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Problem 5-25 (LO. 1, 2) Cardinal Corporation, a calendar year taxpayer, receives dividend income of $250,000...

Problem 5-25 (LO. 1, 2)

Cardinal Corporation, a calendar year taxpayer, receives dividend income of $250,000 from a corporation in which it holds a 10% interest. Cardinal also receives interest income of $35,000 from municipal bonds. (The municipality used the proceeds from the bond issue to construct a library.) Cardinal borrowed funds to purchase the municipal bonds and pays $20,000 of interest on the loan. Excluding these three items, Cardinal's taxable income is $500,000. Cardinal has $150,000 of accumulated E & P at the end of the prior year, and it paid Federal income taxes of $131,250 during the year.

Dividends received deduction table to be used

Percentage of Ownership Deduction Percentage

Less than 20% 50%

20% or more (but less than 80%) 65%

80% or more* 100%

a. After these three items are taken into account, Cardinal Corporation's taxable income is $

b. Cardinal Corporation's accumulated E & P at the start of next year is $

Solutions

Expert Solution

According to the scenario, given data is :

Cardinals income ( excluding dividends) = $500,000

Dividend received = $250,000

E & P beginning balance = $150,000

interest income from municipal bonds = $35,000

interest paid = $20,000

Federal taxes paid = $200,000

Dividends received deduction is tax break applied to corporations who receives dividend from the companies in which it holds stake. The deduction eliminates triple taxation consequences on dividend receipt.

There are three tiers of possible deductions:

Allowed deduction of dividend

If company holds less than 20% of another company

50%

If company holds more than 20% - 80%of another company

65%

If company holds more than 80%

100%

Applicable deduction would be 50% as Cardinal holds only 10% interest.

Requirement 1

ekkarill92 answered 2 years ago

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