25. 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, Cardinals 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. What is Cardinal Corporations taxable income after these three items are taken into account? What is Cardinal Corporations accumulated E & P at the start of next year?

27. Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following transactions in 2022, its second year of operation: Taxable income $330,000 Federal income tax liability paid 69,300 Tax-exempt interest income 5,000 Meals expense provided by a restaurant (total) 3,000 Premiums paid on key employee life insurance 3,500 Increase in cash surrender value attributable to life insurance premiums 700 Proceeds from key employee life insurance policy 130,000 Cash surrender value of life insurance policy at distribution 20,000 Excess of capital losses over capital gains 13,000 MACRS deduction 26,000 Straight-line depreciation using ADS lives 16,000 Section 179 expense elected during 2021 25,000 Dividends received from domestic corporations (less than 20% owned) 35,000 Sparrow uses the LIFO inventory method, and its LIFO recapture amount increased by $10,000 during 2022. In addition, Sparrow sold property on installment during 2021. The property was sold for $40,000 and had an adjusted basis at sale of $32,000. During 2022, Sparrow received a $15,000 payment on the installment sale. Finally, assume that no additional first-year depreciation was claimed. Compute Sparrows current E & P.

28. In each of the following independent situations, indicate the effect on taxable income and E & P, stating the amount of any increase (or decrease) in each as a result of the transaction. Assume that E & P has already been increased by taxable income. ? Transaction Taxable Income Increase (Decrease) E & P Increase (Decrease) a. Realized gain of $80,000 on involuntary conversion of building ($10,000 of gain is recognized). blank 1 blank 2 b. Mining exploration costs incurred on May 1 of current year; $24,000 is deductible from current-year taxable income. blank 3 blank 4 c. Sale of equipment to unrelated third party for $240,000; basis is $120,000 (no election out of installment method; no payments are received in current year). blank 5 blank 6 d. Dividends of $20,000 received from 5% owned corporation, together with dividends received deduction (assume that taxable income limit does not apply). blank 7 blank 8 e. Additional first-year (bonus) depreciation of $45,000 claimed in current year. blank 9 blank 10 f. Section 179 expense deduction of $25,000 in current year. blank 11 blank 12 g. Impact of current-year 179 expense deduction in succeeding year. blank 13 blank 14 h. MACRS depreciation of $80,000. ADS depreciation would have been $90,000. blank 15 blank 16 i. Federal income taxes of $80,000 paid in current year. blank 17 blank 18

30. Sparrow Corporation is a calendar year taxpayer. At the beginning of the current year, Sparrow has accumulated E & P of $33,000. The corporation incurs a deficit in current E & P of $46,000 that accrues ratably throughout the year. On June 30, Sparrow distributes $20,000 to its sole shareholder, Libby. If Libbys stock has a basis of $4,000, how is she taxed on the distribution?

31. At the beginning of the year, Teal Corporation had accumulated E & P of $210,000. On March 30, Teal sold an asset at a loss of $200,000. For the calendar year, Teal incurred a deficit in current E & P of $305,000, which includes the $200,000 loss on the sale of the asset. If Teal made a distribution of $50,000 to its sole shareholder on April 1 and the shareholder had a basis in her stock of $72,000, how will the shareholder be taxed?

32. Green Corporation (a calendar year taxpayer) had a deficit in accumulated E & P of $250,000 at the beginning of the current year. Its net profit for the period January 1 through July 30 was $300,000, but its E & P for the entire taxable year was only $40,000. If Green made a distribution of $60,000 to its sole shareholder on August 1, how would the shareholder be taxed?

33. Black Corporation and Tom each own 50% of Tan Corporations common stock. On January 1, Tan has a deficit in accumulated E & P of $200,000. Its current E & P is $90,000. During the year, Tan makes cash distributions of $40,000 each to Black and Tom. How are the two shareholders taxed on the distribution? What is Tan Corporations accumulated E & P at the end of the year?

47. Kendra purchased 10,000 shares of Gold Corporation common stock six years ago for $160,000. In the current year, Kendra received 800 shares of preferred stock as a dividend on her common stock, while the other holders of common stock received a common stock dividend. The preferred stock Kendra received has a fair market value of $80,000, and her common stock has a fair market value of $240,000. Assume that Gold has ample E & P to cover any distributions made during the year. What is Kendras basis in the preferred and common stock after the dividend is received? When does her holding period commence for the preferred stock?