Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

In the current year (year 0), Amisha became a shareholder in Sultan Incorporated, a calendar year S corporation, by contributing $15,000 cash in exchange for

In the current year (year 0), Amisha became a shareholder in Sultan Incorporated, a calendar year S corporation, by contributing $15,000 cash in exchange for stock. Shortly before the end of the year, Sultans CFO notified Amisha that her pro rata share of ordinary loss for the year would be $55,000. Amisha immediately loaned $40,000 to Sultan in exchange for a two-year, interest-bearing corporate note. Consequently, she had enough stock and debt basis to allow her to deduct the $55,000 loss on her current year return. In each case, assume she has a 35 percent marginal tax rate on ordinary income, a 15 percent rate on capital gains, and a 6 percent discount rate. Use Appendix A.

Required:

  1. Compute the NPV of Amishas cash flow associated with her loan. For the next two years (years 1 and 2), Amishas share of Sultans ordinary income totaled $49,000, and Sultan did not distribute cash to its shareholders. However, it did repay the $40,000 loan plus $3,800 interest in year 2.
  2. Compute the NPV of Amishas cash flow associated with her loan. For the next two years (years 1 and 2), Amishas share of Sultans ordinary income totaled $19,100, and Sultan did not distribute any cash to its shareholders. However, it did repay the $40,000 loan plus $3,800 interest in year 2.
  3. Compute the NPV of Amishas cash flow associated with her loan. For the next two years (years 1 and 2), Amishas share of Sultans ordinary loss totaled $11,400. In year 2, the corporation declared bankruptcy and defaulted on all its debts, including the loan from Amisha.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting In A Nutshell Accounting For The Non-specialist

Authors: Walker, Janet

3rd Edition

075068738X, 9780750687386

More Books

Students also viewed these Accounting questions

Question

Consider some type of redress for the customer, such as a coupon.

Answered: 1 week ago

Question

Sell the quality of your brand or products.

Answered: 1 week ago