Canary Corporation, an Accrual Method C Corporation, Uses the Calendar

question 66

Essay

Canary Corporation, an accrual method C corporation, uses the calendar year for tax purposes. Leticia, a cash method taxpayer, is both a shareholder of Canary and the corporation's CFO. On December 31, 2014, Canary has accrued a $75,000 bonus to Leticia. Describe the tax consequences of the bonus to Canary and to Leticia under the following independent situations.
a. Leticia owns 35% of Canary Corporation's stock and the corporation pays the bonus to Leticia on February 3, 2015.
b. Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on April 3, 2015.
c. Leticia owns 75% of Canary Corporation's stock and the corporation pays the bonus to Leticia on February 3, 2015.

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Definitions:

Market Price

The current price at which an asset or service can be bought or sold on the open market.

Coupon Bond

A bond that pays the holder a fixed interest payment (coupon) at regular intervals until the maturity date, when the principal amount is repaid.

Market Yield

The current return on investment for a security, factoring in its price variations and dividend payments.

Face Value

The nominal or dollar value printed on a financial instrument, such as a bond or currency note.