Question

Problem 19-33

Cardinal Corporation, 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, Cardinal's 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 $131,250 during the year.

See bottom for the Dividend Received Deduction Table.

a. After these three items are taken into account, Cardinal Corporation's taxable income is $ 625,000. (Correct)

b. Cardinal Corporation's accumulated E & P at the start of next year is $_________. ??

Given: Dividends Received Deduction

Percentage of Ownership by Corporate Shareholder Deduction Percentage

Less than 20% 50%

20% or more (but less than 80%) 65%

80% or more* 100%

*The payor corporation must be a member of an affiliated group with the recipient corporation.

Answer 1

Answer - (b) -

Calculation of Cardinal Corporation's accumulated E & P at the start of next year

	Particulars	Explanation	Amount ($)
I.	E&P beginning balance	Given in question	150000
II.	Taxable income	As per part - (a)	625000
III.	Dividends Received Deduction	$250000 *50%	125000
IV.	Interest Income	Given in question	35000
V.	Interest Expense	Given in question	20000
VI.	Federal taxes paid	Given in question	131250
Accumulated E & P at the start of next year		I + II + III + IV - V - VI	783750