ACCTG 473 Lecture Notes - Lecture 8: Equity Method, Retained Earnings, Income Statement
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Barry Potter and Winnie Weasley are considering making an Selection on March 1, 2015, for their C corporation, Omniocular.However, first they want to consider the implications of thefollowing information: (Round your intermediate dollarcalculations and final answer to the nearest whole dollaramount.) |
| ⢠| Winnie is a U.S. citizen andresident. |
| ⢠| Barry is a citizen of the UnitedKingdom, but a resident of the United States. |
| ⢠| Barry and Winnie each own 50 percent of the voting power inOmniocular. However, Barryâs stock provides him with a claim on 60percent of the Omniocular assets in liquidation. |
| ⢠| Omniocular was formed under Arizona state law, but it plans oneventually conducting some business in Mexico. |
| a. | Is Omniocular eligible to elect S corporation status? | ||||
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For the remainder of the problem, assume Omniocular made a validS election effective January 1, 2015. Barry and Winnie each own 50percent of the voting power and have equal claim on Omniocularâsassets in liquidation. In addition, consider the followinginformation: |
| ⢠| Omniocular reports on a calendar tax year. |
| ⢠| Omniocularâs earnings andprofits as of December 31, 2014, were $55,000. |
| ⢠| Omniocularâs 2014 taxable incomewas $15,000. |
| ⢠| Omniocularâs assets at the endof 2014 are as follows: |
| Omniocular Assets December 31, 2014 | |||||
| Asset | Adjusted Basis | FMV | |||
| Cash | $ | 50,000 | $ | 50,000 | |
| Accountsreceivable | 20,000 | 20,000 | |||
| Investments instocks and bonds | 700,000 | 700,000 | |||
| Investment inland | 90,000 | 100,000 | |||
| Inventory(LIFO) | 80,000* | 125,000 | |||
| Equipment | 40,000 | 35,000 | |||
| Totals | $ | 980,000 | $ | 1,030,000 | |
| *$110,000 under FIFOaccounting. |
| ⢠| On March 31, 2015, Omniocularsold the land for $42,000. |
| ⢠| In 2015, Omniocular sold all the inventory it had on hand at thebeginning of the year. This was the only inventory it sold duringthe year. |
| Other Income/Expense Items for 2015 | ||
| Sales revenue | $ | 155,000 |
| Salary toowners | $ | (50,000) |
| Employee wages | $ | (10,000) |
| Depreciationexpense | $ | (5,000) |
| Miscellaneousexpenses | $ | (1,000) |
| Gain on sale ofmachinery | $ | 12,000 |
| Interest income | $ | 40,000 |
| Dividend income | $ | 65,000 |
| ⢠| Assume that if Omniocular were a C corporation for 2015, itstaxable income would have been $88,500. |
| b. | How much LIFO recapture tax is Omniocular required to pay andwhen is it due? |
| c. | How much built-in gains tax, if any, is Omniocular required topay? |
| d. | How much excess net passiveincome tax, if any, is Omniocular required to pay? |
| e. | Assume Barry's basis in his Omniocular stock was $40,000 onJanuary 1, 2015. What is his stock basis on December 31, 2015? |
For the following questions, assume that after electing Scorporation status Barry and Winnie had a change of heart and filedan election to terminate Omniocularâs S election, effective August1, 2016. |
| ⢠| In 2016, Omniocular reported the following income/expenseitems: |
| January 1âJuly 31 2016 (213 days) | August 1âDecember 31, 2016 (153 days) | January 1âDecember 31, 2016 | ||||||
| Sales revenue | $ | 80,000 | $ | 185,000 | $ | 265,000 | ||
| Cost of goodssold | (40,000) | (20,000) | (60,000) | |||||
| Salaries to Barryand Winnie | (60,000) | (40,000) | (100,000) | |||||
| Depreciationexpense | (7,000) | (2,000) | (9,000) | |||||
| Miscellaneousexpenses | (4,000) | (3,000) | (7,000) | |||||
| Interest income | 6,000 | 5,250 | 11,250 | |||||
| Overall net income(loss) | $ | (25,000) | $ | 125,250 | $ | 100,250 | ||
| f. | For tax purposes, how would you recommend Barry and Winnieallocate income between the short S corporation year and the shortC corporation year if they would like to minimize double taxationof Omniocularâs income? | ||||
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| g. | Assume in part (f) that Omniocular allocates income between theshort S and C corporation years in a way that minimizes the doubletaxation of its income. If Barryâs stock basis in his Omniocularstock on January 1, 2016, is $50,000, what is his stock basis onDecember 31, 2016? |
| h. | When is the earliest tax year inwhich Omniocular can be taxed as an S corporation again? | ||||||
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