholder would prefer to receive a return of
capital distribution (e.g., stock redemption) rather than a dividend
distribution. Provide an example of where the opposite is true.
1526. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #13
Aubrey has been operating his business as a C corporation for the past 5 years.
The corporation pays him a reasonable salary. The profits of the corporation,
after paying Federal income tax, are distributed to him each year as a
dividend. He is considering electing S status for his corporation in order to
avoid double taxation. What factors should he consider assuming after-tax
earnings will continue to be distributed to him?
1527. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #14
Why are S corporations not subject to the accumulated earnings tax?
1528. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #15
Marsha is going to contribute the following assets to a business entity in
exchange for an ownership interest.
Adjusted
Basis
FMV
Cash
$100,000
$100,000
Land and
building
60,000
95,000
What are the tax consequences of the contribution to Marsha if the business
entity is a(n):
a.
Sole proprietorship?
b.
Partnership?
c.
C
corporation?
d.
S
corporation?
1529. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #16
Gladys contributes land with an adjusted basis of $70,000 and a fair market
value of $100,000 to a business entity in which she is an 80% owner on the
first day of the tax year. Discuss the tax consequences to Gladys if the
business entity sells the land six months later for $130,000 if:
a.
The business
entity is a partnership?
b.
The business
entity is a C corporation?
c.
The business
entity is an S corporation?
Correct
Answer:
a.
For a partnership, the precontribution gain of
$30,000 ($100,000 $70,000) must be allocated to Gladys. Thus, Gladys share
of the recognized gain of $60,000 ($130,000 $70,000) on the sale of the
land by the partnership is $54,000 [$30,000 + ($30,000 80%)].
b.
None of the $60,000 gain is allocated to the
shareholders. All of the gain is taxed to the corporation.
c.
The $60,000 gain is passed through to the
shareholders of the S corporation based on the stock ownership. Thus, $48,000
($60,000 80%) is allocated to Gladys.
1530. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #17
Terry has a 20% ownership interest in a business for which his basis is
$100,000. During the year, the entity earns profits of $90,000 and makes cash
distributions to the owners of $50,000. How do these transactions affect
Terrys basis if:
a.
The entity
is a C corporation?
b.
The entity
is a general partnership?
c.
The entity
is an S corporation.
1531. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #18
A business entity has appreciated land (basis of $50,000 and fair market value
of $75,000) which it is going to distribute to Craig, one of its owners. The
entity has earned substantial profits during its 15 years of operations and has
reinvested most of them in the business. What are the tax consequences of the
distribution to the business entity and to Craig if the business entity is
a(n):
a.
C corporation?
b.
S
corporation?
c.
Partnership?
1532. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #19
In calculating the owners initial basis for an ownership interest, which of
the following business entity forms have a carryover basis and which have a
stepped-up or stepped-down basis associated with its formation?
a.
C
corporation.
b.
S corporation.
c.
Partnership.
1533. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #20
Under what circumstances, if any, do the 469 passive activity loss rules
apply to C corporations?
1534. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #21
For a C corporation to be classified as a personal service corporation (PSC)
for 469 purposes, what requirements must be satisfied?
1535. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #22
Do the 465 at-risk rules apply to partnerships, LLCs, and S corporations?
1536. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #23
Do the 465 at-risk rules treat recourse debt and nonrecourse debt
differently?
1537. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #24
With respect to special allocations, is the S corporation treated more like a
partnership or a C corporation?
1538. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #25
Agnes owns a sole proprietorship for which the assets have appreciated in
value. If she is going to sell the business to Abner, should she structure the
sale as (1) a sale of the individual assets or (2) a sale of the sole
proprietorship?
1539. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #26
Peter is going to purchase the assets of Kirstens sole proprietorship. The
assets of Kirstens sole proprietorship have appreciated in value. From Peters
perspective, does it matter whether the purchase is structured as (1) the
purchase of the individual assets or (2) the purchase of the sole
proprietorship?
1540. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #27
Ralph wants to purchase either the stock or the assets of Red, Inc., a C
corporation.
a.
Under what
circumstances would Ralph prefer to purchase the stock from the shareholders?
b.
Under what
circumstances would Ralph prefer to purchase the assets from the corporation?
1541. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #28
Walter wants to sell his wholly-owned C corporation, Cream, Inc. The fair
market value of his stock exceeds the corporations adjusted basis for the
assets. Should Walter sell his stock or have Cream sell its assets and make a
liquidating distribution to him?
1542. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #29
In the sale of a partnership, does the way the sale is structured (i.e., sale
of the partnership interests versus the sale of the assets) produce different
tax consequences?
1502. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #10
Swallow, Inc., is going to make a distribution of $550,000 to Marjean who is in
the 35% tax bracket.
a.Determine
the tax liability to Marjean if the form of the distribution is a dividend. b.Determine
the tax liability to Marjean if the form of the distribution is a stock redemption.
Assume Marjeans adjusted basis for the stock redeemed is $400,000 and that
she has owned the stock for five years.
1503. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #11
Kirk is establishing a business in 2011 which could have potential environmental
liability problems. Therefore, he is trying to decide between the C corporation
form and the S corporation form. He projects that the business will generate
losses of approximately $100,000 each year for the first 3 years and then will
generate profits of at least $200,000 each year thereafter. All profits will be
reinvested in the growth of the business. Kirk projects he will be in the 35%
bracket in 2011 and thereafter. Advise Kirk on which tax form he should select.
1504. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #12
Melanie and Sonny form Bird Enterprises. Sonny contributes cash of $100,000 and
land worth $50,000 (adjusted basis of $30,000). Melanie contributes land and
building worth $280,000 (adjusted basis of $200,000) and performs services
worth $20,000 associated with the formation of the entity. Melanie receives a
two-thirds ownership interest and Sonny receives a one-third ownership
interest. Determine the tax consequences of the contributions to Melanie,
Sonny, and Bird if the business is:
a.An S
corporation. b.A C
corporation c.A
partnership.
1505. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #13
Sam and Vera are going to establish a business.
Sam will contribute cash of $100,000 for a 50% interest, and Vera will
contribute land and a building worth $135,000 (adjusted basis of $65,000) for a
50% interest. The land and building is encumbered by a $35,000 mortgage which
the entity assumes. Determine the tax consequences of the contribution to Sam,
Vera, and the entity if the business is:
a.An S
corporation. b.A
partnership. c.A C
corporation.
1506. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #14
Colin and Reed formed a business entity several years ago. At that date,
Colins basis for his ownership interest was $40,000 and Reeds basis for his
ownership interest was $50,000. Colins profit and loss percentage is 40% and
Reeds profit and loss percentage is 60%. During the intervening period, the
entity has reported profits of $200,000. At the beginning of the current year,
the entity had liabilities (all recourse) of $50,000. At the end of the current
year, the liabilities (all recourse) had increased to $70,000. Determine Colin
and Reeds basis for their ownership interest if the entity is:
a.A partnership. b.A C
corporation. c.An S
corporation.
1507. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #15
Ashley contributes property to the TCA Partnership which was formed 7 years ago
by Clark and Tara. Ashleys basis for the property is $70,000 and the fair
market value is $150,000. Ashley receives a 25% interest for his contribution.
Because the TCA Partnership is unsuccessful in having the property rezoned from
agricultural to commercial, it sells the property 12 months later for $210,000.
a.Determine
the tax consequences to Ashley and to the partnership on the contribution of
the property to the partnership. b.Determine
the tax consequences to Ashley and the other partners on the sale of the
property. c.Would the
tax consequences in b. differ if the entity were an S corporation?
1508. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #16
Alice has a 70% interest in a business entity. Her basis for her ownership
interest is $260,000. The net income of the business for the tax year is
$100,000 and the entity liabilities have increased by $50,000. Determine the
effect of the earnings and the liabilities on Alices basis for her ownership
interest if the business is:
a.A C
corporation. b.An S
corporation. c.A
partnership.
1509. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #17
Wren, Inc. is owned by Alfred (30%) and Mabel (70%). Alfreds marginal tax rate
is 25% and Mabels marginal tax rate is 33%. Wrens taxable income for 2011 is
$400,000.
a.Determine
the amount of the distribution that Wren would make to enable Alfred and
Mabel to pay their tax liabilities associated with Wrens $400,000 taxable
income if Wren is an S corporation. b.If Wren is a
C corporation.
1510. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #18
Eagle, Inc., a C corporation, distributes $250,000 to its shareholder, Jean,
and land worth $250,000 (adjusted basis of $190,000) to its shareholder, Pam.
Eagle has earnings and profits of $700,000. Determine the tax consequences to
Eagle, Jean, and Pam.
1511. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #19
Maurice purchases a bakery from Philip for $410,000. He spends an additional
$150,000 (financed with a nonrecourse loan) updating the bakery equipment.
During the first year of operations as a sole proprietorship, the bakery incurs
a loss of $125,000. Maurice has $300,000 of salary income as the chief
financial officer of a publicly-traded corporation. He has interest income of
$30,000 and dividend income of $50,000.
a.What amount
can Maurice deduct for the loss if he is a material participant? b.What amount
can Maurice deduct for the loss if he is not a material participant?
1512. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #20
Lee owns all the stock of Vireo, Inc., a C corporation for which he has an
adjusted basis of $150,000. The assets of Vireo, Inc., are as follows:
Adjusted
Basis FMV Cash$35,000$35,000Accounts
receivable 20,000 20,000Inventory 22,000 25,000Building 28,000 30,000Land 40,000 90,000
Lee sells his stock to Katrina for $200,000.
a.Determine
the tax consequences to Lee. b.Determine
the tax consequences to Katrina. c.Determine
the tax consequences to Vireo, Inc.
1513. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #21
Ralph owns all the stock of Silver, Inc., a C corporation for which his
adjusted basis is $225,000. Ralph founded Silver 12 years ago. The assets and
liabilities of Silver are as follows:
Assets Basis
FMV Cash$ 15,000$ 15,000Accounts
receivable025,000Inventory30,00035,000Machinery
and equipment*70,00090,000Land 60,000 150,000 $175,000$315,000 Liabilities Basis
FMV Accounts
payable$ 5,000$ 5,000Notes
payable 10,000 10,000 $15,000$15,000
*Accumulated depreciation of $55,000 has been deducted.
Ralph and the purchaser, Marilyn, have agreed to a purchase price of $350,000
less any outstanding liabilities. They are both in the 35% tax bracket, and
Silver is in the 34% tax bracket.
a.Advise Ralph
on whether the form of the sales transaction should be a stock sale or an
asset sale. b.Advise
Marilyn on whether the form of the purchase transaction should be a stock
purchases or an asset purchase.
1514. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #1
Included among the factors that influence the choice of the form of a business
entity are the following:
Capital
formation. Limited liability. Estimated
life of the business. Number of
owners and their roles in the management of the business. Freedom of
choice in transferring ownership interest. Organizational
formality including the related cost and extent of governmental regulations.
Evaluate the validity of the statement.
1515. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #2
Lisa is considering investing $25,000 in a limited partnership which is raising
additional capital. According to the prospectus, for the past 10-year period
the average earnings have been 15% and for the past 5-year period the average
earnings have been 8%. Lisa is in the 33% tax bracket.
a.List some
factors Lisa should consider in making a decision on the potential
investment. b.Assuming the
partnership finances its activities with equity rather than debt, what is the
maximum cash flow benefit Lisa can receive if the partnership generates
losses?
1516. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #3
Which of the following business entity forms are subject to single taxation on
the profits and which are subject to double taxation?
a.Sole
proprietorship. b.Partnership. c.C
corporation. d.S
corporation. e.LLC.
1517. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #4
List some techniques which can be used to avoid and/or reduce double taxation
for a C corporation.
1518. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #5
List some techniques for reducing and/or avoiding double taxation by making
distributions to the shareholders that are deductible to the corporation.
1519. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #6
What is the major pitfall associated with attempting to reduce and/or avoid
double taxation by a corporation not making distributions to shareholders?
1520. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #7
Why does stock redemption treatment for an individual shareholder produce more
favorable tax consequences than a dividend?
Correct
Answer:Both a stock
redemption (assuming the holding period is long-term) and a dividend (assuming
the dividend is a qualified dividend) are taxed at beneficial tax rates (i.e.,
15%/0%). The full amount of a dividend is subject to taxation (i.e., included
in gross income). For a stock redemption, only the recognized gain (amount
realized basis) is subject to taxation (i.e., included in gross income).
1521. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #8
What special adjustment is required in calculating the AMT of a C corporation
that does not apply in calculating the AMT of an individual taxpayer?
1522. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #9
What tax rates apply for the AMT for an individual taxpayer and for a C
corporation?
1523. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #10
To which of the following entities does the AMT apply?
Sole
proprietorship. Partnership. LLC. S
corporation. C
corporation.
1524. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #11
How can double taxation be avoided or reduced by owning assets outside a C
corporation?
1525. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #12
Normally a C corporation shareholder would prefer to receive a return of
capital distribution (e.g., stock redemption) rather than a dividend
distribution. Provide an example of where the opposite is true.
1526. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #13
Aubrey has been operating his business as a C corporation for the past 5 years.
The corporation pays him a reasonable salary. The profits of the corporation,
after paying Federal income tax, are distributed to him each year as a
dividend. He is considering electing S status for his corporation in order to
avoid double taxation. What factors should he consider assuming after-tax
earnings will continue to be distributed to him?
1527. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #14
Why are S corporations not subject to the accumulated earnings tax?
1528. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #15
Marsha is going to contribute the following assets to a business entity in
exchange for an ownership interest.
Adjusted
BasisFMVCash$100,000$100,000Land and
building60,00095,000
What are the tax consequences of the contribution to Marsha if the business
entity is a(n):
a.Sole proprietorship? b.Partnership? c.C
corporation? d.S
corporation?
1529. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #16
Gladys contributes land with an adjusted basis of $70,000 and a fair market
value of $100,000 to a business entity in which she is an 80% owner on the
first day of the tax year. Discuss the tax consequences to Gladys if the
business entity sells the land six months later for $130,000 if:
a.The business
entity is a partnership? b.The business
entity is a C corporation? c.The business
entity is an S corporation?
Correct
Answer:a.For a partnership, the precontribution gain of
$30,000 ($100,000 $70,000) must be allocated to Gladys. Thus, Gladys share
of the recognized gain of $60,000 ($130,000 $70,000) on the sale of the
land by the partnership is $54,000 [$30,000 + ($30,000 80%)]. b.None of the $60,000 gain is allocated to the
shareholders. All of the gain is taxed to the corporation. c.The $60,000 gain is passed through to the
shareholders of the S corporation based on the stock ownership. Thus, $48,000
($60,000 80%) is allocated to Gladys.
1530. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #17
Terry has a 20% ownership interest in a business for which his basis is
$100,000. During the year, the entity earns profits of $90,000 and makes cash
distributions to the owners of $50,000. How do these transactions affect
Terrys basis if:
a.The entity
is a C corporation? b.The entity
is a general partnership? c.The entity
is an S corporation.
1531. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #18
A business entity has appreciated land (basis of $50,000 and fair market value
of $75,000) which it is going to distribute to Craig, one of its owners. The
entity has earned substantial profits during its 15 years of operations and has
reinvested most of them in the business. What are the tax consequences of the
distribution to the business entity and to Craig if the business entity is
a(n):
a.C corporation? b.S
corporation? c.Partnership?
1532. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #19
In calculating the owners initial basis for an ownership interest, which of
the following business entity forms have a carryover basis and which have a
stepped-up or stepped-down basis associated with its formation?
a.C
corporation. b.S corporation. c.Partnership.
1533. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #20
Under what circumstances, if any, do the 469 passive activity loss rules
apply to C corporations?
1534. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #21
For a C corporation to be classified as a personal service corporation (PSC)
for 469 purposes, what requirements must be satisfied?
1535. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #22
Do the 465 at-risk rules apply to partnerships, LLCs, and S corporations?
1536. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #23
Do the 465 at-risk rules treat recourse debt and nonrecourse debt
differently?
1537. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #24
With respect to special allocations, is the S corporation treated more like a
partnership or a C corporation?
1538. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #25
Agnes owns a sole proprietorship for which the assets have appreciated in
value. If she is going to sell the business to Abner, should she structure the
sale as (1) a sale of the individual assets or (2) a sale of the sole
proprietorship?
1539. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #26
Peter is going to purchase the assets of Kirstens sole proprietorship. The
assets of Kirstens sole proprietorship have appreciated in value. From Peters
perspective, does it matter whether the purchase is structured as (1) the
purchase of the individual assets or (2) the purchase of the sole
proprietorship?
1540. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #27
Ralph wants to purchase either the stock or the assets of Red, Inc., a C
corporation.
a.Under what
circumstances would Ralph prefer to purchase the stock from the shareholders? b.Under what
circumstances would Ralph prefer to purchase the assets from the corporation?
1541. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #28
Walter wants to sell his wholly-owned C corporation, Cream, Inc. The fair
market value of his stock exceeds the corporations adjusted basis for the
assets. Should Walter sell his stock or have Cream sell its assets and make a
liquidating distribution to him?
1542. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #29
In the sale of a partnership, does the way the sale is structured (i.e., sale
of the partnership interests versu
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Describe how you could use operations security in your current job
/in Uncategorized /by JosephDescribe how you could use operations security in your current job
If you are currently unemployed, define the job you are looking to apply for and how you would use operation security in that position. Respond to at least 1 classmate’s post with recommendations on how you would enhance his/her approach.
500-700 words. Use of APA Standard is highly desirable.
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Identify at least five opportunities areas for management to improve company’s security plan.
/in Uncategorized /by JosephThe CIO, of the company you chose in Week One, has asked you to create a PowerPoint®informational presentation. The audience for this week’s presentation will be the members of the executive staff, including the Vice Presidents, CIO, and CEO.
Create an 8- to 10-slide PowerPoint® informational presentation
The objectives of this presentation are to:
The objectives of this assignment are
Identify at least five opportunities areas for management to improve company’s security plan.
Identify at least five opportunities for employees to contribute a positive effect on the company’s security plan.
Identify at least three opportunities for management to display their support for the efforts of the IT Department in the pursuit of safe computing for all employees.
Detailed slide notes including analysis of each concept or term listed in each slide. Each slide must include detailed slide notes supported by one or more supporting references. The references must be cited in the slide notes. Do not use material copied from your resources.
References used to support your presentation, including a minimum of two outside academic references in addition to course textbooks and videos. Your references must be shown in a references slide at the end of your presentation.
Neither the title slide nor the references slide are included in the required slide count.
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Pick three reasons personally that would likely prevent or have prevented conducting an FA.
/in Uncategorized /by JosephRemember, respond individually to the questions in this post.
Functional Assessment and Treatment Questions
Moran, D.J., & Maillot, R.W. (Eds.; 2004). Evidence-based educational methods. San Diego: Elsevier Academic Press.
1. Haley(2012) discusses several reasons often given for not conducting a functional analysis (FA).
(a) Pick three reasons personally that would likely prevent or have prevented conducting an FA.
(b) If you decided to not conduct a FA, what other options do you have for determining a function of a behavior?
2. Not much has been published about the hypothesis-driven model of problem behavior (Rep, Felice, Barton, 1998) discussed in teh Carr (1994) article since it was written. However, for some cases, it seems particularly well-suited. In fact, there are many cases to suggest that just because you conduct an FA does not mean that you have conclusively determined the function of a behavior(s). What you can say is that for the environmental variables you have introduced and controlled for, and under a certain type of conditions which a function was tested, that it appears that ”x” is a function of ”y”. Which is why Carr, and any good behavior analyst, recommends making sure you ”get it right” when you initially do your indirect assessment. Because if the context isn’t right, you may not have the correct discriminate stimuli, motivating operations, or schedule of reinforcement to occasion the behavior in an analogue setting (i.e. clinic, classroom) as it naturally occurs.
(a) What do you think are some of the problems of using the hypothesis-driven model as a mode of assessment for making conclusions about function(s) of a behavior?
3. Tiger, Hanley, Bruzek (2008) provide summary recommendations for conducting FCT. In the clinic, training a functoinal communicatoin response (FCR) as part of FCT is relativley easy (the hard part is thinning the schedule of reinforcement!). Often it is easy because in a clinic you control the variables (i.e. when they are introduced, their form, etc.)
(a) Given some of the details, give some thought to and name three obstacles that you think would be most problematic when conducting FCT in a natural environment setting (i.e. home, home-classroom, work, etc.).
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Describe your understanding of the north / south divide as it relates to the health of populations in developing counties.
/in Uncategorized /by JosephQuestion
Health” Please respond to the following:
•Based on the lecture and Webtext materials, address the following:
?Describe your understanding of the north / south divide as it relates to the health of populations in developing counties. Determine specific steps — aside from building more clinics — that the leadership in developing countries can take to improve their health care systems and, as a consequence, the health of the
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Locate information about three business intelligence products on the Internet.
/in Uncategorized /by JosephOrder Description
Locate information about three business intelligence products on the Internet.
Compare and contrast the three business products. Answer the following:
Identify the three business intelligence products.
What problem does the sales literature say they are solving?
Is the solution a small-scale solution or an enterprise-level solution and why?
What types of reports can be generated?
What data can be searched with the software?
Does it have the capability to interact with Microsoft Office tools?
Write a three-page paper about your findings using APA formatting.
The use of a table for a summary comparison is required for this paper and APA format is required for the table.
The length of the paper does not include the title page reference page or table.
Use at least three sources for this paper that were published within the last five years.
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Identify the main ‘barriers’ that you see to activating sectors in your community. What about building consensus? Why? Be specific, but not critical, in your examples.
/in Uncategorized /by JosephIdentify the main ‘barriers’ that you see to activating sectors in your community. What about building consensus? Why? Be specific, but not critical, in your examples. Which of the examples and suggestions in our required readings do you think would be the easiest to implement and would work best in your community? Why?
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Why do you think the target firms agreed to be acquired?
/in Uncategorized /by Josephyou reviewed the companies profiled in the opening case “Technology Giants’ Acquisition Strategies and Their Outcomes” include Microsoft, Google, and Facebook. These three firms are using acquisitions to move quickly into market space that they see developing. Through its acquisition of Skype, Microsoft is seeking to broaden its communication base. Google’s acquisition of YouTube is seen as a move to gain access to new models of advertising. Facebook’s acquisition of Snaptu (and several other companies) appears to be focused on obtaining the human capital necessary to further develop evolving aspects of its business. In fast-cycle industries companies often lack the time to develop businesses or capabilities that it needs to complement their existing businesses or capitalize on changing conditions in a timely manner. Acquisitions can help firms achieve their objectives much faster than other options. My question is why Microsoft, Google, and Facebook, three financially solid companies, didn’t just develop the businesses/capabilities that they obtained through the profiled acquisitions? Why do you think the target firms agreed to be acquired?
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Post a brief summary on the effects of globalization on health in Russia
/in Uncategorized /by JosephCell phones, video cameras, and other technologies are changing the way we live today. It is difficult to avoid the stories and images of poverty, human rights abuses, disasters, diseases, and other tragedies that plague people in rich and poor countries alike.
It is not just communications technology that is making the world a “smaller” place. Globalization is also exerting a powerful effect on the conditions in which people live and work, (i.e., the social determinants of health) and, thus, on health itself.
Post a brief summary on the effects of globalization on health in Russia. Discuss one change in quality of life in post-transition Russia. Also, explain one change in mortality in post-transition Russia. Provide examples for both.
This is a fairly straight-forward discussion, using a fact-example, fact-example sort of pattern. Expanding on your insights would include a summary where you discuss what you, as a public health leader, can learn from the case study this week, and apply to your own community.
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Determine the tax liability to Marjean if the form of the distribution is a dividend.
/in Uncategorized /by Joseph1502. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #10
Swallow, Inc., is going to make a distribution of $550,000 to Marjean who is in
the 35% tax bracket.
a.
Determine
the tax liability to Marjean if the form of the distribution is a dividend.
b.
Determine
the tax liability to Marjean if the form of the distribution is a stock redemption.
Assume Marjeans adjusted basis for the stock redeemed is $400,000 and that
she has owned the stock for five years.
1503. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #11
Kirk is establishing a business in 2011 which could have potential environmental
liability problems. Therefore, he is trying to decide between the C corporation
form and the S corporation form. He projects that the business will generate
losses of approximately $100,000 each year for the first 3 years and then will
generate profits of at least $200,000 each year thereafter. All profits will be
reinvested in the growth of the business. Kirk projects he will be in the 35%
bracket in 2011 and thereafter. Advise Kirk on which tax form he should select.
1504. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #12
Melanie and Sonny form Bird Enterprises. Sonny contributes cash of $100,000 and
land worth $50,000 (adjusted basis of $30,000). Melanie contributes land and
building worth $280,000 (adjusted basis of $200,000) and performs services
worth $20,000 associated with the formation of the entity. Melanie receives a
two-thirds ownership interest and Sonny receives a one-third ownership
interest. Determine the tax consequences of the contributions to Melanie,
Sonny, and Bird if the business is:
a.
An S
corporation.
b.
A C
corporation
c.
A
partnership.
1505. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #13
Sam and Vera are going to establish a business.
Sam will contribute cash of $100,000 for a 50% interest, and Vera will
contribute land and a building worth $135,000 (adjusted basis of $65,000) for a
50% interest. The land and building is encumbered by a $35,000 mortgage which
the entity assumes. Determine the tax consequences of the contribution to Sam,
Vera, and the entity if the business is:
a.
An S
corporation.
b.
A
partnership.
c.
A C
corporation.
1506. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #14
Colin and Reed formed a business entity several years ago. At that date,
Colins basis for his ownership interest was $40,000 and Reeds basis for his
ownership interest was $50,000. Colins profit and loss percentage is 40% and
Reeds profit and loss percentage is 60%. During the intervening period, the
entity has reported profits of $200,000. At the beginning of the current year,
the entity had liabilities (all recourse) of $50,000. At the end of the current
year, the liabilities (all recourse) had increased to $70,000. Determine Colin
and Reeds basis for their ownership interest if the entity is:
a.
A partnership.
b.
A C
corporation.
c.
An S
corporation.
1507. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #15
Ashley contributes property to the TCA Partnership which was formed 7 years ago
by Clark and Tara. Ashleys basis for the property is $70,000 and the fair
market value is $150,000. Ashley receives a 25% interest for his contribution.
Because the TCA Partnership is unsuccessful in having the property rezoned from
agricultural to commercial, it sells the property 12 months later for $210,000.
a.
Determine
the tax consequences to Ashley and to the partnership on the contribution of
the property to the partnership.
b.
Determine
the tax consequences to Ashley and the other partners on the sale of the
property.
c.
Would the
tax consequences in b. differ if the entity were an S corporation?
1508. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #16
Alice has a 70% interest in a business entity. Her basis for her ownership
interest is $260,000. The net income of the business for the tax year is
$100,000 and the entity liabilities have increased by $50,000. Determine the
effect of the earnings and the liabilities on Alices basis for her ownership
interest if the business is:
a.
A C
corporation.
b.
An S
corporation.
c.
A
partnership.
1509. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #17
Wren, Inc. is owned by Alfred (30%) and Mabel (70%). Alfreds marginal tax rate
is 25% and Mabels marginal tax rate is 33%. Wrens taxable income for 2011 is
$400,000.
a.
Determine
the amount of the distribution that Wren would make to enable Alfred and
Mabel to pay their tax liabilities associated with Wrens $400,000 taxable
income if Wren is an S corporation.
b.
If Wren is a
C corporation.
1510. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #18
Eagle, Inc., a C corporation, distributes $250,000 to its shareholder, Jean,
and land worth $250,000 (adjusted basis of $190,000) to its shareholder, Pam.
Eagle has earnings and profits of $700,000. Determine the tax consequences to
Eagle, Jean, and Pam.
1511. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #19
Maurice purchases a bakery from Philip for $410,000. He spends an additional
$150,000 (financed with a nonrecourse loan) updating the bakery equipment.
During the first year of operations as a sole proprietorship, the bakery incurs
a loss of $125,000. Maurice has $300,000 of salary income as the chief
financial officer of a publicly-traded corporation. He has interest income of
$30,000 and dividend income of $50,000.
a.
What amount
can Maurice deduct for the loss if he is a material participant?
b.
What amount
can Maurice deduct for the loss if he is not a material participant?
1512. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #20
Lee owns all the stock of Vireo, Inc., a C corporation for which he has an
adjusted basis of $150,000. The assets of Vireo, Inc., are as follows:
Adjusted
Basis
FMV
Cash
$35,000
$35,000
Accounts
receivable
20,000
20,000
Inventory
22,000
25,000
Building
28,000
30,000
Land
40,000
90,000
Lee sells his stock to Katrina for $200,000.
a.
Determine
the tax consequences to Lee.
b.
Determine
the tax consequences to Katrina.
c.
Determine
the tax consequences to Vireo, Inc.
1513. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #21
Ralph owns all the stock of Silver, Inc., a C corporation for which his
adjusted basis is $225,000. Ralph founded Silver 12 years ago. The assets and
liabilities of Silver are as follows:
Assets
Basis
FMV
Cash
$ 15,000
$ 15,000
Accounts
receivable
0
25,000
Inventory
30,000
35,000
Machinery
and equipment*
70,000
90,000
Land
60,000
150,000
$175,000
$315,000
Liabilities
Basis
FMV
Accounts
payable
$ 5,000
$ 5,000
Notes
payable
10,000
10,000
$15,000
$15,000
*Accumulated depreciation of $55,000 has been deducted.
Ralph and the purchaser, Marilyn, have agreed to a purchase price of $350,000
less any outstanding liabilities. They are both in the 35% tax bracket, and
Silver is in the 34% tax bracket.
a.
Advise Ralph
on whether the form of the sales transaction should be a stock sale or an
asset sale.
b.
Advise
Marilyn on whether the form of the purchase transaction should be a stock
purchases or an asset purchase.
1514. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #1
Included among the factors that influence the choice of the form of a business
entity are the following:
Capital
formation.
Limited liability.
Estimated
life of the business.
Number of
owners and their roles in the management of the business.
Freedom of
choice in transferring ownership interest.
Organizational
formality including the related cost and extent of governmental regulations.
Evaluate the validity of the statement.
1515. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #2
Lisa is considering investing $25,000 in a limited partnership which is raising
additional capital. According to the prospectus, for the past 10-year period
the average earnings have been 15% and for the past 5-year period the average
earnings have been 8%. Lisa is in the 33% tax bracket.
a.
List some
factors Lisa should consider in making a decision on the potential
investment.
b.
Assuming the
partnership finances its activities with equity rather than debt, what is the
maximum cash flow benefit Lisa can receive if the partnership generates
losses?
1516. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #3
Which of the following business entity forms are subject to single taxation on
the profits and which are subject to double taxation?
a.
Sole
proprietorship.
b.
Partnership.
c.
C
corporation.
d.
S
corporation.
e.
LLC.
1517. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #4
List some techniques which can be used to avoid and/or reduce double taxation
for a C corporation.
1518. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #5
List some techniques for reducing and/or avoiding double taxation by making
distributions to the shareholders that are deductible to the corporation.
1519. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #6
What is the major pitfall associated with attempting to reduce and/or avoid
double taxation by a corporation not making distributions to shareholders?
1520. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #7
Why does stock redemption treatment for an individual shareholder produce more
favorable tax consequences than a dividend?
Correct
Answer:
Both a stock
redemption (assuming the holding period is long-term) and a dividend (assuming
the dividend is a qualified dividend) are taxed at beneficial tax rates (i.e.,
15%/0%). The full amount of a dividend is subject to taxation (i.e., included
in gross income). For a stock redemption, only the recognized gain (amount
realized basis) is subject to taxation (i.e., included in gross income).
1521. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #8
What special adjustment is required in calculating the AMT of a C corporation
that does not apply in calculating the AMT of an individual taxpayer?
1522. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #9
What tax rates apply for the AMT for an individual taxpayer and for a C
corporation?
1523. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #10
To which of the following entities does the AMT apply?
Sole
proprietorship.
Partnership.
LLC.
S
corporation.
C
corporation.
1524. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #11
How can double taxation be avoided or reduced by owning assets outside a C
corporation?
1525. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #12
Normally a C corporation shareholder would prefer to receive a return of
capital distribution (e.g., stock redemption) rather than a dividend
distribution. Provide an example of where the opposite is true.
1526. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #13
Aubrey has been operating his business as a C corporation for the past 5 years.
The corporation pays him a reasonable salary. The profits of the corporation,
after paying Federal income tax, are distributed to him each year as a
dividend. He is considering electing S status for his corporation in order to
avoid double taxation. What factors should he consider assuming after-tax
earnings will continue to be distributed to him?
1527. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #14
Why are S corporations not subject to the accumulated earnings tax?
1528. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #15
Marsha is going to contribute the following assets to a business entity in
exchange for an ownership interest.
Adjusted
Basis
FMV
Cash
$100,000
$100,000
Land and
building
60,000
95,000
What are the tax consequences of the contribution to Marsha if the business
entity is a(n):
a.
Sole proprietorship?
b.
Partnership?
c.
C
corporation?
d.
S
corporation?
1529. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #16
Gladys contributes land with an adjusted basis of $70,000 and a fair market
value of $100,000 to a business entity in which she is an 80% owner on the
first day of the tax year. Discuss the tax consequences to Gladys if the
business entity sells the land six months later for $130,000 if:
a.
The business
entity is a partnership?
b.
The business
entity is a C corporation?
c.
The business
entity is an S corporation?
Correct
Answer:
a.
For a partnership, the precontribution gain of
$30,000 ($100,000 $70,000) must be allocated to Gladys. Thus, Gladys share
of the recognized gain of $60,000 ($130,000 $70,000) on the sale of the
land by the partnership is $54,000 [$30,000 + ($30,000 80%)].
b.
None of the $60,000 gain is allocated to the
shareholders. All of the gain is taxed to the corporation.
c.
The $60,000 gain is passed through to the
shareholders of the S corporation based on the stock ownership. Thus, $48,000
($60,000 80%) is allocated to Gladys.
1530. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #17
Terry has a 20% ownership interest in a business for which his basis is
$100,000. During the year, the entity earns profits of $90,000 and makes cash
distributions to the owners of $50,000. How do these transactions affect
Terrys basis if:
a.
The entity
is a C corporation?
b.
The entity
is a general partnership?
c.
The entity
is an S corporation.
1531. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #18
A business entity has appreciated land (basis of $50,000 and fair market value
of $75,000) which it is going to distribute to Craig, one of its owners. The
entity has earned substantial profits during its 15 years of operations and has
reinvested most of them in the business. What are the tax consequences of the
distribution to the business entity and to Craig if the business entity is
a(n):
a.
C corporation?
b.
S
corporation?
c.
Partnership?
1532. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #19
In calculating the owners initial basis for an ownership interest, which of
the following business entity forms have a carryover basis and which have a
stepped-up or stepped-down basis associated with its formation?
a.
C
corporation.
b.
S corporation.
c.
Partnership.
1533. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #20
Under what circumstances, if any, do the 469 passive activity loss rules
apply to C corporations?
1534. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #21
For a C corporation to be classified as a personal service corporation (PSC)
for 469 purposes, what requirements must be satisfied?
1535. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #22
Do the 465 at-risk rules apply to partnerships, LLCs, and S corporations?
1536. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #23
Do the 465 at-risk rules treat recourse debt and nonrecourse debt
differently?
1537. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #24
With respect to special allocations, is the S corporation treated more like a
partnership or a C corporation?
1538. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #25
Agnes owns a sole proprietorship for which the assets have appreciated in
value. If she is going to sell the business to Abner, should she structure the
sale as (1) a sale of the individual assets or (2) a sale of the sole
proprietorship?
1539. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #26
Peter is going to purchase the assets of Kirstens sole proprietorship. The
assets of Kirstens sole proprietorship have appreciated in value. From Peters
perspective, does it matter whether the purchase is structured as (1) the
purchase of the individual assets or (2) the purchase of the sole
proprietorship?
1540. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #27
Ralph wants to purchase either the stock or the assets of Red, Inc., a C
corporation.
a.
Under what
circumstances would Ralph prefer to purchase the stock from the shareholders?
b.
Under what
circumstances would Ralph prefer to purchase the assets from the corporation?
1541. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #28
Walter wants to sell his wholly-owned C corporation, Cream, Inc. The fair
market value of his stock exceeds the corporations adjusted basis for the
assets. Should Walter sell his stock or have Cream sell its assets and make a
liquidating distribution to him?
1542. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #29
In the sale of a partnership, does the way the sale is structured (i.e., sale
of the partnership interests versus the sale of the assets) produce different
tax consequences?
1502. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #10
Swallow, Inc., is going to make a distribution of $550,000 to Marjean who is in
the 35% tax bracket.
a.Determine
the tax liability to Marjean if the form of the distribution is a dividend. b.Determine
the tax liability to Marjean if the form of the distribution is a stock redemption.
Assume Marjeans adjusted basis for the stock redeemed is $400,000 and that
she has owned the stock for five years.
1503. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #11
Kirk is establishing a business in 2011 which could have potential environmental
liability problems. Therefore, he is trying to decide between the C corporation
form and the S corporation form. He projects that the business will generate
losses of approximately $100,000 each year for the first 3 years and then will
generate profits of at least $200,000 each year thereafter. All profits will be
reinvested in the growth of the business. Kirk projects he will be in the 35%
bracket in 2011 and thereafter. Advise Kirk on which tax form he should select.
1504. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #12
Melanie and Sonny form Bird Enterprises. Sonny contributes cash of $100,000 and
land worth $50,000 (adjusted basis of $30,000). Melanie contributes land and
building worth $280,000 (adjusted basis of $200,000) and performs services
worth $20,000 associated with the formation of the entity. Melanie receives a
two-thirds ownership interest and Sonny receives a one-third ownership
interest. Determine the tax consequences of the contributions to Melanie,
Sonny, and Bird if the business is:
a.An S
corporation. b.A C
corporation c.A
partnership.
1505. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #13
Sam and Vera are going to establish a business.
Sam will contribute cash of $100,000 for a 50% interest, and Vera will
contribute land and a building worth $135,000 (adjusted basis of $65,000) for a
50% interest. The land and building is encumbered by a $35,000 mortgage which
the entity assumes. Determine the tax consequences of the contribution to Sam,
Vera, and the entity if the business is:
a.An S
corporation. b.A
partnership. c.A C
corporation.
1506. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #14
Colin and Reed formed a business entity several years ago. At that date,
Colins basis for his ownership interest was $40,000 and Reeds basis for his
ownership interest was $50,000. Colins profit and loss percentage is 40% and
Reeds profit and loss percentage is 60%. During the intervening period, the
entity has reported profits of $200,000. At the beginning of the current year,
the entity had liabilities (all recourse) of $50,000. At the end of the current
year, the liabilities (all recourse) had increased to $70,000. Determine Colin
and Reeds basis for their ownership interest if the entity is:
a.A partnership. b.A C
corporation. c.An S
corporation.
1507. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #15
Ashley contributes property to the TCA Partnership which was formed 7 years ago
by Clark and Tara. Ashleys basis for the property is $70,000 and the fair
market value is $150,000. Ashley receives a 25% interest for his contribution.
Because the TCA Partnership is unsuccessful in having the property rezoned from
agricultural to commercial, it sells the property 12 months later for $210,000.
a.Determine
the tax consequences to Ashley and to the partnership on the contribution of
the property to the partnership. b.Determine
the tax consequences to Ashley and the other partners on the sale of the
property. c.Would the
tax consequences in b. differ if the entity were an S corporation?
1508. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #16
Alice has a 70% interest in a business entity. Her basis for her ownership
interest is $260,000. The net income of the business for the tax year is
$100,000 and the entity liabilities have increased by $50,000. Determine the
effect of the earnings and the liabilities on Alices basis for her ownership
interest if the business is:
a.A C
corporation. b.An S
corporation. c.A
partnership.
1509. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #17
Wren, Inc. is owned by Alfred (30%) and Mabel (70%). Alfreds marginal tax rate
is 25% and Mabels marginal tax rate is 33%. Wrens taxable income for 2011 is
$400,000.
a.Determine
the amount of the distribution that Wren would make to enable Alfred and
Mabel to pay their tax liabilities associated with Wrens $400,000 taxable
income if Wren is an S corporation. b.If Wren is a
C corporation.
1510. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #18
Eagle, Inc., a C corporation, distributes $250,000 to its shareholder, Jean,
and land worth $250,000 (adjusted basis of $190,000) to its shareholder, Pam.
Eagle has earnings and profits of $700,000. Determine the tax consequences to
Eagle, Jean, and Pam.
1511. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #19
Maurice purchases a bakery from Philip for $410,000. He spends an additional
$150,000 (financed with a nonrecourse loan) updating the bakery equipment.
During the first year of operations as a sole proprietorship, the bakery incurs
a loss of $125,000. Maurice has $300,000 of salary income as the chief
financial officer of a publicly-traded corporation. He has interest income of
$30,000 and dividend income of $50,000.
a.What amount
can Maurice deduct for the loss if he is a material participant? b.What amount
can Maurice deduct for the loss if he is not a material participant?
1512. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #20
Lee owns all the stock of Vireo, Inc., a C corporation for which he has an
adjusted basis of $150,000. The assets of Vireo, Inc., are as follows:
Adjusted
Basis FMV Cash$35,000$35,000Accounts
receivable 20,000 20,000Inventory 22,000 25,000Building 28,000 30,000Land 40,000 90,000
Lee sells his stock to Katrina for $200,000.
a.Determine
the tax consequences to Lee. b.Determine
the tax consequences to Katrina. c.Determine
the tax consequences to Vireo, Inc.
1513. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question PR #21
Ralph owns all the stock of Silver, Inc., a C corporation for which his
adjusted basis is $225,000. Ralph founded Silver 12 years ago. The assets and
liabilities of Silver are as follows:
Assets Basis
FMV Cash$ 15,000$ 15,000Accounts
receivable025,000Inventory30,00035,000Machinery
and equipment*70,00090,000Land 60,000 150,000 $175,000$315,000 Liabilities Basis
FMV Accounts
payable$ 5,000$ 5,000Notes
payable 10,000 10,000 $15,000$15,000
*Accumulated depreciation of $55,000 has been deducted.
Ralph and the purchaser, Marilyn, have agreed to a purchase price of $350,000
less any outstanding liabilities. They are both in the 35% tax bracket, and
Silver is in the 34% tax bracket.
a.Advise Ralph
on whether the form of the sales transaction should be a stock sale or an
asset sale. b.Advise
Marilyn on whether the form of the purchase transaction should be a stock
purchases or an asset purchase.
1514. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #1
Included among the factors that influence the choice of the form of a business
entity are the following:
Capital
formation. Limited liability. Estimated
life of the business. Number of
owners and their roles in the management of the business. Freedom of
choice in transferring ownership interest. Organizational
formality including the related cost and extent of governmental regulations.
Evaluate the validity of the statement.
1515. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #2
Lisa is considering investing $25,000 in a limited partnership which is raising
additional capital. According to the prospectus, for the past 10-year period
the average earnings have been 15% and for the past 5-year period the average
earnings have been 8%. Lisa is in the 33% tax bracket.
a.List some
factors Lisa should consider in making a decision on the potential
investment. b.Assuming the
partnership finances its activities with equity rather than debt, what is the
maximum cash flow benefit Lisa can receive if the partnership generates
losses?
1516. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #3
Which of the following business entity forms are subject to single taxation on
the profits and which are subject to double taxation?
a.Sole
proprietorship. b.Partnership. c.C
corporation. d.S
corporation. e.LLC.
1517. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #4
List some techniques which can be used to avoid and/or reduce double taxation
for a C corporation.
1518. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #5
List some techniques for reducing and/or avoiding double taxation by making
distributions to the shareholders that are deductible to the corporation.
1519. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #6
What is the major pitfall associated with attempting to reduce and/or avoid
double taxation by a corporation not making distributions to shareholders?
1520. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #7
Why does stock redemption treatment for an individual shareholder produce more
favorable tax consequences than a dividend?
Correct
Answer:Both a stock
redemption (assuming the holding period is long-term) and a dividend (assuming
the dividend is a qualified dividend) are taxed at beneficial tax rates (i.e.,
15%/0%). The full amount of a dividend is subject to taxation (i.e., included
in gross income). For a stock redemption, only the recognized gain (amount
realized basis) is subject to taxation (i.e., included in gross income).
1521. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #8
What special adjustment is required in calculating the AMT of a C corporation
that does not apply in calculating the AMT of an individual taxpayer?
1522. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #9
What tax rates apply for the AMT for an individual taxpayer and for a C
corporation?
1523. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #10
To which of the following entities does the AMT apply?
Sole
proprietorship. Partnership. LLC. S
corporation. C
corporation.
1524. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #11
How can double taxation be avoided or reduced by owning assets outside a C
corporation?
1525. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #12
Normally a C corporation shareholder would prefer to receive a return of
capital distribution (e.g., stock redemption) rather than a dividend
distribution. Provide an example of where the opposite is true.
1526. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #13
Aubrey has been operating his business as a C corporation for the past 5 years.
The corporation pays him a reasonable salary. The profits of the corporation,
after paying Federal income tax, are distributed to him each year as a
dividend. He is considering electing S status for his corporation in order to
avoid double taxation. What factors should he consider assuming after-tax
earnings will continue to be distributed to him?
1527. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #14
Why are S corporations not subject to the accumulated earnings tax?
1528. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #15
Marsha is going to contribute the following assets to a business entity in
exchange for an ownership interest.
Adjusted
BasisFMVCash$100,000$100,000Land and
building60,00095,000
What are the tax consequences of the contribution to Marsha if the business
entity is a(n):
a.Sole proprietorship? b.Partnership? c.C
corporation? d.S
corporation?
1529. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #16
Gladys contributes land with an adjusted basis of $70,000 and a fair market
value of $100,000 to a business entity in which she is an 80% owner on the
first day of the tax year. Discuss the tax consequences to Gladys if the
business entity sells the land six months later for $130,000 if:
a.The business
entity is a partnership? b.The business
entity is a C corporation? c.The business
entity is an S corporation?
Correct
Answer:a.For a partnership, the precontribution gain of
$30,000 ($100,000 $70,000) must be allocated to Gladys. Thus, Gladys share
of the recognized gain of $60,000 ($130,000 $70,000) on the sale of the
land by the partnership is $54,000 [$30,000 + ($30,000 80%)]. b.None of the $60,000 gain is allocated to the
shareholders. All of the gain is taxed to the corporation. c.The $60,000 gain is passed through to the
shareholders of the S corporation based on the stock ownership. Thus, $48,000
($60,000 80%) is allocated to Gladys.
1530. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #17
Terry has a 20% ownership interest in a business for which his basis is
$100,000. During the year, the entity earns profits of $90,000 and makes cash
distributions to the owners of $50,000. How do these transactions affect
Terrys basis if:
a.The entity
is a C corporation? b.The entity
is a general partnership? c.The entity
is an S corporation.
1531. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #18
A business entity has appreciated land (basis of $50,000 and fair market value
of $75,000) which it is going to distribute to Craig, one of its owners. The
entity has earned substantial profits during its 15 years of operations and has
reinvested most of them in the business. What are the tax consequences of the
distribution to the business entity and to Craig if the business entity is
a(n):
a.C corporation? b.S
corporation? c.Partnership?
1532. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #19
In calculating the owners initial basis for an ownership interest, which of
the following business entity forms have a carryover basis and which have a
stepped-up or stepped-down basis associated with its formation?
a.C
corporation. b.S corporation. c.Partnership.
1533. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #20
Under what circumstances, if any, do the 469 passive activity loss rules
apply to C corporations?
1534. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #21
For a C corporation to be classified as a personal service corporation (PSC)
for 469 purposes, what requirements must be satisfied?
1535. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #22
Do the 465 at-risk rules apply to partnerships, LLCs, and S corporations?
1536. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #23
Do the 465 at-risk rules treat recourse debt and nonrecourse debt
differently?
1537. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #24
With respect to special allocations, is the S corporation treated more like a
partnership or a C corporation?
1538. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #25
Agnes owns a sole proprietorship for which the assets have appreciated in
value. If she is going to sell the business to Abner, should she structure the
sale as (1) a sale of the individual assets or (2) a sale of the sole
proprietorship?
1539. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #26
Peter is going to purchase the assets of Kirstens sole proprietorship. The
assets of Kirstens sole proprietorship have appreciated in value. From Peters
perspective, does it matter whether the purchase is structured as (1) the
purchase of the individual assets or (2) the purchase of the sole
proprietorship?
1540. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #27
Ralph wants to purchase either the stock or the assets of Red, Inc., a C
corporation.
a.Under what
circumstances would Ralph prefer to purchase the stock from the shareholders? b.Under what
circumstances would Ralph prefer to purchase the assets from the corporation?
1541. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #28
Walter wants to sell his wholly-owned C corporation, Cream, Inc. The fair
market value of his stock exceeds the corporations adjusted basis for the
assets. Should Walter sell his stock or have Cream sell its assets and make a
liquidating distribution to him?
1542. CHAPTER
13COMPARATIVE FORMS OF DOING BUSINESS Question ES #29
In the sale of a partnership, does the way the sale is structured (i.e., sale
of the partnership interests versu
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Critically evaluate the above quote in regards to contemporary budgeting practice. You should review current business and academic literature relevant to management control and budgeting.
/in Uncategorized /by JosephThis assignment is designed to give you an opportunity:
• apply management accounting concepts and finance frameworks…to increase the effectiveness of management decision making (Objective 2)
• apply management accounting concepts …to help assess the impact on organisational systems (Objective 3)
• apply and use management accounting concepts and finance frameworks…to provide solutions to real world problems (Objective 4)
Part One (60 Marks)
Question One
Corporate budgeting is a joke, and everyone knows it. It consumes a huge amount of executives’ time, forcing them into endless rounds of dull meetings and tense negotiations. It encourages managers to lie and cheat, lowballing targets and inflating results, and it penalizes them for telling the truth. It turns business decisions into elaborate exercises in gaming. It sets colleague against colleague, creating distrust and ill will. And it distorts incentives, motivating people to act in ways that run counter to the best interests of their companies.
Source: Jensen, Michael C. (2001) Corporate Budgeting is Broken – Let’s Fix It, Harvard Business Review, Volume 79, Issue 10, November, p. 94-101.
Required:
1. Critically evaluate the above quote in regards to contemporary budgeting practice. You should review current business and academic literature relevant to management control and budgeting. Use appropriate sources to summarise and support your personal views about corporate budgeting. Ensure you relate your discussion to the above quote. You should also make a determination as to whether you agree or disagree with Jensen’s view. (Guideline: 2000 – 2500 words.)
2. Apply the Jensen commentary to a business scenario in which senior management are consistently exceeding financial targets. In this hypothetical organisation senior management receive significant financial benefits for favourable budget outcomes. Currently senior management set the budgets with limited input from line personnel. The organisation uses an incremental budgeting system.
Using your knowledge of budgeting processes and performance evaluation systems address the following:
(a) Suggest potential reasons for why the managers are able to consistently exceed budgetary targets.
(b) Suggest refinements to the budgeting system.
(c) Suggest refinements to the performance evaluation system. (Guideline: 800 – 1000 words)
Part Two (40 Marks)
Answer the following questions:
(1) Complex Resources has a current breakeven point of 93 400 units. To reduce the break-even point Complex Resources should:
a. increase the variable costs per unit
b. increase fixed costs
c. reduce the sales price per unit
d. increase the contribution margin per unit
(2) Sanjay Ltd has 1000 units in inventory that cost $2.00 per unit to produce. Due to changing technology, the sales department is having difficulty selling the product. It will cost $500 to scrap the units. What is the minimum price Sanjay should sell these units for?
(3) Leisure Life manufactures various sporting equipment. During the first year of operations the company worked on four jobs. The predetermined overhead application rate was 150% of direct labour cost. Job 104 included direct materials of $20,000 and total costs were $25,000. Calculate the manufacturing overhead allocated to Job 104 to date.
(4) Te Rangi Photographic Ltd manufactures digital camera equipment. For each unit $1,475 of direct material is used and there is $1,500 of direct manufacturing labour (at $30 per hour). Manufacturing overhead is allocated at $35 per direct manufacturing labour hour. Calculate the cost of each unit.
(5) Unique Mistique Ltd has fixed costs of $400,000 and variable costs are 75% of the selling price. To realise profits of $100,000 from sales of 500,000 units, the selling price per unit must be?
(6) Diamond Interiors is approached by Mr John Lee, a new customer, to fulfil a one-time only special order for a product similar to those offered to regular customers. The following per unit data apply for sales to regular customers:
Direct Materials $455
Direct Labour $300
Variable Manufacturing Overhead $45
Fixed Manufacturing Overhead $100
Total Manufacturing Costs $900
Mark Up (60%) $540
Target Sales Price $1440
Diamond Interiors has excess capacity. Mr Lee wants the cabinet in a metallic finish rather than laminate, so direct materials will increase by $30 per unit. What is the minimum selling price that Diamond Interiors would accept for this one time only special order?
(7) The mayor of Snowbrook, Western Island, is considering the purchase of a computer system to automate the city’s rate collections. The system costs $75 000 and has an estimated life of five years. The mayor estimates the following savings will result if the system is purchased.
If Snowbrook uses a 10 per cent discount rate for capital budgeting decisions, what is the net present value of the computer system?
(8) A piece of equipment has an estimated five-year life, an internal rate of return of 12 per cent and estimated annual savings of $15 000. What was the cost of the equipment?
(9) Imperial Airways Ltd is planning a project that is expected to last for six years. During that time, the project is expected to generate net cash inflows of $75 000 per annum.
The project will require the purchase of a machine for $280 000. This new machine is expected to have a salvage value of $10 000 at the end of six years. In addition to its annual operating costs, the machine will require an overhaul costing $50 000 at the end of the fourth year. The company presently has a minimum desired rate of return of 12 per cent. Based on this information, the accountant prepared the following analysis:
Therefore, the accountant recommends that the project be rejected, as it does not meet the company’s minimum desired rate of return.
i. Critically assess the accountant’s evaluation of the project.
ii. Use cash flow analysis to determine whether the project should be accepted. Ignore tax effects. iii. Is the internal rate of return greater or less than 12 per cent?
(10) Cyndy Ltd recently invested $25 000 in equipment with an estimated life of five years. The manager projects the following cash flows.
Calculate the payback period.
General Requirements:
1. Answer each question using a heading indicating the question number. Part one and part two of the assignment should be answered within the same word document.
2. Full referencing is required in accordance with the USQ preferred Harvard Referencing style.
3. There is no specified word length for this assignment. However, be as concise and efficient in your writing as possible. Word limit guidelines are provided for part one only.
4. Assignment extensions will only be granted if there are extenuating circumstances. University policy provides that the maximum extension is 5 business days.
5. The assignment is to be submitted electronically. Submit the assignment using the link on the study desk. File types allowed include doc and docx. Only one file will be accepted. If more than one file is uploaded, only the first file listed will be marked. Do not submit a cover sheet.
(Sources withheld: Questions for this assignment are taken from other sources. Details of this source have been withheld for assessment purposes. This material is reproduced under the provisions of the Section 200 (1) (b) of the Copyright Amendment Act 1980.)
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