Just a thought…
Has anyone worked on the SIM below? I use and came across it in Roger's IPQ. This problem is ridiculously long…too long for 15 minute budget (at least for me). These are the types of SIMS that worry me. There are so many details and calculations that cause me to scramble.
Cedar Creek Corporation (Cedar), incorporated in 1996, is an accrual basis, calendar-year entity. In 2000, it suffered a casualty loss, which caused a net operating loss (NOL) in that year. Cedar has furnished the first page of its 2000 tax return to support this NOL. Cedar carried the NOL back and has been slowly using the NOL to offset its taxable income in subsequent years. Cedar also incurred a capital loss on the sale of stock in 2013, none of which it has yet been able to offset with capital gains and, thus, has been carrying it forward along with its NOL. Pertinent 2015 tax return forms and worksheets have been provided for your review.
Cedar is interested in planning for a few very important transactions to occur over the period from 2016 through 2018. Cedar purchased for $1 million a new manufacturing building in November 2015 and wants to acquire new manufacturing equipment in 2016 (i.e., this year) for this building. The cost of the new equipment will be $400,000. The payments for the building are $300,000 in 2016 and 2017 and the remainder in 2018. To finance these new acquisitions, Cedar is selling its old equipment and old manufacturing building. Cedar will also sell some of its investments in GHI stock to supplement the cash required for the new assets. By the end of 2018, Cedar wants all of the investment in GHI sold. Cedar estimates that it will have net taxable income (and cash flow) from operations of $80,000 for the years of 2016 through 2018. This income (cash flow) is before considering the cash flows and taxable income resulting from the two planning options described below. Other than the capital gains resulting from the options, Cedar does not expect to have any other capital gains or losses over the three years. To the extent possible, Cedar would like to maximize its use of its carryforwards and its total cash flows. Cedar’s after-tax rate of return is 5%.
The options are as follows:
Option 1: Sell its old equipment in 2016 and its old manufacturing building in 2017. With this option, it would need to sell all of its investment in GHI stock in 2016 in order to have the cash necessary for 2016. Cedar bought 7,200 shares of GHI in 2013 for $50 per share. The 2016 selling price for GHI is $56 per share.
Option 2: Sell its old manufacturing building in 2016 and its equipment in 2017. With this option, it would sell 3,240 GHI shares in 2016 and 3,960 in 2018 in order to have the cash necessary for 2016 – 2018. Cedar bought 7,200 shares of GHI in 2013 for $50 per share. The 2016 selling price for GHI is $56 per share, and in 2018 the price per share is expected to be $60.
.