Question 19 XYZ Corporation distributed to its shareholders a total of $30,000 i

Question

Question 19 XYZ Corporation distributed to its shareholders a total of $30,000 in cash plus property that had a fair market value of $80,000 and a basis of $60,000. The corporation’s earnings and profits were $100,000 on the last day of the year in which the distribution was made after taking into effect the impact on the corporation’s earning and profits of the gain recognized on the distribution (but before reducing earnings and profits by the fair market value of the distribution). How much was the total dividend income received by the shareholders as a result of the distributions made by XYZ Corporation? A. 0. B. $90,000. C. $100,000. D. $110,000.

Explanation / Answer

Solution:

Total earnings and profits = $100,000

Total distribution at fair value = $30,000 + $80,000 = $110,000

Total distrbution at carrying value = $30,000 + $60,000 = $90,000

Hence dividend income received by shareholder as a result of the distributions made by XYZ corporation will be lower of

1. Fair value of distribution or

2. Corporation's earning and profits

Therefore dividend income received by shareholder = $100,000

Hence option C is the right choice.

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