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Computational Exercises 15-16
Computational Exercises
Chapter 15
15. LO.2 Compute the AMT exemption for the following taxpayers.
a. Bristol, who is single, reports AMTI of $149,500.
b. Marley and Naila are married and file a joint tax return. Their AMTI is $498,000.
16. LO.3 In March 2016, Serengeti exercised an ISO that had been granted by his employer, Thunder Corporation, in December 2013. Serengeti acquired 5,000 shares of Thunder stock with a strike price of $65 per share. The fair market value of the stock at the date of exercise was $90 per share. Determine Serengeti’s AMT adjustment related to these events:
a. For 2013.
b. For 2016.
17. LO.3 This year, Brennen sold a machine used in his business for $180,000. The machine was put into service eight years ago for $340,000. Depreciation up to the date of the sale for regular income tax purposes was $210,000; it was $190,000 for AMT purposes. What, if any, AMT adjustment arises as a result of the sale of the machine?
18. LO.4 Dimitri owns a gold mine that qualifies for a 15% percentage depletion rate.
The basis of the property at the beginning of the year, prior to any current year depletion deduction, is $21,000. Gross income from the property for the year is $200,000; taxable income before depletion is $65,000. Compute Dmitri’s AMT depletion preference for the tax year.
19. LO.4 Kiki, who incurred intangible drilling costs (IDC) of $94,000 during the year, deducted that amount. Her net oil and gas income for the year was $110,000.
Compute Kiki’s AMT preference for IDC.
20. LO.5 Yanni, a single individual, reports the following information for the tax year.
Salary $80,000
State income taxes 6,800
Mortgage interest expense 6,200
Charitable contributions 1,500
Interest income 1,300
Personal exemption 4,050
Compute the following for Yanni.
a. Regular taxable income.
b. AMT income.
c. Tentative minimum tax.
21. LO.6 Elijah, who is single, holds a $12,000 AMT credit available from year 1. For year 2, Elijah’s regular tax liability is $28,000, and his TMT is $24,000. Does
Elijah owe any AMT for year 2? If so, how much (if any) of the AMT credit can he use for that year?
Chapter 16
18. LO.1 Delaine is a 90% shareholder in a personal service corporation (PSC). The corporation paid Delaine a salary of $265,000 during its fiscal year ending
September 30, 2016.
a. Assume that the corporation cannot satisfy the business purpose test for a fiscal year. How much salary must Delaine receive during the period October 1 through December 31, 2016, in order for the corporation to continue to use its fiscal year?
b. Assume that the corporation cannot satisfy the business purpose test or salary test for a fiscal year. The corporation pays Delaine a salary of $50,000 for
October 1 through December 31, 2016, and salary of $300,000 from January 1, 2017, through September 30, 2017. How much must the corporation limit its deduction for salary for its fiscal year ending September 30, 2017, in order to retain the fiscal year?
19. LO.1 Gaffey Corporation obtained permission to change from a calendar year to a fiscal year ending May 31, beginning in 2016. For the short period January 1 through May 31, 2016, the corporation’s taxable income was $140,000. For computing the tax, assume a tax rate of 25%.
a. What is Gaffey Corporation’s annualized short period income?
b. What is Gaffey Corporation’s tax for the short period?
20. LO.1 In 2016, Aurora received a $25,000 bonus computed as a percentage of profits.
In 2017, Aurora’s employer determined that the 2016 profits had been incorrectly computed, and Aurora had to refund the $8,000 in 2017. Assume that Aurora was in the 35% tax bracket in 2016 but in the 15% bracket in 2017.
a. In 2016, how much is Aurora required to include in income?
b. In 2017, what is the amount of the deduction Aurora can claim? What is the reduction in taxes for 2017 as a result of the deduction?
21. LO.2 In 2016, Chaya Corporation, an accrual basis, calendar year taxpayer, provided services to clients and earned $25,000. The clients signed notes receivable to
Chaya that have a fair market value of $22,000 at year-end. In addition, Chaya sold a
36-month service contract on June 1, 2016, and received payment in full of $12,000.
How much income does Chaya report from these transactions in 2016?
22. LO.3 For 2016, Essence Company, a calendar year taxpayer, will change from using the cash method for tax purposes to the accrual method. At the end of
2015, Essence had the following items:
Accounts receivable $200,000
Accounts payable 135,000
Bank loan 100,000
What is the § 481(a) adjustment for this change in accounting method? Be sure to state whether it is positive or negative.
23. LO.4 On December 30, 2016, Whitney sold a piece of property for $85,000. Her basis in the property was $40,000, and she incurred $1,200 in selling expenses.
The buyer paid $5,000 down with the balance payable in $10,000 installments over the next eight years. In addition, the buyer assumed a $15,000 mortgage on the property. Round any division to four decimal places, and use in subsequent computations.
Under the installment sales method, what is the total contract price, the total gain on the sale, and the amount of gain reported in 2016?
24. LO.4 In 2016, Skylar sold an apartment building for $20,000 cash and a $300,000 note due in two years. Skylar’s cost of the property was $250,000, and he had deducted depreciation of $150,000, $60,000 of which was in excess of what the straight-line amount would have been.
a. Under the installment sales method, what is Skylar’s total realized gain?
b. In 2016, how much § 1250 gain does Skylar recognize? How much § 1231 gain does he recognize?
25. LO.4 Mason canceled a note issued by Emma (Mason’s niece) that arose in connection with the sale of property. At the time of the cancellation, the note had a basis to Mason of $30,000, a face amount of $55,000, and a fair market value of $42,000. Presuming that the initial sale by Mason qualified as an installment sale, how much gain does the cancellation result in for Mason?
26. LO.5 Jebali Corporation, a calendar year taxpayer utilizing the completed contract method of accounting, constructed a building for Samson, Inc., under a longterm contract. The gross contract price was $2,300,000. Jebali finished construction in 2016 at a cost of $2,100,000. However, Samson insisted that Jebali redo the doorway; otherwise, the contract price would be reduced. The estimated cost of redoing the doorway is $80,000. In 2017, the dispute is settled and Jebali fixed the doorway at a cost of $65,000.
a. How much must Jebali include in gross income? What amount of deductions is
Jebali allowed for 2016?
b. In 2017, how much must Jebali include in gross income? What amount of expenses can Jebali deduct in that year?
27. LO.5 Shumpert, Inc., entered into a contract that was to take two years to complete, with an estimated cost of $900,000. The contract price was $1,300,000.
Costs of the contract for 2015, the first year, totaled $675,000.
a. What was the gross profit reported by the percentage of completion method for
2015?
b. After the contract was completed at the end of 2016 at a total cost of $950,000, what was the gross profit reported by the percentage of completion method for
2016?