Answer:
b. $20,000
Explanation:
Dividend is an amount of money that a company pays out its earnings and profits (E&P) and/or reserves on a regular basis, especially yearly, to its shareholders, especially ordinary shareholders and preference shareholders.
It should be noted that reserves are accumulated E&P. Therefore, a company that does not have accumulated E&P can only pay dividend out of its current E&P. Any amount paid in excess of the current profit after tax when there is no accumulated E&P cannot be considered as dividend.
From the question,
Cavalier's current year E&P = $40,000
Cavalier's accumulated E&P = 0
Aaron's Shareholding in Cavalier = 50%
Amount received by Aaron = $25,000
Cavalier's total amount that can be considered as dividend = Cavalier's current year E&P + Cavalier's accumulated E&P
Cavalier's total amount that can be considered as dividend = $40,000 + 0
= $40,000
Dividend received by Aaron is Cavalier's total amount that can be considered as dividend multiply by Aaron's Shareholding in Cavalier. That is:
Dividend received by Aaron = $40,000 × 50%
= $20,000
Amount received by Aaron but not dividend = Amount received by Aaron - Dividend received by Aaron
Amount received by Aaron but not dividend = $25,000 - $20,000
= $5,000
Therefore, Aaron’s distribution that will be taxed as a dividend is $20,000 which is the actual dividend received by Aaron.
All the best.
