Question

A calendar-year corporation has positive current E&P of $500 and accumulatednegative E&P of $1,200. The corporation makes a $400 distribution to its soleshareholder. Which of the following statements is true?
A)The distribution will be a dividend because current earnings and profits arepositive and exceed the distribution.
B)A distribution from a corporation to a shareholder is always a dividend, regardlessof the balance in earnings and profits.
C)The distribution may be a dividend, depending on whether total earnings andprofits at the date of the distribution is positive.
D)The distribution will not be a dividend because total earnings and profits is anegative $700.

Answer 1

Answer:

Correct option is (a)

Explanation:

Current earnings and profits represent current year's earnings and accumulated E&P represent earnings after making distributions in the form of dividends to the shareholders. The level of accumulated E&P shows the ability of organizations to make cash distributions to its shareholders.

A distribution made by the corporation is considered dividend if current year E&P is positive irrespective of whether accumulated E&P is positive or negative.

In this case, current E&P is $500, which is more than distribution of $400, so it is considered as dividends.