Cardinal corp, 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 $200,000 during the year.

a. what is cardinal corporation’s taxable income after these three items are taken into account? 500,000

b. what is cardinal corporations accumulated e & p at the start of the next year?

The correct answer for (A) is $575,000 and for (B) is $715,000.

Explanation:

According to the scenario, given data is :

Cardinals income ( excluding dividends) = $500,000

Dividend received = $250,000

E & P beginning balance = $150,000

interest income from municipal bonds =  $35,000

interest paid = $20,000

Federal taxes paid = $200,000

So,

(A) Taxable income = Income + Dividend received

where, Assume cardinal Corp. entitled for 70% DRD than,

Dividends received  =  $250,000 - $175,000 = $75,000

Hence, Taxable income = $500,000 + $75,000

= $575,000

(B) E & P  balance = ( E&P beginning balance +Taxable income + DRD + Interest Income ) - ( Interest paid + Federal taxes paid )

= ( $150,000 + $575,000 + $175,000 + $35,000) - ( $20,000 + $200,000)

= $715,000

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