Cardinal Corporation, a calendar year taxpayer, receives dividend income of $250,000 from a corporation in which...

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.

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

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

Expert Solution

Answer :

a. Cardinal Corporation's taxable income is $575,000.

b. Cardinal Corporation's accumulated E & P at the start of next year is $783,750

Particulars	Amount	Amount
a. Calculation of taxable income :
Income excluding dividends		$500,000
Dividend received	$250,000
Less: Dividend received deduction (250,000 × 0.70)	(175,000)	75,000
Taxable income		$575,000

b. Calculation of accumulated E & P :
E & P beginning balance		$150,000
Add:
Taxable income	$575,000
Dividend received deduction	175,000
Interest income from muncipal bonds	35,000	785,000
Less:
Interest paid on loan	(20,000)	(20,000)
Current E & P		$915,000
Less : Federal taxes paid		(131,250)
E & P balane accumulated balance at start of next year		$783,750

Note : Interest received from muncipal bonds are not taxable.

ekkarill92 answered 2 years ago

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