Dover Corporation owns 18 percent of the voting stock of Hassan, Inc. The remainder of the Hassan stock is held by numerous investors with small holdings. Monica Kurtz, president of Dover and a member of Hassan's board of directors, heavily influences Hassan's policies. Under the market value method of accounting for investments, Dover's net income increasing as it receives dividends from Hassan. Dover pays President Kurtz a bonus computed as a percentage of Dover's net income. Therefore, Kurtz can control her personal bonus to a certain extent by influencing Hassan's dividends. A recession occurs in 20X0, and corporate income is low. Kurtz uses her power to have Hassan, Inc., pay a large cash dividend. The action requires Hassan to borrow so heavily that it may lead to financial difficulty. Required: In getting Hassan to pay the large cash dividend, is Kurtz acting within her authority as a member of the Hassan board of directors? Are Kurtz's actions ethical? Whom can her actions harm?

Dover Corporation owns 18 percent of the voting stock of Hassan, Inc. The remainder of the Hassan stock is held by numerous investors with small holdings. Monica Kurtz, president of Dover and a member of Hassan's board of directors, heavily influences Hassan's policies. Under the market value method of accounting for investments, Dover's net income increasing as it receives dividends from Hassan. Dover pays President Kurtz a bonus computed as a percentage of Dover's net income. Therefore, Kurtz can control her personal bonus to a certain extent by influencing Hassan's dividends. A recession occurs in 20X0, and corporate income is low. Kurtz uses her power to have Hassan, Inc., pay a large cash dividend. The action requires Hassan to borrow so heavily that it may lead to financial difficulty. Required: In getting Hassan to pay the large cash dividend, is Kurtz acting within her authority as a member of the Hassan board of directors? Are Kurtz's actions ethical? Whom can her actions harm?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On January 1, 2010, Harris pays $300,000 for 6,000 shares of Horton, representing a 25% ownership. Harris has a significant influence. During 2010, Horton earns $200,000 and pays dividends of $2 per share. Harris has net income of $500,000 and pays dividends of $300,000 in 2010. a) How much equity income is recorded by Harris in 2010? b) What is the balance in the Investment in Horton found on Harris' books at December 31, 2010?
Walton decided to issue additional new common stock. Mr. Adib Rahman, an individual investor purchased 100 shares of this stock from Munawar Associates, the underwriter. Would this transaction be a primary or a secondary market transaction? If Mr. Adib Rahman purchased previously outstanding Walton stock from another investor, then which financial market will this transaction be traded in?
Charleston Corporation (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 24%. The firm carns $3,000,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. Assume that the corporate tax rate is 34% and the personal tax rate is 24%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status? a. $7,752 b. $2,472 $9.732 d $5,472 & $3,000
W has a zero basis in his stock investment with Y Corporation, a C corporation. During the year, W receives a $50,000 cash distribution. His share of the current-year earnings and profits is a negative $30,000 and his share of the beginning-of-year accumulated earnings and profits is a negative $10,000. How does W treat the $50,000 distribution? Taxable dividend income Capital gain Nontaxable return of capital Part nontaxable return of capital and part capital gain
Kimball, a partner in a one-office firm, inherits 15 shares of Spotless Housekeeping Services stock. The stock has a market value of $25 per share; there is a ready market for them; and there are 300,000 shares outstanding. Spotless is an audit client of the firm, and Kimball does no work or consulting for Spotless engagements. Which of the following is CORRECT regarding Kimball receiving this stock and maintaining the firm's independence with Spotless? As long as Kimball does not work on the engagements for Spotless, nothing need be done. If he works on the engagements for Spotless, then the shares must be promptly sold to preserve the firm's independence. Since the shares are worth only $375 and they were inherited, nothing need be done. If Kimball transfers the shares to a blind trust where he is the beneficiary, independence with Spotless will not be impaired. The shares must be sold within 30 days of their receipt.
Sam owns 50 Class A non-voting shares of ABC Co. Leslie owns 50 Class B voting shares of ABC Co. Who has control of ABC Co? A) Sam B) Both Sam and Leslie C) Leslie D) Neither Sam nor Leslie Odinie has been an employee of ABC Co for the last 5 years. Recently, the CFO has asked all employees to incorporate and advised that their pay will now be received through their corporation instead. Odinie is a Canadian resident individual and is interested in what type of corporation his new company will be. It is established in Canada. A) Specified investment business B) Public corporation C) Personal services business D) Other corporation
On creating a new 100 percent-owned corporation, Ben was advised by his tax consultant to treat 50 percent of the total amount that was invested as a loan and 50 percent as a purchase of corporate stock. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Explain.
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Karl Stick is president of Stock Company. He also owns 100 percent of its stock. Karl's salary is $220,000. At the end of the year, Karl was paid a bonus of $100,000 because the firm had a good year. Stock Company deducted $320,000 as compensation expense for the year. Upon audit, $100,000 of the deduction was disallowed. How could this happen? How would you advise Stock Company?
Dmitri and Sue are equal shareholders in Vineyard Corporation. On January 1 of the current year, Vineyard had accumulated E & P of $30,000. It had $150,000 of current E & P, earned evenly throughout the year. Vineyard makes two cash distributions of $100,000 on July 1 and December 1. Dmitri and Sue both have a basis of $80,000 in their stock. Determine how much of each distribution is from current E & P, accumulated E & P, a return of capital, or capital gain.