Excess of Federal taxes actually paid over amount provided at December 31, preceding year.... Cash dividends paid on preferred stock during

2,475,000 $5,125,000

$100,000

From the preceding information, prepare an income tax statement showing only gross income, deductions from income, and computation of the tax. (No Balance Sheets required.)

9. The White Motor Corporation has a capital of $250,000.00. They set aside a percentage of earnings as a bonus for their employees. The profit for the year amounts to $75,000.00. The income tax of 122% is to be figured after deducting the bonus. The bonus amounts to 10% of the earnings after deducting the income tax and a 15% dividend.

tax.

Compute the amount of the dividend, bonus and income

(Note. The problem does not state whether the yearly profit of $75,000.00 represents earnings before or after deduction of the bonus. Since a bonus is an expense, some might contend that it should be deducted in determining the profit on which the rate of the bonus applies. However, it is, undoubtedly, more logical to assume that the amount of the profit stated in the problem represents the net operating profits before deducting the amount of the bonus and that it is to be used as the basis of the bonus after the income tax and a 15% dividend are deducted. It is, of course, understood from the statement of the problem that the bonus is itself a deduction in determining the amount of the income tax.)

IO. The Home Outfitting Company, incorporated under the Laws of the State of Ohio, has been in business for the past two years. The following statement taken from the books reveals the financial condition of the company at the beginning and end of the current fiscal year and the results of the operations for the current year ending June 30.

The collections for the year amounted to $90,000.00 of which $35,000.00 was applicable to the installment sales of the previous year. No part of the collections applicable to the sales of the previous year need be reported as income for the current year because the gross profit to be realized on the installment sales was reported in the Income Tax Return for the previous year. In making the return for the current year, only the profit derived from collections applicable to the installment sales of the current year need be reported.

In computing the profits, the obligations of purchasers were treated as the equivalent of cash. In other words, the gross profit to be realized on the total installment sales was taken as an earned profit for the year in which the sales were made. Under the present Income Tax Law, it is permissible for a taxpayer to report his income on a basis of the profits realized on the collections received during the year. It is desired to take advantage of this provision of the Law and you are asked to draft a journal entry which will change the books in accord with the current Regulations and prepare a statement of the income tax for the current year. You should also prepare a Comparative Balance Sheet as at the beginning and end of year taking into consideration the adjustment on account of the deferred install

ments.

After preparing the income tax statement and Comparative Balance Sheets, you may prepare a statement showing the computation of the Company's capital stock tax. This tax is based upon the fair value of the total capital stock. You may assume that the assets and liabilities, as stated in the Balance Sheet of June 30, after adjustment of Installment Accounts Receivable, represents fair values, hence the net worth of the Company as exhibited by the Balance Sheet may be considered the fair value of the total capital stock.

Review Problems

I. In 1909 C. H. Purdy and Frank Rodman formed a corporation for the purpose of conducting the business then carried on by them under a partnership, the capital stock being divided equally. Mr. Rodman died on June 1, 1917, bequeathing his shares of stock to his son Charles by will. Because of Mr. Rodman's death, the corporation ceased active business and began to liquidate. From time to time assets were disposed of and dividends were declared and paid from the moneys received. What is the status of such dividends for Federal income tax purposes, assuming the dividends were paid during the current year:

(a) As regards C. H. Purdy?

(b) As regards Charles Rodman?

2. You are employed by Paul F. Fusselman, a married man, to prepare his Income Tax Return for the current year. His income and expenditures for the year ending December 31, are as follows: