Critical Thinking: S-Corporation 

Critical ThinkingS-Corporation

Lockhart Corporation is a calendar-year corporation. At the beginning of 2013, its election to be taxed as an S corporation became effective. Lockhart Corp.’s balance sheet at the end of 2012 reflected the following assets (it did not have any earnings and profits from its prior years as a C corporation):

Asset Adjusted Basis FMV
Cash $ 35,000 $ 35,000
Accounts receivable    25,000   25,000
Inventory  â€‚180,000   210,000
Land   125,000   120,000
Totals   $365,000   $390,000

Lockhart’s business income for the year was $65,000 (this would have been its taxable income if it were a C corporation).Critical Thinking: S-Corporation 

  1. During 2013, Lockhart sold all of the inventory it owned at the beginning of the year for $250,000. What is its built-in gains tax in 2013?  Be sure to show your work.
  2. Assume the same facts as in part (1), except that if Lockhart were a C corporation, its taxable income would have been $17,000. What is its built-in gains tax in 2013? Be sure to show your work.
  3. Assume the original facts except the land was valued at $115,000 instead of $120,000. What is Lockhart’s built-in gains tax in 2013?  Be sure to show your work. 

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