Question

Boulder Company reports current E&P of $500,000 this year and accumulated negative E&P at the beginning of the year of $200,000. Boulder distributed $400,000 to its sole shareholder on December 31 of this year. How much of the distribution is treated as a dividend this year?

Answer 1

Answer:

$400,000

Explanation:

Distribution for a particular year will be first drawn for the earning and profits for that year. Distributions will be treated as dividends if the earnings and profits in the current year are positive, regardless of whether the accumulated balance is negative.

Boulder had positive earnings and profits of $500,000.  It has distributions of $400,000, which will be drawn from the earning from the current earnings.  This distribution will be dividends because they can be satisfied with the current earnings.