L0.2 Sparrow Corporation (a calendar year, accrual basis taxpayer) had the follo
ID: 2603007 • Letter: L
Question
L0.2 Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following transactions in 2015, its second year of operation. Taxable income Federal income tax liability paid Tax-exempt interest income Meals and entertainment expenses (total) Premiums paid on key employee life insurance Increase in cash surrender value attributable to life insurance premiums Proceeds from key employee life insurance policy Cash surrender value of life insurance policy at distribution Excess of capital losses over capital gains MACRS deduction Straight-line depreciation using ADS lives Section 179 expense elected during 2014 Dividends received from domestic corporations less than 20% owned 330,000 112,000 5,000 3,000 3,500 700 130,000 20,000 13,000 26,000 16,000 25,000 25,000 Sparrow uses the LIFO inventory method, and its LIFO recapture amount increased by $10,000 during 2015. In addition, Sparrow sold property on installment during 2014. The property was sold for $40,000 and had an adjusted basis at sale of $32,000. During 2015, Sparrow received a $15,000 payment on the installment sale. Finally, assume that no additional first-year depreciation was claimed. Compute Sparrow's current E & P.Explanation / Answer
Earnings & profits (E&P) refers to the measure of a economic ability of corporation to pay dividends to their shareholders. An up-to-date calculation of E&P is important for corporate transactions, like determining whether a distribution of shareholders is a dividend which is taxable.
LIFO recapture amount is the difference through which the inventory valued under the method of FIFO exceeds the inventory valued in the LIFO method. Under Sec. 1363(d), the amount of LIFO recapture is included in the income of the corporation in its final tax return.
Given below is the calculation of E and P as per federal taxation:
Taxable income $330,000
Federal income tax liability paid (112,000)
Tax-exempt interest income 5,000
Disallowed portion of meals
and entertainment expenses (1,500)
Life insurance premiums paid
, net of increase In cash surrender value
(3,500 – 700) (2,800)
Proceeds from life insurance policy,
net cash Surrender value
(130,000 – 20,000) 110,000
Excess capital losses (13,000)
Expenses (26,000 – 16,000) 10,000
Allowable portion of 2013
SS 179 Expenses (20% x 100,000) (20,000)
Dividends received deduction
(70% x $25,000) 17,500
LIFO recapture adjustment 10,000
Installment sale gain (3,000)*
Total $330,200
*[($40,000 sale price - $32,000 adjusted basis) / $40,000 sales price]x $15,000
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