Rourke Enterprises is owned by Dallas. For the year, Rourke had net income per books of $450,000.
Question:
Rourke Enterprises is owned by Dallas. For the year, Rourke had net income per books of $450,000. This included the following items:
Federal income tax expense $125,000
Bad Debt Expense1 $80,000
Rent $50,000
Meals $45,000
Depreciation expense2 $105,000
Dividends3 $50,000
This was calculated using the allowance method. Using specific write-off, this would have been $50,000.
Sum-of-the-years-digits method was used for book purposes. Had MACRS been used, depreciation expense would have been $125,000. Had straight-line been used, depreciation would have been $95,000.
These dividends were from Mavis, Inc. Rourke owns 75% of Mavis.
During the year, Rourke pays Dallas distribution of $500,000. Dallas has a basis of $600,000 in her stock.
- What are the tax consequences of the distribution to Dallas?
- What basis will Dallas take in her stock after the distribution?
Accounting Principles
ISBN: 978-1119048503
7th Canadian Edition Volume 1
Authors: Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel, Barbara Trenholm, Valerie Warren, Lori Novak