LO.2 Capon Corporation, a calendar year taxpayer, receives dividend income of

$600,000 from a corporation in which it holds a 12% interest. Capon also receives interest income of $90,000 from municipal bonds. (The municipality used the proceeds from the bond issue to construct a library.) Capon borrowed funds to purchase the municipal bonds and pays $50,000 of interest on the loan. Excluding these items, Capon’s taxable income is $1.2 million.

a. What is Capon Corporation’s taxable income after these items are taken into account?

b. What is Capon Corporation’s accumulated E & P at the start of next year if its beginning balance this year is $400,000?